How Investor Sentiment Affects Your Trading
Why should you care about Market Sentiment
A lot of investors mention the word ‘sentiment’. But do you really know what it means, and how can you use it wisely as a trader? In short, Market sentiment is the feeling or tone of a market, or its crowd psychology, as revealed through the activity and price movement of the securities traded in that market.
Sentiment is an important feature of the financial trading system. trading and pricing were always mostly depended on social interaction. Many times in recent history, it was the sentiment of the investing crowd that has driven prices up or down, rather than any other technical or fundamental event.
If you are new to sentiment, the basic theory is as follows. If we see excessive bullishness, it means most investors are probably close to fully invested. Conversely, if we see excessive bearishness, then most people have probably sold already. If everyone has bought, then buying power becomes weak. If everyone has sold, then selling pressure drops.
Traditionally the sentiment has been tough to predict. However, as a social trading network we make it easier to measure this sentiment very accurately simply by collecting the data from across our social trading network. This is the main idea in using the wisdom of the crowds for trading.
How to read sentiment?
In our Social Web-Trader, the sentiment in a market is summed up in one column, as a percentage of buying or selling positions. It reflects what is going on right now in the Tradeo community. This allows our traders to get an immediate overview of the direction in which the crowds expect the market to head.
However, it is important to remember the sentiment does not predict the movement of the market accurately. Sometimes it might even point to the opposite. For example, sometimes the market price will clearly be on the rise, as the crowd sentiment will still be bearish rather than bullish.
Try the sentiment feature in our platform.
What to do with this information?
The way in which you interpret and use the sentiment information is up to you and your willingness to take on risk exposure. Depending on your trading strategies, you can act in accordance with the crowd and sell in a bear market, or you can go against the masses and buy in a bear market.
If the sentiment feature tells you that many people are selling this means the price will likely go down and you may be looking forward to a unique buying opportunity for a stock you have been considering for a long time.
Though the Forex market is decentralized (not traded on a central exchange), various retail Forex brokerage firms publish positioning ratios (similar to the Put/Call ratio) and other data regarding their own clients’ trading behavior. Since most retail currency traders are unsuccessful, measures of Forex market sentiment are typically used as contrarian indicators.
We hope you use this information wisely, and trade better with our sentiment feature in our platform.