Market sentiment is the overall attitude of traders and investors towards a market or any particular asset. It’s the vibe or mood of the market’s crowd that can be revealed through the overall activity and price movements. In broad terms, if prices rise — it indicates that overall market sentiment is bullish. If prices fall, then it’s bearish. In this article, you will learn all the peculiarities of market sentiment.
Market sentiment is also called ‘investor sentiment’ and it’s not always based on fundamentals. Day traders can also use market sentiment because it influences technical indicators.
Technical indicators are good to analyse short-term price movements but these movements are usually caused by investor attitudes towards assets.
Contrarian investors use market sentiment more often than anyone because they trade in the opposite direction to the trend. For instance, if the market sentiment is bullish, then constrained investors sell assets.
Investors divide market sentiment into bearish and bullish:
- Bearish sentiment means that prices fall and bears control the market.
- Bullish sentiment means that prices rise and bulls control the market.
A lot of investors profit by finding stocks that are undervalued or overvalued based on market sentiment. They use various technical and fundamental indicators to determine market sentiment. The process of finding out what the market sentiment is called sentiment analysis.
The are several market indicators that can be used to determine market sentiment and improve trading performance:
The-High-Low index. This index compares the number of assets making the 52-weeks highs to the number of assets making the 52-weeks low. The index is calculated between the numbers zero and one hundred. If the index is below thirty, it means the asset prices are trading at their low. If the index is above seventy, it means that the asset prices are trading at their high.
Bullish Percent Index. This index indicates the number of assets with bullish prices on the market. Neutral markets usually have a bullish index of around fifty percent. Cryptocurrency markets usually have indexes of over fifty or under fifty percent due to the dominance of
Bitcoin on the market. In other words, if Bitcoin falls on the market, it usually means that other currencies also fall and the bullish percent index is way under fifty percent in this case.
Moving averages. This index ‘snapshots’ average prices during a certain period. Investors use the fifty-day simple moving average and two hundred days moving average to determine market sentiment.
Sentiment analysis cannot be completed without other types of analysis, namely:
Polarity Analysis. This type of analysis ranks textual sentiment in a positive, negative or neutral way. The polarity analysis takes into account various news feeds of crypto assets and analyses their tone. For instance, the phrase: ‘The price of Bitcoin goes up’ will be classified as positive by Polarity analysis.
Tone Analysis. This type of analysis scores the different types of emotions presented in the particular text. The most influential emotions are sadness, happiness, anger, despair and so on. For instance, the phrase: ‘Do not miss this crazy rally of Bitcoin!’ shows excitement and joy.
Aspect Sentiment Analysis. This type of analysis focuses on interpreting the sentiment about specific subjects within a sentence rather than a sentence as a whole. For instance, in Elon Musk’s tweet “Dogecoin is the people’s crypto” aspect analysis will determine the sentiment related to “Dogecoin” instead of the complete sentence.
Cryptocurrency is still vulnerable to the irrationality of the market and lack of proper disclosure channels. When making use of sentiment analysis to crypto assets, we are likely to encounter a challenge related to the misconception about how sentiment is reflected in news and social networks. Any source of information can be quite informative but also useless for sentiment analysis.
The sentiment in reputable news sources should trend around neutral. While social media news results in behaviour in the exact opposite way. Social media threads tend to be noisy and relatively subjective, which can produce misleading sentiment analysis results. That’s why you need to be careful with choosing the source of information that you are analysing.
Market sentiment is a good indicator that shows where the market stands currently and the direction it is likely to move. It can help you to determine when to sell or buy. Or maybe go against the market if it fits your trading strategy.
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