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Market sentiment analysis

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Nick Goold

Did you know that understanding market sentiment can significantly affect your trading results? A good understanding of market sentiment can improve your trading results. Let's take a look at what sentiment is.

What is sentiment?

It's the overall behaviour of traders towards the market. A market contains many individual and institutional traders, all with a diversity of opinions. Each trader has a different thought on why the market is moving the way it is, whether they should trade in the same direction as the market or go in the opposite direction, etc.

A crowd sometimes forms that includes many traders with similar views. Sentiment analysis is the study of how that crowd reacts. This sentiment analysis signals faster than any other indicator when a market is likely to change direction.

Also, when the market is trending, an appreciation of market sentiment makes it easier to follow and profit from the trend.

How to ride a trend using sentiment

Understand the dominant sentiment of the crowd, especially in the early stages of a trend, and then make the same moves as the crowd. When sentiment rises, it's typically when an uptrend begins, and when that sentiment falls, it can result in a new downtrend. You can ride the trend by recognising the start of an uptrend or downtrend.

How to track sentiment

You can get a feel for crowd sentiment through news, blogs and conversations with other traders. As you gain more experience, your understanding of market sentiment will improve.

Also, as the trend becomes better known in general, through more news articles and publicity, it can mean it's likely to end soon, as new buyers will gradually disappear. Traders then begin selling when the end-of-trend sign appears, which can sometimes accelerate the reversal.

The reverse is also true: at the end of a downtrend, traders begin accumulating long positions. Always check for changes in market sentiment when trading.

How to better understand sentiment analysis

Point 1

Read a variety of news articles to get different opinions. Understanding how analysts and other traders view the market will help you when analysing the market. There are always reasons why markets move and you will be able to understand why markets are the way they are.

Point 2

Be confident in your trading judgement and decision-making. Different traders have different targets to aim for and different positions to open. It's essential to use other traders' opinions only as a reference and not trust them implicitly. You will be more consistent in your trading if you trust your market analysis.

Point 3

There is no formula for analysing sentiment. Sentiment analysis can be challenging as there is no strict rule to determine optimal trade timing. Experience and improved market analysis skills will help you decide whether to follow or buck the market trend.

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