2.8 - Sentiment analysis

Why is sentiment important?

Sentiment reflects the collective emotions of gamblers which can significantly influence market behaviour and price movements. Positive sentiment can drive buying pressure and negative sentiment can push price down.

By analysing sentiment, traders and investors can predict potential market turning points, identify overbought and oversold conditions.

Understanding the behaviour of RETAIL behaviour and their tendencies to crowd to one side of the market can provide valuable insights for making more informed trading decisions. When retail sentiment reach extremes and anticipating potential market reversals, traders can PREPARE more effectively (tighten a stop loss, heding)

Being on one side of the boat

When a majority of retail is bullish or bearish, the market often likes to move in the opposite direction. This can be due to when everyone is bullish, that means most of the buying pressure has already been used up and when everyone is bearish, that can mean most people have already sold or are down so bad they are ready to capitulate.

Smart money use these extremes as signals to take the opposite position.