What is sentiment trading?
Sentiment trading or sentiment analysis is a method that some traders use to try to gain an advantage about what to buy or sell, by reading the signals about how other investors are feeling about a particular market or stock.
Key takeaways
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Sentiment trading involves analyzing how other investors feel about markets or stocks to gain advantages in buying and selling decisions.
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This investment style has been historically overshadowed by fundamental and technical analysis approaches used by financial advisers and investors.
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Simple sentiment trading includes identifying bull markets where traders buy without examining fundamentals, expecting securities to continue rising.
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Market corrections typically occur when sentiment gets pushed too far, causing investor sentiment to shift from confidence to caution.
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Modern sentiment trading uses computer programs to analyze vast data, with quant investors incorporating sentiment into their statistical trading triggers.
Where have you heard about sentiment trading?
Investors may have heard of it from investment guides and in parts of the financial media. Their financial adviser may be a proponent of this particular investment style, long overshadowed by the 'fundamental' and 'technical' schools of investment analysis.
What you need to know about sentiment trading.
Sentiment trading can be as simple as identifying a bull market, when traders expect securities to carry on going up so they continue to buy without closely examining the fundamentals. But when sentiment gets pushed too far then a correction is likely to happen, as sentiments change from confidence to caution.
It's now become much more complex, however. Researchers try to gauge the sentiment of the market by using computer programmes to analyse vast quantities of data and communications.
Quant investors who base their decisions on statisticss and graphs are trying to find ways of accurately reading sentiment and factoring it into their buying and selling triggers.