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.
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.