What is Sentiment Trading?

What is sentiment?
Sentiment trading
Why you should use it?
The Important thing you need to know about sentiment trading
What do you think?

What is sentiment?

The sentiment is literally what you think about something or what a number of people think about it.

Sentiment in trading can be said to be the view that people hold for the financial asset and what they think, whether the price should go up or down.

Say that you go to a market to buy apples and you see a vendor selling it for $2 per dozen.

You might bargain with the vendor to sell it to you for $1.50, that’s because you think $2 was too high. This is what sentiment is.

This won’t just apply to buying fruits or vegetables in the market but can apply to literally everything around you.

We’re humans after all right and we will have opinions, this opinion then forms our sentiment, the same happens in the financial markets too.

Sentiment Trading

The financial markets literally run on the mass investor and trader sentiment, and of course, demand and supply have a good role to play in it too.

But if you see, when most of the market participants think that the price is cheap and they start buying, the price goes up.

On the other hand, when most of the market participants think that the price is expensive and they start selling, the price goes down.

This is also what we know as the market is bullish and bearish, it is all derived from the sentiment of the market participants.

So, sentiment trading is all about understanding what the market participants are thinking, what their opinion is towards the price, and using this to your advantage.

Now you might ask how to understand market sentiment and how to use it to your advantage? Well, I’ll tell you that in the next blog post that I’ll be uploading, so do watch out for it.

Why should you use it?

If you haven’t yet understood the value that knowing the market sentiment can add to your trading then I’ll tell you that now.

Say that you already trade a strategy, it could be a reversal strategy, order block strategy, or whatever. You get a trade signal and you are going to take the trade.

Just before you enter, you can have a look at the sentiment of the market participants and this could give you additional confirmation.

What I mean by this is that if you get a long trade from your strategy, you could see if the market sentiment is bullish or bearish. If it’s bullish, then you can take the trade with complete confidence. If it’s not in line with your trade, then you can be a little cautious.

I’m not saying that then you shouldn’t take the trade only, you can either look for some more confirmation using your strategy, or you could get it with a smaller position size.

You have to decide what works for you best and you can know that only after you have tested it for yourself.

But before you do that, you need to know some things about market sentiment.

Important things you need to know about sentiment trading

The most important thing you need to know in sentiment trading is that sentiment can change any time and way before you even know it.

These changes can happen due to various reasons be it based on fundamentals or even based on technicals.

Now, if the sentiment shows bullish, it does not necessarily mean that the price will keep going up all the time.

Bullish sentiment basically means that the mood of the market participants is optimistic and that they are expecting the market to go up in the future.

The same would be the case with a bearish sentiment. If market participants are bearish then the price won’t necessarily go down right away and won’t keep going down all the time.

It’s just that the market participants do not have much confidence and that they are pessimistic at the moment.