Trading with technical indicators can be profitable, but only some of the time. Since, it is more of an art and a science, charts and indicators can be hindering your overall strategy for making money. Think of someone who is successful in life, does he or she sit in front of a screen or telephone after they have received a call from a lover or friend to go out? Probably not. What if someone you liked gave you an urgent call to go out with them while you were trading, what would you do? Before you answer rationally, you may have already made your decision before you even knowing it, depending on how much you liked that person! But your successful trading plan, should help you in this scenario! Emotions are very much a part of financial markets, and learning about technical indicators that pertain to sentiment will help you understand how to make money and gauge your own emotions. That’s why I recommend learning about sentiment indicators.
Unless you are training and adapting your trading with indicators and charts, you may fall into the traps of all traders by merely losing time to the markets. although it can be dangerous to react wildly from sentiment alone, sentiment analysis can help you take the call in your trading, so to speak, so that you can adapt and continue your successes in making money.
SENTIMENT ACTIVITYThe idea behind a sentiment indicator is that the chart should depict sentiment activity, as opposed to just price and volume. Similar to brain wave activity, this is meant to be an accurate picture of people’s ebbs and flows towards a single stock, ETF or index.
Here is a chart from Sentdex that graphs sentiment activity based on a text-processor from news and tweets:
Figure 2 Sentdex 30 Day Chart of EURUSD Sentiment
It’s important to understand, part of sentiment is a lagging indicator, creating merely an anchor point for how much of a crowding-in effect there may be in the markets. That’s why you should add confirmation to any assumptions of the chart, just as with any other trading indicator and strategy.
To see when sentiment may be a lagging indicator, take, for example, the Michigan consumer confidence index, a prime example of how data can be less of an actionable indicator and more of an anchor point. This version of sentiment may be a good contrarian indicator at times, but is far from being any cause for price changes itself.
There’s no change in equilibrium prices given sentiment alone, per our definition of sentiment. In only so much that sentiment can increase consumer and investment expenditures, can sentiment change equilibrium prices. Given the formula for aggregate demand of the economy:
Our definition of sentiment in this article does not change any of the variables of this equation. Any fundamental changes in the demand curve given sentiment would have to do with investor sentiment in its ability to change consumer spending and investment expenditures.
The ability to process and make informed decisions is the technique of one who is successful. In most cases, you as the trader are acting as a liquidity provider by following any methodology or technique that is after a quick bump in profits. The success of a liquidity provider, an imbalanced risk trader, is to be able to understand his or her risk.
Just like a skydiver knows his plummet, and his well prepared for it, so too should sentiment traders know where they are with their risk factors. To better understand this, sentiment analysis helps you make profitable decisions while also understanding your own emotions to adapt as a trader.
