Beginner Tips to use Sentiment Indicators

From the very start, beginner traders are taught to use two major types of sources to generate necessary market data. They are Technical Analysis and Fundamental Analysis. We know that the first one helps to define the best trading opportunities by using the price action.

The second type (Fundamental Analysis) provides insights about a particular company’s performance as well as the global economics overview. It helps to evaluate the economic health influenced by geopolitical and other factors. What’s more, traders are able to see the over or under-valued assets.

With these two major types of analysis, traders often forget about the third one: Sentimental Analysis.

How can it be useful and how investors may benefit from sentimental indicators? Read in today's article.

Sentimental Analysis Explained

Judging by the name, it is clear that the analysis can be used for market sentiment evaluation to generate information about the asset or market direction. If you track positive data about the market health and assets, the signal is considered for the long position. A short position appears in the case of negative information generated by sentimental indicators.

Of course, the information gathered does not always mean correct signals. Besides, traders should take into account either good or bad financial news that may have a great impact on the asset price. The result will depend on traders’ interpretation of the info they retrieve. This is where market sentiment indicators may help.

What Are Market Sentiment Indicators?

They can be either graphical or numerical. They depict a specific group and the way it feels about the current market conditions. In other words, you will have a chance to see how specific positions and beliefs can influence market participants’ behavior in the nearest future.

It also depends on the asset you trade. For example, when using a stock sentiment indicator, you will be able to identify a group of buyers or sellers. As a result, it is possible to predict bullish or bearish market conditions. The price may soon start growing in case of too bearish conditions and vice versa.

A Market Sentiment Explained

It shows the attitude to a specific financial instrument. The sentiment refers to a feeling that can be revealed with the help of the price movement. Besides, it is necessary to consider the market activity of a traded security:

  1. If the price goes up, it is a signal for a bullish market.
  2. If the price goes down, it is a signal for the bearish market.

What Sentiment Indicators Can Tell

It depends on the way you read them. Low reading depicts consumers who feel depressed and downtrodden towards the market. On the other hand, it may also mean soon enough improvements and price reversal.

The high reading says that consumers feel positive and upbeat. At the same time, experienced traders should expect indicators going lower over a certain period.

Sentiment Indicators vs. Technical Indicators

Some indicators can be both sentiment and technical. However, they are still different:

  1. Sentiment indicators show the positioning of both consumers and traders as well as the way they feel about the market or asset.
  2. Technical indicators provide a broader market overview with price, volumes, and other data depicted on a trading chart.

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The Bottom Line

Sentiment indicators are limited to a single piece of information they can generate. Traders are not supposed to use them as signals to make a move. What’s more, they will never let you indicate the exact time of a price or trend change. They only provide the data about the traders and consumers' market beliefs and feelings. To make the most of the market analysis, they should be used together with technical indicators, which will help to confirm the price trend.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.