How do you feel about financial markets - do you think they will increase or decrease in the future? If you can answer that question, then you understand what your emotional level about the financial market is, whether you trade stocks, foreign exchange or any other product.

The financial market is driven by emotions and this is one of the main reasons why investors can find trading opportunities. Taking stock as an example, one of the main reasons why stock prices do not necessarily match the company's book value is because what investors have expected has exceeded the fundamentals of business. Industry and prices.

This shows the importance of emotions to the market, but you also need to combine other forms such as technical analysis or fundamental analysis to be able to clearly see the picture. market.

Understanding market sentiment is one thing, but trading or not is another. Because the market always has completely different ideas from what you want, what you expect. So how do you monitor market sentiment and how do you trade it?

What is market sentiment?

Market sentiment represents the mood of the financial market and the overall feeling among traders, whether forex trading, stock market or anything else. This will help you assess the future of an optimistic or pessimistic market to trade.

If the market is feeling positive and optimistic then this is called a bull market and a pessimistic market is a primary market, predicting a decline in prices or a bear market.

In fact, measuring market sentiment is quite difficult because the prospects of the market are shaped by anything. Therefore, investors need to analyze in many different directions to ensure they capture as much information as possible about the market they trade.

In addition, while most of the market will be tilted one way or the other, every participant has his or her own opinion to explain why the market works that way and what the next trend is. While the opinion of the majority often gives a general view of the market, there are investors seeking to counter the dominant psychology, which is always looking to reverse the wave. When the market goes up it tries to sell and vice versa when the market goes down it tries to buy.

One of the important factors taking advantage of market sentiment to trade is to be able to read the next trend that is about to happen, gig, and that's where fear and greed arise.

Transaction emotions: Greed and fear

The feeling of dominance in the market often determines the overall sentiment of a market. Most investors seek to follow the general trend of prices. And even then, at some point psychology will reach its peak (psychology increases or decreases psychology). Understanding when prices are peaking is important for investors to avoid buying. Or face a (sold) greedy recession when prices bottom out just before prices begin to rise again (fear).

Discovering fear or greed will help traders determine when to exit when prices begin to fall, or to find a way to buy when prices have reached the bottom.

How to trade according to market sentiment?

Volume can be a way of assessing how the market is feeling. This is especially true of stocks and options because it tends to raise or lower interest rates. For example, if the company's stock price continues to increase but the volume begins to fall, for example, this could be a sign that the stock has fallen into an overbought state.

In addition, market sentiment indicators are one of the most useful tools for investors to assess how the current market trend is and in a pessimistic or positive state, in order to find out opportunity to buy in or sell out. However, you should note that these indicators should be used along with other technical and fundamental analysis to give a clearer picture of the market.

Some tools used by investors to determine market sentiment are:

Commitment of Traders (COT): COT is published by the Commodity Futures Trading Commission (CFTC) every Friday and shows Buy and Sell positions of speculative and trade traders. This helps to outline market dynamics in detail based on the transactions of big boys (such as hedge funds, banks and corporations). If the COT shows that the trader is moving in a direction that causes the price to go down / rise in an upward / downward market trend, this indicates that the market is about to have a new turning point.

Volatility Index (VIX): Also known as the fear index, VIX tracks option prices and measures volatility. Used as a way for investors to protect themselves from any price adjustment is like an insurance policy. The higher the VIX synonym, the more likely the current trend is to reverse. If the VIX is low, the market sentiment is stable and the current trend will continue.

High / low sentiment ratio: One of the easiest ways to find out if the market is in a good mood or bewildered is the High / low sentiment ratio. This is based on a comparison of how many stocks are heading for the 52-week high before the number of stocks that created a 52-week low. If the average direction of the market shows a low, the bears are in control - the market is falling and when the market is at higher levels the bulls are in control - the market is rising.

Bullish Percentage Index: An indicator that helps you understand the market's rise. The index uses a buy signal and a buy signal, listing the number of stocks that have generated a buy signal in a given indicator. Based on the Point and Figure Chart (P&F), stocks carry a clear buy or sell signal with a scale as a percentage from 0% to 100%. Investors apply their own thresholds to this indicator to determine market movements, but generally if the index is between 70% and 80% of the buy signal, then investors consider the market to be overbought. and be ready for Sell orders in the near future. If the market is below 30% or 20%, it will indicate that the market is oversold and is likely to rebound in the near future.

As such, there are many ways to measure market sentiment, which helps traders to speculate and be one step ahead of the market, before major events occur. Never underestimate market sentiment. Investors should try to get as much information as possible. Listen to both the bulls and the bears, string together to create a complete picture of market sentiment to create high efficiency in trading. Good luck!

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Author: Tin Nguyen

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