Sentimental analysis is an advanced technique used by professional investors to assess market sentiment and predict future price movements. Unlike fundamental analysis, which focuses on financial and economic indicators, and technical analysis, which is based on charts and trends, sentimental analysis examines the psychology of the market, the behavior of participants, and their reactions to information.
Basics of sentimental analysis
For an experienced investor, sentimental analysis is an important complement to other techniques, allowing you to identify moments of extreme optimism or pessimism that can lead to trend reversals and investment opportunities. In this article, we will discuss how sentiment analysis works, the most important tools, integration with other methods, and strategies for using it in practice.
Sentimental analysis is based on the assumption that market participants’ emotions affect asset prices. Fear, greed, excessive optimism or panic often lead to overvaluation or undervaluation of assets.
Key aspects:
- Extreme market sentiment – Traders analyze the level of pessimism and optimism among market participants to identify contrarian moments.
- Crowd psychology – studying the behavior of large groups of investors allows you to predict the potential reactions of the market to macroeconomic information and events.
- Market and media information – news, analytical reports, expert opinions, and social media all influence market perception and trigger short-term price movements.
- Herd effect – advanced investors take into account the tendency of market participants to follow the majority, which can lead to temporary deviations from the fundamental value.
Understanding these mechanisms allows an investor to use market behavior in an informed and strategic way.
Sentimental analysis tools
Advanced sentiment analysis uses a variety of tools to monitor market sentiment.
The most important include:
- Investor sentiment indices – e.g. the Fear & Greed Index or institutional sentiment indices, which measure the level of fear and greed in the market.
- Survey research – sentiment reports published by brokers, analysts and financial institutions provide information about the predictions and investment plans of market participants.
- Volume and open position analysis – observing changes in trading volume and the number of futures contracts allows you to understand which way the capital is moving.
- Media and social media monitoring – analysis of content in traditional media and social platforms allows you to assess the opinions of retail and institutional investors.
Professional traders often combine several sentiment indicators to get a more reliable picture of the market situation and avoid one-sided interpretations.
Strategies for using sentimental analysis
Sentimental analysis is effective primarily in contrarian strategies and in identifying trend reversal points.
Examples of strategies:
- Contrarian investing – taking a position opposite to the prevailing market mood in moments of extreme optimism or pessimism.
- Confirm trends – integrating sentiment with technical and fundamental analysis allows you to verify the strength and durability of the trend.
- Short-term trading – using sudden changes in mood to take short-term positions in day trading and swing trading.
- Hedging and risk management – sentiment analysis helps to determine the levels of collateral in the portfolio, responding to psychological changes in the market.
An advanced trader uses these strategies in a systematic manner, basing decisions on empirical data and indicators, rather than just intuition.
Integration with other investment techniques
Sentimental analysis combined with fundamental and technical analysis allows for a more complete assessment of the market. Professional investors use it to:
- Confirmation of technical signals – e.g. strong optimism of investors at the time of reaching resistance levels may signal an upcoming trend reversal.
- Portfolio risk assessments – changes in market sentiment affect asset allocation and exposure limits.
- Selection of investment opportunities – combining sentiment with fundamental data allows you to choose assets that are undervalued or overvalued in the short term.
- Short-term strategies – day trading and swing trading use sudden changes in sentiment as signals for quick decisions.
Integrating sentiment analysis with other methods allows the trader to make more comprehensive and precise decisions, minimizing risk and maximizing potential profits.
Sentimental analysis is an advanced investment technique that allows you to assess market sentiment and predict short-term price movements. The key elements are the study of the psychology of market participants, media monitoring, sentiment indices and analysis of volume and open positions. Professional traders integrate sentimental analysis with fundamental and technical analysis, applying it to contrarian, short-term, and risk management strategies. This makes it possible to make decisions based on data and psychological trends, increasing the effectiveness of investments and minimizing the impact of emotions. Sentimental analysis in the hands of an experienced investor becomes not only a tool for observing the market, but also an element of a comprehensive investment strategy, allowing you to use market psychology to your advantage.