Earlier, we said that price action should theoretically reflect all available market information. Unfortunately, it isn’t that simple.
The stock markets do not simply reflect all of the information out there because traders will all just act the same way. Of course, that isn’t how things work.
Stock Sentiment Analysis
This is why sentiment analysis is important. Each trader has his or her own opinion of why the market is acting the way it does and whether to trade in the same direction of the market or against it.
The market is just like Facebook – it’s a complex network made up of individuals who want to spam our news feeds.
Kidding aside, the market basically represents what all traders – you, Warren Buffet or Celine from the donut shop – feel about the market.
Each trader’s thoughts and opinions, which are expressed through whatever position they take, helps form the overall sentiment of the market regardless of what information is out there.
The problem is that as retail traders, no matter how strongly you feel about a certain trade, you can’t move the stock markets in your favor.
Even if you truly believe that the stock prices is going to go up, but everyone else is bearish on it, there’s nothing much you can do about it (unless you’re one of the GSs – George Soros or Goldman Sachs!).
As a trader, you have to take all this into consideration. You need to perform sentiment analysis.
It’s up to you to gauge how the market is feeling, whether it is bullish or bearish.
Then you have to decide how you want to incorporate your perception of market sentiment into your trading strategy.
If you choose to simply ignore market sentiment, that’s your choice. But hey, we’re telling you now, it’s your loss!
Being able to gauge market sentiment aka sentiment analysis can be an important tool in your toolbox.
Source: www.babypips.com