Trading Sentiment Analysis | Examples Trading With & Against the Crowd

by birtanpublished on October 4, 2020

We all know that sentiment plays an incredibly important part when it comes to financial markets but how can you use the market sentiment tool a breakdown between buyers and sellers to better analyze markets and increase your chances of a profitable trade we've had a few requests lately to have to take a look at our market sentiment tool so um this is what we're going to do in this video here's here's the price of gold so at the time of recording we'd seen gold push out

To uh fresh all-time highs it has reversed quite sharply as you can see here uh at the time of recording uh we've punched as high overnight there's about 1980 an ounce uh and in this video i'm going to talk a bit more about this market sentiment you can see on the right hand side we're going to look at a mix of different markets look at ways we can use it to trade both with the masses and more importantly against the masses at major market turning points so i'm

Going to talk a bit more about what makes this tool up then we'll come back and uh look at it in more detail and have a look at some markets and see if we can set a trade up hello i'm david jones from capital.com and i thought it would be interesting to do another video on trading strategy this time around we will look at the sentiment analysis tool this can be a useful way of a couple of things first of all trading with the masses and perhaps more importantly

Trading against them when a market's gone too extreme so in this video i'll talk about how it's composed and how we can use it to set up uh low risk but potential high reward trades as usual if you're watching this and you haven't subscribed if you could click on subscribe it helps us continue to grow the channel and push out regular and hopefully useful market content whether it's on strategies or the various market analysis we do uh

During the month i'm gonna jump on the platform in a second and uh just go through a few things in more detail when it comes to sentiment analysis but first of all let's talk about what it is so within the capital.com uh trading platform it looks at uh positions positions our clients have so on something like powering against a dollar for example a popular market like that it looks at all the trades that clients have up and running at the moment what percentage along what percentage

Are short so how many think the market's going to rise how many think the markets can afford so it's a pretty straightforward calculation but it can give us some real insight into the psychology surrounding a market of course when it comes to short-term trading it's no secret um that there is a minority of people uh who make money you know for most people short-term trading is difficult and i've talked about the reasons for this before i think i think plenty of traders

Go against major trends uh so end up trying to go short gold for example if it's soaring higher and losing money traders do tend to be quite short-term so worrying about perhaps the next few minutes next few hours rather than looking at the bigger picture and also poor risk management um risking losing too much uh on a trade so if most traders end up being wrong then clearly if we can get a snapshot of what most traders are doing that can add a bit more color to our own

Uh market analysis and this is exactly what the sentiment analysis does it gives us an instant snapshot of which way our clients are positioned in the market which way they think it's going to go let's jump on the platform and just take a look at a couple of examples so when you bring up a market in our platform so i've searched for pound us dollar top left in the search button up here so i've got my chart at the bottom and then over here on the right hand side this is what we're talking about

And it's quite interesting actually at the moment if i maximize the chart so from late june through to where we are now the pound has risen by uh about 600 points so we've seen a decent rise but look at that market sentiment at the moment um the majority almost 70 percent of our clients who've got a position uh are short the parent um so they're perhaps feeling the pain a little bit if those short positions have been running uh for a while and i think there's a lot we can take from that

We're going to come back in a second and uh look to take place a trade on so that's where we've got sentiment going against the trend let's take a look at a more uh perhaps more positive market uh the price of silver so silver has seen some massive volatility uh in recent days it did push out to its best levels overnight uh for many years look at market sentiment so we have um 89 of clients who've got a position with silver

Are are long uh and they will have been well rewarded uh over recent days and weeks as the price has moved higher maybe feeling a bit of pain uh overnight but an example there where uh that the market sentiment has been with that medium-term trend and i think there are ways we can use this to set up trades i'm going to talk about it a bit more then we're going to come back and uh place a trade using market sentiment so i'd start off by saying we're going to look at different ways different ways

Of using this now but i start off by saying of course no no strategy works all the time no technique works all the time but i think sentiment analysis can add some color uh when we're looking at markets for me price action is still important so if a market is rising for me what the price is doing is the most important thing so sentiment analysis can help back that up if we're seeing plenty of positive sentiment in a market and the market's moving higher

You could argue it does add something to the trend but perhaps the more interesting approach is where sentiment reaches an extreme we have an extreme reading of bullishness where nearly everybody appears to be expecting a market market rise or an extreme reading of bearishness where everyone's expecting a market continue to fall there are lots of examples of this i mean a couple of high profile examples i can think of from my recent trading in recent years bitcoin is a really obvious one

Um late 2017 when we'd seen that fantastic rise for bitcoin bitcoin in the last quarter of 2017 um plenty of people thought the price is going to carry on going through the moon and of course in 2018 uh the price crashed a more recent example i think is um oil from back in april if you're watching markets in april um there was absolutely tons of coverage when the the futures contract the front month the may month uh for west texas oil went negative

Traded nearly minus 40 dollars a barrel and then looking at the sentiment analysis on the platform nearly everybody was bearish on oil uh sentiment had really reached an extreme and of course since then we have seen this really strong recovery in oil so i think it's tying up these extremes with what's actually going on in the market so if we're looking at a widely traded market and uh perhaps sentiment the sentiment is at an

Extreme but the price isn't confirming it it can be an early sign of a reversal or if we look at a market where the trend is clearly strong but sentiment is uh somewhat mixed it can suggest that perhaps we haven't reached extremes yet and the trend could have further to go let's take a look at some real examples from some popular markets and i think popular markets are the ones we need to focus on here the really high detroit highly traded ones

To get a good picture of sentiment just to quickly go back to that silver chart we do have an extreme sentiment you know nearly nine out of ten of our clients who are trading silver are long sale but we've seen a sharp reversal overnight so i think perhaps the contrarian trade here if you thought that um sentiment had reached an extreme is way for a reversal and we do have at the moment what's known as dark cloud cover when it comes to candlestick

Charting it can be a short to medium term reversal pattern so if you thought well actually sentiment is too extreme we have seen that just blip down slightly uh so it's updating in real time um perhaps one strategy could be if you think people are wrong at this major turning point look to go short so we could go short at 23.50 where it's trading now and where i would put my stop loss would be above that overnight high that overnight high is

Just above 26 so you could use it when it's at an extreme um to put a trade on for the trend to go the other way but what i'm going to use it for is a trade on euro dollar because i think it's really interesting sentiment on euro dollar at the moment let's bring it up before we look at it we do have a trade running at the moment on the euro against the dollar so we've been long since the 27th of may uh from um just below 110 on euro dollar and the market's currently 117

So we've made 700 points on that trade i've moved to stop up we're up 1100 pounds so i'm quite happy to add to that position if that's what the sentiment's telling me let's take a look at the euro us dollar chart so euro us dollar is a really popular market the most popular foreign exchange pair out there and i think it's really interesting what the market sentiment is telling us at the moment so the trend

For euro us dollar off those march lows is positive so the market's gone from 106 we've got a good trend in place there we're trading we recently punched up near 118 and that's the highest level we've got to go back to september 2018. so we're at what's that a 20 22 month high for the euro against the dollar so the trend is up but still um we're not seeing an extreme in sentiment in fact most people trading euro us dollar with us are sure let's zoom in again

On the last few months so if you've watched any of the videos you we do in the past you know i'm a big fan of trading with the trend for me that trend is clearly up perhaps in the short term it could do with a correction but the market sentiment is telling me at the moment we haven't reached an extreme in terms of bullishness in terms of positivity so i think the trade for me it doesn't appear at the moment as if everyone thinks the euro's going to the moon so it does suggest because of course

Most people are wrong when it comes to markets that the euro could have further to go so that to me adds to the argument it adds a bit more color and adds to the argument of going long the euro here so let's set the trade up let's take a look at um perhaps what's been going on since early july we'll flip this to an hourly chart so just to recap i'm taking the view because the um sentiment hasn't reached an extreme and in fact most people

Trading with us are still short the euro i think the euro squeeze could still continue to squeeze higher from here we've got this trend on the hourly chart this has been doing a great job i've picked up from the lows from july the 10th we've got good support coming in around about 1 15 50 shorter term support uh around about 1 15 80. um so i'm quite happy to be a buyer here and look to buy into that trend because i think that sentiment hasn't

Reached an extreme we've got further to go the trend is up let's set the trade up and put a stop loss in at 1.15 20. so i'm buying 13 000 euro dollar uh where the price is trading now just above one seventeen twenty i'm putting a stop loss a couple of hundred points away and it's been a pretty volatile market it needs to give the market time to move um and um my uh risk as usual is a couple of hundred pounds let's set that trade up so for me the fact that we aren't seeing

An extreme uh in sentiment we are we have seen those sellers just blip down from 53 to 52 so perhaps we are seeing some more buying come back in but the fact we out we aren't seeing extreme i'm going to trade against what seems to be something of a split opinion at the moment but i'm going to trade with the trend and i'm going to use it as confirmation that perhaps this trend has got further to run we'll see how it works out over the next few weeks but that's one way of using market

Sentiment maybe that that that split between buyers and sellers we aren't seeing an extreme to confirm an existing trend in the market that's it for our look at sentiment analysis i hope you found it interesting and perhaps you know a different twist on uh how to look at what's going on when it comes to market psychology it's not perfect it doesn't work all the time but like i say it can give you just an added dimension of color when it comes to looking at markets we'll wrap things up there so from me

David jones and capital.com good luck with your trading for more trading videos just like this please subscribe to our channel

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