Sentiment Analysis: Avoiding Extremes
Posted by Edward Dy on June 29th, 2008
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Photo credit: Sonneteer
Sentiment Analysis is the art of avoiding extremes. When everyone seems so inclined in a particular direction, chances are it’s not going to stay that way for long if it has gotten to a certain extreme. It specializes on determining patterns of investors’ movement on a subjective basis, so that when a everyone is leaning too far in one direction, it is most certainly that shift in the opposite direction is about to occur - just like a pendulum.
Traders who use this method of analysis will observe investors as to how they are reacting to the current trend. They usually conduct investors sentiment surveys asking about their current market outlook. When these analysts see that everyone is leaning in one direction, they will then act in direct opposition to these results: if fewer than 25% of the surveyed investors surveyed are sure that the market will be profitable, sentimental analysts will usually increase a bet in the market expecting that there will soon be a buying opportunity.
If the actions of investors are such that it would seem that the value of a currency will rise, sentiment analysts will usually sell, in preparation for a drop in the currency’s value.
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