Technical analysis is the staple of all trading, and knowing how to apply it in your favor is an essential skill for any trader.
While most traditional technical indicators are better for day traders or those who hold positions for a few days at most, sentiment traders can benefit from their use as well if they’re modified to reflect market psychology rather than recent price movement.
Here’s a list of the most reliable sentiment trading indicators.
- Social Media Strength
One of the best sentiment trading indicators for gauging the mood of investors is how active they are on social media. This can be done by tracking which stocks get the most mentions and have many positive versus negative comments.
The logic behind this is that when there’s more conversation around a particular stock, it’s likely being talked about for a reason. The more attractive the reason, the higher the likelihood of a price swing.
- CBOE Volatility Index
Another excellent sentiment trading indicator is the CBOE Volatility Index (VIX), which measures stock market volatility. This index can vary between a level of 0 and 100, with anything over 30 suggesting that investors are feeling uneasy about it.
However, this isn’t necessarily a time to trade against the trend as there may be instances when the VIX is high, but that doesn’t necessarily mean that it’s going to break its long-term trend.
- High/Low Sentiment Ratio
Finally, another sentiment trading helpful indicator is the High/Low Sentiment Ratio, which calculates bullish comments to bearish comments on popular sentiment analysis platforms such as StockTwits, TickerTags, and Twitter.
This ratio gives traders an idea about whether or not investors feel confident or fearful about a particular stock, which can be an essential piece of data that helps you determine whether you should be buying or selling.
- NYSE Bullish Percentage Index
The NYSE Bullish Percentage Index, or NYBPI, is a sentiment indicator that measures the number of stocks on the NYSE that are trading above their respective 100-day moving averages.
This index is often used to track the sentiment of large-cap stocks but can be applied more generally.
- Fear and Greed Index
The Fear and Greed Index gauges investor sentiment by evaluating the most recent price activity and market volatility.
Traders can use this indicator to determine whether now may be an excellent time to trade against the trend, depending on whether the index is in oversold or overbought territory.
- Put/Call Ratio
Another sentiment trading indicator that helps traders gauge investor sentiment is the put/call ratio. This indicator compares the number of puts being bought to the number of calls and can help determine whether investors are feeling bearish or bullish.
Using the above sentiment indicators, you’ll be able to maximize your potential gains as a sentiment trader. Other indicators that can be useful are RSI, Bollinger Bands, and moving averages with more extended periods (such as a 50-day moving average). With the right combination of technical tools and strategies, you’re bound to see success in your trading endeavors!