User Trader Sentiment
Did you know that the global markets have previously fallen 1,500 points in one day due to traders sentiment? What is trader sentiment and why does it have such an impact on the markets? Continue reading to discover this catalyst.
Market sentiment, or user trader sentiment can be defined as a measure that can rarely be quantitative of the attitude, feelings, and mood of investors toward the financial markets, or a specific sector or asset, in general.
Market sentiment is just a piece of the puzzle that drives price action in the markets. Of course this should not discredit the power behind traders emotions and how it can truly alter the game. So, you might be asking as an avid trader, how can you measure user trader sentiment. Well, unfortunately there is no one way to have a quantifiable number, but, there are many metrics and indicators that, if used collectively, can gather an overall understanding of the general idea of how traders view and feel about the market at a particular time.
Safe Haven Assets
One of the more traditional ways of gathering information regarding market sentiment is looking at safe haven assets like risk free assets and US treasury bonds, gold, certain currencies, and other precious metals.
VIX Index/CBOE Volatility Index
Considered to be a more notable measure of sentiment is the VIX Index, also known as the CBOE Volatility Index, or Fear Index. This quantitative measure is only for S&P 500 index options and shows the sentiment analysis through implied volatility.
This index is a ratio of stocks that have new 52- week highs as opposed to those making lows. To analyze this metric, if the number is below 30, this implies a bearish sentiment, while above 70 implies a bullish sentiment.
Put Call Ratio
This quantitative analysis of trader sentiment measures the put options to the call options being purchased in the market at a given time. Generally, investors acquire puts to protect their investments, a high reading in the Put Call Ratio can be analyzed as investors having a more fearful sentiment; that they believe the market is in a trough, or decline.
CNN’s Fear & Greed Index
Although, from a third party source, CNN’s Fear & Greed Index uses 7 quantitative measurable assessments to determine the market sentiment. On an easy to read scale from 1 to 100, this sentiment index also gives insight on previous dates like 1 week, month, and year ago. Flashing in bright red indicates fear, while on the opposite end green, at 100 indicates traders are particularly greedy towards the market.
As shown, there are many ways to measure user trader sentiment and it has been shown in the past that traders’ volatile emotions and physiological trading does have an impact. You can explore and analyze this aspect, but in the end it must be noted that this is truly a qualitative aspect that can only be turned quantitative with multiple and accurate measures simply for an overall idea.