Sentiment Trading refers to strategies based on trader behavior. It involves using sentiment indicators to get a clear picture of the mood of the stock market. These strategies are based on investors' perceptions and reactions to market events.

The essence of sentiment trading lies in its ability to predict market movements based on investor psychology. By understanding market sentiment, traders can anticipate trends and adjust their strategies accordingly.

Use our strategy database to develop quantitative strategies faster.

Known as the Fear Index, the VIX is based on options prices. An increase in VIX indicates a greater need for insurance in the market, a sign of rising volatility.

This index compares the number of stocks hitting 52-week highs with the number hitting 52-week lows. This helps to understand whether the market is bearish or bullish.

The BPI measures the number of stocks with bullish patterns based on point and figure charts. A neutral market has a bullish percentage of around 50%.

Investors generally use 50-day and 200-day simple moving averages (SMAs) to determine market sentiment.

Studies, such as Lee's on the relationship between investor sentiment and the performance of value versus growth stocks, show that investor sentiment at least partially influences the premium performance of value stocks. By using Sentiment Trading, traders can therefore develop strategies based on investor behavior and maximize their returns.

Sentiment Trading is an essential component of quantitative trading. By integrating sentiment indicators into their algorithms, traders can refine their strategies and navigate volatile markets more effectively. Ultimately, understanding market psychology and using it to one's advantage is the key to success in the complex world of algo trading.

💡 Read more: