Market sentiment
The overall mood of traders and investors towards a market. Sentiment can carry prices further than the news alone would suggest, in either direction.
What market sentiment is.
The mood of the crowd, and how it shows up in prices.
Market sentiment is the general attitude of traders and investors towards a market. When most expect prices to rise, the mood is optimistic. When most expect falls, it is pessimistic.
Sentiment is not the same as fundamentals. A currency can rise on hopeful mood alone, then fall when the data disappoints.
Traders use sentiment as context. It describes how crowded a view may be, not where price will go next.
How sentiment is measured.
Five kinds of measure, each covering a different group of traders.
Positioning data.
The Commitments of Traders report, from the US Commodity Futures Trading Commission, shows how groups of futures traders are positioned. It is published weekly.
Implied volatility.
The Cboe Volatility Index, or VIX, is calculated from S&P 500 option prices. It tends to rise when traders pay more for protection, so it is often called a fear gauge.
Surveys.
Some groups ask investors each week whether they expect prices to rise or fall. The AAII Investor Sentiment Survey of US individual investors is one example.
Options activity.
A put gains value when prices fall, and a call when they rise. The put/call ratio compares how many of each are traded. More puts can mean traders are buying protection against falls.
Fear and greed indices.
Composite gauges that combine several measures into one score from 0 to 100. They have their own guide.
VIX is a registered trademark of Cboe Exchange, Inc. S&P 500 is a registered trademark of Standard & Poor’s Financial Services LLC.
How traders use sentiment.
As a question to ask of the chart, not an answer in itself.
Start with the trend.
Read sentiment alongside the price chart, not instead of it. Note the trend first, then ask how the crowd feels about it.
Look for extremes.
Very one-sided readings suggest a crowded view. Some traders treat that as a reason for caution, not a reason to trade the other way.
Check for a divergence.
If the mood keeps improving while price stalls, the move may be losing support. It is a question to ask, not an answer.
Let price confirm.
Wait for the chart to show a change, such as a break of support, before you act on a sentiment reading.
With the crowd, or against it.
Two ways traders can read the same sentiment reading.
Suppose a weekly survey shows that most respondents expect a stock index to keep rising, while the index trades near a record high.
A trend follower sees the mood as support for the trend. They keep a long position, with a trailing stop below the last swing low.
A contrarian, who looks to go against the crowd, sees a crowded view. If almost everyone has already bought, there may be fewer buyers left. The contrarian waits for price to confirm a turn.
Either view can be right at different times. The reading alone does not say which applies, so neither trader acts on it without the chart.
Common mistakes.
Where traders new to sentiment most often go wrong.
Treating an extreme reading as a timing tool. Sentiment can stay extreme while a trend runs for months.
Trading against the crowd by reflex. A contrarian view needs confirmation from price like any other.
Mixing up timeframes. Weekly positioning data says little about the next hour.
Relying on one measure. Each gauge covers a different group of traders and markets.
Questions, answered.
What traders ask most about market sentiment.
01What is market sentiment, in plain terms?
02What is a contrarian?
03Is the VIX a measure of sentiment?
04How often is the COT report published?
05Can I practise using sentiment?
Watch sentiment and price together.
Compare a sentiment reading with the chart on a free MT5 demo before you trade with real money.
Trading CFDs on a live account puts your capital at risk and you can lose money. A demo does not.