February 19, 2011
Market sentiment and the investor emotions are very powerful when trading stocks and options. If you learn how to master market sentiment you could find yourself finally making trades ahead of the next big move higher/lower.
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Today we are going to show you how to put a trade on and be confident that the position will start moving in your direction instead of going against you right away. I use market sentiment analysis each and every month for my own trading, and attribute much of my success to it. But.
I Lost Too Much Money Early On
When I first started trading I had the same problem many of you are experiencing right now. I got stopped out of a lot of trade even though when I looked at the charts it "seemed" I should have been winning much more often.
A couple months of this trading and major hits to my overall confidence and I begin to also cut my winning trades short. I would see a profit and take it quickly - fearful it would disappear.
I soon came to realize however, that to really make money trading stocks and option you need to position yourself with the major driving forces in the market and not against it. This momentum or driving force is - Market Sentiment.
Sentiment Is Based On Human Emotions
Since nearly all trading is still done by actual humans, though computer trading is on the rise, market movements are driven primarily by emotional people. It's this changing perceptions and emotions of people that run the market. Most people keep forgetting this simple fact.
People move the markets, not candlestick patterns, stochastic indicators, put/call ratios or economic data. We have all seen cases where any one of these indicators or event seems to be bullish for the market and yet it sell off!
Here's a past post about Apple. It had earnings that beat all estimates and yet the stock fell the next morning?
Regardless of how bullish something seems to be for the market, it's the traders and investors who determine how higher the market will go (or won't go) in the past case of Apple.
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Predicting Market Sentiment Is Much Easier
Fortunately for us today, predicting the market sentiment or market emotions of traders is a lot easier than predicting price action. Hard to believe a first but absolutely true.
Between money flows, RSI indicators, Commitment of Traders, and other sentiment readings - we can easily see if the market is poised for a sell-off or rally.
Once we know where most traders are positioned, the key to profitable trading is more about getting direction right when sentiment is strong than it is about getting in at precise price levels and times. In plain English - we want to identify a trend and jump on board, rather than try to pick tops and bottoms.
If you can master market sentiment, you will quickly start trading the next big trend and make a lot of money doing it.
COT - One Of The Best Sentiment Indicators
The Commitment of Traders data is released every week by the CFTC government regulatory organization and publicly gives the positioning of the two largest players in the market. These two groups are "large speculators" (i.e. hedge funds and banks) and "commercials" (corporations). With this information it's hard to NOT be on the right side of the trade right?
Now you know that it's publicly available what the "Smart Money" is doing each and every week. When the large speculators put on or take off exposure each week, you can follow their moves all year long.
Seems so simple now that you know what to look for right?
Tuesday, 17 September 2019