Understanding the market sentiment or pulse is key to trading and investing. Find out what it means and how to use it right.
The stock market is a collection of buyers and sellers who trade listed securities. At any given point, every market participant has a particular outlook about specific securities and overall markets. It could be due to technical or fundamental analysis, news, or government policies. This collective sentiment of market participants drives demand and supply, leading to price movements.
Understanding this collective market sentiment or pulse could be key to success for any trader or investor. Let's take a detailed look at what is market sentiment and how it can be used-
1. What is Market Sentiment?
Market sentiment is a psychological phenomenon through which the positive or negative positioning of the market is assessed. It is the collective feeling of the market participants towards any stock, commodity, currency, or overall market. While it is not obligatory, it is generally seen that the market moves according to the sentiment, at least in the short term.
If the sentiment is optimistic, there is a high probability of the market being bullish. Similarly, if the pulse is pessimistic, it is considered a bearish market.
2. How to Analyse Market Sentiment?
Thanks to modern technologies, we now have highly sophisticated indicators, metrics, and tools to help us analyze market sentiment. For instance, there is Market Mood Index (MMI), a market sentiment metric developed by MarketPsych. It uses participant emotions, company fundamentals, economic and geopolitical events, etc., to provide a quick market sentiment overview.
Then there is the Fear and Greed Index (FGI), which divides the market sentiment into four emotions- Extreme Fear, Fear, Greed, and Extreme Greed. Investors can also use something like India VIX or a technical indicator like the Moving Average to gauge market sentiment.
3. Who Should Use Market Sentiment?
While mostly intra-day traders and technical analysts closely track the market sentiment, it is an important metric for every market participant. While an intra-day trader would be interested in today’s market sentiment or sentiment in a specific security, a long-term investor could gauge the overall market pulse and sentiments in a particular sector, stock, or mutual fund before investing.
But while market sentiment is a handy tool to assess securities and markets, it should not be used as a standalone tool for making trading and investment decisions. Use it along with technical and fundamental analysis tools to make holistic investment decisions.
4. Why Should Traders and Investors Use Market Sentiment?
Better Predict Market Behaviour
As emotions like greed and fear drive market movements, knowing the pulse of the market can help participants make informed decisions. Even the most technically and fundamentally sound trades and investments can fail if the market sentiment is not in your favour.
Improve Trading Skills
While securities or the overall market doesn’t always move according to the collective market sentiment, it can be a vital metric to gauge your trading decisions. When used along with other analysis tools, market sentiment can considerably improve your trading skills.
Find Trading Opportunities
Events like changes in company management or new government policies can significantly impact market sentiment. The sentiment moving from bearish to bullish or vice versa can provide you with profitable trading opportunities.
Trade and Invest More Confidently
When you know the market sentiment is in your favour, you can trade and invest more confidently. Knowing that your stock or market outlook aligns with the majority of the participants helps you make informed and more profitable decisions.
5. Where to Find Market Sentiment Tools and Indicators?
MarketPsych’s MMI index is available on its official website. The index tracks the stock market in 200+ countries, including India. As for the other versions of market sentiment tools and indicators, like the GFI, you can easily find them on various online platforms.
The India VIX index is created by NSE (National Stock Exchange) and is available on their official website and other online platforms. Indicators like Moving Average (MA) are mostly available with all the online trading and charting platforms.
Understand Market Sentiment to Understand the Market
Emotions significantly influence market behaviour. Therefore, knowing the market's pulse or understanding other participants' collective outlook is critical to trading and investing successfully.
Mutual funds can be a smarter alternative if you are new to the stock market and find it complex and risky. Discuss your investment goals with a financial advisor who can help you choose investments according to your risk profile.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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