How to use sentiment indicators

I once knew someone who referred to sentimental songs as ‘semimental’ songs. LOL.

So, sentiment indicators. Pretty popular. Get quoted a lot (especially over the last 2 weeks or so). None of the sources I read say that because sentiment indicators are overly bearish then we are going to get a rally straight away (especially over the last 2 weeks or so). Thats too simplistic. Really bearish sentiment might mean we get a rally straight away, or it might mean the mkt keeps going a bit lower more, pushing sentiment lower still … and causing much pain to longs looking for an relief rally. Vice versa when sentiment is very bullish.

Nah, best to use sentiment indicators very lightly indeed (especially over the last 2 weeks or so). If sentiment is overly bearish its best to look for further falls to be limited. Don’t go getting short and looking for the home run (especially over the last 2 weeks or so) – by all means keep playing shorts, but take your profits and don’t be surprised that the dips run into support (there are lots of people short, right?). Vice versa if sentiment is overly bullish – by all means keep playing longs, but take your profits and don’t be surprised that the rallies run into offers (there are lots of people already long, right?).

Thats the best way to use sentiment in your trading, not as a trigger to go all in on a counter-trend trade (though that will work eventually… everything works eventually).

Make sense? Or not? Whatever.

Twitter: @FinMktTrader

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