Sentiment Analysis
The study of market feeling — the collective mood of traders.
Core principle: Extreme sentiment creates reversals. When everyone is bullish (or bearish), the majority is usually wrong.
What Is Sentiment?
| Sentiment | Meaning |
|---|---|
| Bullish | Everyone buying |
| Bearish | Everyone selling |
| Fear | Panic selling |
| Greed | FOMO buying |
| Neutral | Indifferent |
Sentiment Indicators
Fear & Greed Index
Measures crypto market sentiment (0-100):
| Value | Sentiment | Implication |
|---|---|---|
| 0-25 | Extreme Fear | Potential bottom |
| 25-50 | Fear | Caution |
| 50-75 | Greed | Caution |
| 75-100 | Extreme Greed | Potential top |
COT Report (Commitments of Traders)
Shows trader positioning:
| Category | Position |
|---|---|
| Large specs | Net long |
| Small specs | Net short |
| Commercials | Hedging |
Use: Watch extreme net positions for reversals.
Retail Sentiment
| Source | What It Shows |
|---|---|
| IG Client Sentiment | % long vs short |
| OANDA Retail | Positioning |
| TradingView | Buy/Sell ratio |
Use: Fade extreme retail positioning.
Volatility Index (VIX)
Measures market fear:
| VIX Level | Market Fear |
|---|---|
| < 12 | Complacent |
| 12-20 | Normal |
| 20-30 | Elevated |
| 30+ | Fear |
Use: Low VIX = high risk, high VIX = safe.
How to Use Sentiment
Extreme Sentiment = Reversal Potential
When everyone is positioned one way:
- Everyone long → Dump potential
- Everyone short → Rally potential
Why: No one left to buy/sell.
Low Volatility = Risk
When VIX is low:
- Complacency builds
- Risk increases
- Corrections hurt
Use: Reduce exposure when VIX < 12.
High Volatility = Opportunity
When VIX spike:
- Panic = oversold
- Opportunity to buy
Use: Look for reversals when VIX spikes.
Sentiment Analysis Process
Step 1: Check Sentiment Indicators
- Where is fear/greed index?
- What’s COT showing?
- What are retail positions?
Step 2: Identify Extremes
- Sentiment shows extreme?
- Everyone on one side?
Step 3: Confirm with Technical
- Price at key level?
- Divergence?
- Reversal pattern?
Step 4: Position
- Oppose extreme sentiment
- Fade the crowd
Sentiment Scenarios
Scenario 1: Extreme Fear
Sentiment: Fear/greed < 20 Situation: Panic selling Position: Potential long
Trade:
- Wait for price to stabilize
- Enter on technical bounce
- Tight stop
Scenario 2: Extreme Greed
Sentiment: Fear/greed > 80 Situation: FOMO buying Position: Potential short
Trade:
- Wait for technical rejection
- Enter on breakdown
- Tight stop
Scenario 3: Complacency
VIX: < 12 Situation: Everyone bullish Position: Caution
Trade:
- Reduce size
- Watch for reversal
Sentiment vs Technical
| Sentiment | Technical | Use |
|---|---|---|
| Direction may change | Timing entry | Sentiment for direction |
| Reversal timing unclear | Precise entry | Technical for entry |
Best: Use sentiment as filter, technicals for entry.
Common Mistakes
1. Fighting Extremes Immediately
Mistake: Shorting at extreme greed.
Result: Even more greed.
Solution: Wait for technical confirmation.
2. Ignoring Sentiment
Mistake: Ignoring COT, positioning.
Result: Trading with the crowd.
Solution: Check contrary indicators.
3. No Confirmation
Mistake: Trading sentiment alone.
Result: No reversal.
Solution: Get technical confirmation.
4. Fighting Strong Trends
Mistake: Looking for reversals in strong trends.
Result: Continuation.
Solution: Trade with trend until exhaustion.
Key Takeaways
- Extremes — Create reversals
- Sentiment — Contrarian indicator
- Technical — Confirms entry
- VIX — Measures fear
- COT — Shows positions
Related
Market-Recap.md >>>
Fade extremes. Confirm with structure.