Every good trader knows their TA from their FA, and can appreciate the effect that fundamental and technical analysis have on market movements. But what about SA? Sentiment analysis, which involves making decisions based on the emotions of other traders, is arguably just as important, especially in the cryptocurrency market, where a herd mentality prevails.
Also read: South Korea’s Largest Crypto Exchange Upbit Under Investigation for Fraud
Other People’s Feelings Matter
“Don’t trade on your emotions” is one of the first rules a trader learns, because making yourself a hostage of FOMO, and all the feelings that come with it – remorse; euphoria; despondency – is a recipe for disaster. But what about trading on the emotions of others? You might be a mechanistic trading automaton, with your unbridled emotions kept in check, but the rest of the market is not, and it’s their decisions – no matter how irrational – that move markets, not yours.
As an example of sentiment analysis, consider the periodic bitcoin movements of the Mt Gox trustee. Every time he sends a tranche of coins to a different address, BTC dumps. Technically, this occurs because people are anticipating that when he offloads 8,000 BTC onto the open market it will cause a flash crash. And yet the trustee has provided reassurances that he is not selling his coins in such a manner, yet BTC still drops the moment he moves coins. The only interpretation is that traders are anticipating other traders dumping BTC on the news and are clamoring to sell first. Even if you have faith in the trustee’s intentions, simple sentiment analysis tells you to sell.
There’s a Fine Line Between TA, FA, and SA
Technical, fundamental, and sentiment analysis are disciplines which intersect. Even
