Since gains and losses are a consequence of traders interpretation of economic data and signals, counting on crowd psychology is also an essential tool in online trading. This is where sentiment analysis comes in.
Sentiment analysis consist on how markets are standing in front of the risk. When traders are willing to take risk, they will probably go after appealing instruments since they may feel secure of having higher returns. On the other hand, traders are not feeling like they want to take risks, they may put their money in safe-haven assets like US Dollar or Gold.
Price action in a way or another should reflect all available market information. But it is not as simple. Financial market will not reflect all of the information out there just because traders will all act the same way. So, things don’t work this way.
This is where sentiment analysis comes in light. Traders have their opinions of why the market is going how it is going, and if they want to trade in the same direction or against it. Trader’s thoughts and opinions are expressed through the action they take, so it is formed the overall sentiment of the market regardless of what information is going around.