Chapter 3
Going with the Flow: Market Sentiment
In This Chapter
Looking into market sentiment
Turning up the volume
Paging through calendar effects
Your goal as a technical trader is to identify what the crowd is doing and take advantage of it — without falling prey to the extremes of sentiment that can cause big losses when the market wakes up and realizes it has gone too far. When just about every trader is either bullish or bearish, you need to stop following the crowd. Acknowledging that the balance of buyers and sellers can tip violently, analysts have devised sentiment indicators and volume indicators to help identify crowd extremes. Sentiment indicators identify extreme situations so you can catch the next wave or get out of the way.
Sentiment and volume indicators operate on the principle that, “The trend is your friend — until the end,” meaning that the crowd is wrong at price extremes. Some sentiment indicators apply to “the market” in its entirety, and others apply to individual securities. Volume directly represents the extent of trader participation and is a powerful indicator in its raw state, before you even manipulate the data to derive an indicator.
The word indicator refers to a statistic comprised of data about the price or volume of a security that has been reorganized or rearranged to provide analytical insight. You can use just about any market data that ...
