Community Submission - Author: John Ma
In finance, the term sentiment (or market sentiment) refers to the highly subjective feeling about the state of a market. It is the overall emotion that traders and investors have in regards to the price action of a particular asset.
Essentially, the market sentiment is a result of multiple factors. It may include the information derived from fundamental analysis (FA) and technical analysis (TA) indicators. Recent news and price history may also play a role in the process.
While they are closely related, it is worth noting that market sentiment and fundamental analysis are quite different things. While the sentiment is related to psychology and emotions, fundamental analysis is more associated with the performance of a particular business or cryptocurrency project (e.g., reputation and market capitalization).
Many traders and chartists consider the market sentiment to be a good indicator of potential short and mid-term price movements. In general, when the sentiment is overly optimistic (bullish) or pessimistic (bearish), the market tends to reverse and start moving in the opposite direction.
In other words, the market tends to go up when the majority of traders are bearish, and down when the overall sentiment is more bullish than what could be considered normal. As such, market sentiment may often work as a type of contrarian indicator.
The market sentiment is one of the things contrarian traders look for. If most people are bullish, they will consider selling or shorting. But, if the sentiment is too bearish, they will consider buying or opening a long position.
Summing up, market sentiment can be seen as the result of the two major emotions that drives a financial market: fear and greed. Other than that, market sentiment is an important component of market psychology.
Recently, attempts have been made to accurately measure and quantify market sentiment by applying the results and knowledge from fields such as behavioral finance and behavioral economics.