Sentiment is the key. How to understand market emotions that traders need to know

In the world of trading and investing, market sentiment is a factor that significantly influences decision-making, comparable to technical analysis. When we talk about market sentiment (Market Sentiment), it refers to the overall expression of feelings and mental state of investors toward various assets during this period. This sentiment itself drives the flow of capital in the market.

Why Sentiment Is Something Not to Be Overlooked

The importance of sentiment in financial markets is clearly demonstrated by the flow of funds. When market emotions tend toward a bearish (Bearish) trend, investors rush to shift their capital into safer assets such as gold or bonds. Conversely, when sentiment turns bullish (Bullish), confidence returns, and funds flow into stocks and other risk assets.

An interesting point is that sentiment does not arise from but is a result of news, rumors, and market expectations. Especially in the cryptocurrency era, sentiment can change rapidly with new information.

How to Read Market Sentiment

1. The VIX – Market Fear Index

The VIX is a tool that indicates the level of volatility and fear among traders. Experts often compare the VIX with Moving Averages to track sentiment direction.

• When the VIX expands higher = increased fear = potential bottom signals
• When the VIX contracts lower = increased confidence = warning of approaching highs

2. The High-Low Index – Measuring Strength Trends

This index compares the number of stocks touching 52-week highs versus lows. Reading sentiment from this tool is quite straightforward.

• Index below 30 = market in a downtrend, stocks trading near lows
• Index above 70 = market in a bullish trend, stocks trading near highs

This method works well when applied to major indices like S&P 500 or Nasdaq.

3. Bullish Percent Index – Indicator of Market Strength

BPI helps traders see the overall percentage of stocks in bullish signals.

• BPI > 80% = very high confidence in an uptrend, possibly nearing the peak
• BPI < 20% = massive selling pressure, market may be near the bottom

4. Monitoring News and Online Discussions

Currently, market sentiment is clearly reflected in investor conversations across various platforms. For example, in 2021, cryptocurrencies gained massive attention, leading to intense FOMO. Conversely, when negative news emerged, sentiment shifted to a lack of confidence.

How to Use Sentiment for Smarter Investment Decisions

Understanding sentiment is not just for investors to follow feelings blindly but to forecast market trends rationally. Those who interpret sentiment well can identify the right timing to enter or exit positions.

However, relying solely on sentiment can lead to FOMO or FUD easily. Therefore, sentiment analysis should be combined with technical analysis and fundamental factors to make more balanced and confident investment decisions.

Summary

Market Sentiment reflects the collective consciousness of investors and drives buy-sell decisions every second, whether in stock, Forex, or cryptocurrency markets. Understanding what sentiment is and how to analyze its reality helps traders make smarter, more systematic investments.