Day trading, sentiment analysis

How many times have you been in a trade that fundamental news events say one thing and the market goes the other way, or technicals conflict fundamentals (very common), maybe to help you need to get sentimental too. Rob Lee Forex trader from AiMS gives you an overview of another form of analysis, sentiment analysis.

Many of you will know I’m predominately a technical analyst when on the Forex markets; I will use technicals as my prime analytical device of forecasting, particularly as my timing tool. Add a dessert spoon of fundamental analysis for confirmation (I do my fundamentals mainly on the USA economy when on Forex for obvious reasons) on the larger scene and I’m all set for a day’s trading.

What I don’t talk about often is sentiment analysis, a strong player on the near-term or day trading game. In my usual style I will define sentimental analysis, how we analyze it and how to use it in rational order.

Sentiment analysis, what is it?

Sentiment analysis is a broad area of processing communication channels, text, audio, visual or digital.  In simple terms we are attempting to gauge the attitude of the speaker or writer and their emotional state, or more importantly the emotional state they wish to communicate to their audience, you.

Also, if you are like me cynical, you would assume that whoever is talking / writing also has a motive that may not be in line with the emotional state they wish to produce from the simple marketer who has to write something to push you towards a product (look for masses of twitters and free this and that), a Bloomberg presenter who is paid to talk (a lot) to a release from a company with an invested interest in the markets or their own share price to finally the governmental speaker that maybe voted out of the next election unless his comments are popular. All I’m asking you to do is think about it.

Sentiment analysis, doing it

Analyzing sentiment can be a science or art, computers using “bag of words” software to provide semantic orientation or appraisal theory assessing the variances of emotional reactions to a given statement or event.  You can use statistical, count positive, negative of statements and then tally your results, or linguistics that produces rules and compares the statement to them.

Whatever method you use the goal remains the same, we are attempting to gauge the polarity of the text, sentence or feature and if it is positive, negative or neutral to the market combatants and project this into our forecast and timing analysis as an added confirmation.

Sentimental analysis, using it

Using sentiment, after my initial technical analysis of the near-term (the last move: daily charts) I’m looking for turning points and apply my money management strategy, from there as a cautious trader I overview my fundamentals and look to trade the same way of the last known fundamentals (also looking for early turns in technical’s for unknown fundamentals too, that’s another story) , as sentiment statements enter the data stream I begin counting positives and negatives and scan the feed for key phases or sentences along with who’s saying it and I think about why they are saying it. All fall into line and trading operations begin, if something is off set I do what a good trader is paid to do, wait, re-analyize, check and double check.

The old saying “There ain’t no such thing as a free lunch” is an important quote to remember, humans by nature have their own goals, amplified by the fact you are in the market with some of the most capitalist, competitive, skilled and cunning people on the planet who will and do everything possible to make money, their communication with you is important and you should take note.

Take care in the information you receive, analyze it: who, why, when, positive, negative, effect

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Rob Lee

Senior Analyst Arriba Capital off-shore

Consultant Analyst and Investment management school London