Market sentiment index


Trade should only be systematically

In conclusion, it should be noted that all discussion on constructions such sentiment index, only make sense in a systematic approach to trading. By itself, the question of what specific benchmarks trader chooses to make a transaction, not a sentiment index. The use of the Index may in combination with any systematic approach to trading with an automated computer trading systems, and with a rational human strategies. It is important to present the trading system. If a trader opens positions for emotional reasons, without precisely and unambiguously fixed rules, the application of the index is meaningless.

Because you can and do not look for universal index and do not follow the strict rules of trade, but simply to keep the on-screen set of standard, reliable and clear indicators (RSI, Stochastic, Bollinger, MACD, DMI, Momentum, etc.), plus a couple of new structures - their own or found in the magazine Stocks & Commodities. So do many traders. Looks, of course, very beautiful, and with some luck can sometimes even lead to some good results. But the variety of emerging display combination that is that talk about any system in the trade at all unrealistic. Every one position becomes independent research, no trade situation is different, and to put the statistics for the objective analysis of the trade will never succeed.

Market sentiment index is not designed to generate signals buy / sell, it shows the prevailing mood in the movements of the market. But the mood does not always coincide with real possibilities. The market may be quite long and hard against the move and mood (as often happens in life, and not only in a speculative business). However, the movement in the financial markets is determined primarily by mood, so if the index accurately reflects the mood, sooner or later it will win and lead the market in the direction. But the moves against the sentiment may be significant.

Therefore, well-chosen sentiment index can improve the statistics of a particular trade. Unsuccessful index it will not improve. But if there is a well-defined trading system, then there are no statistics, then there is nothing to improve. The effect of the index in an ad hoc trade measure nothing but the value of losses that would not necessarily be on the conscience of the index.

Proposed basic rules of interpretation and use of market sentiment index to trade:

1. The main property of the Index is that its positive values indicate an upward trend (bull market) and negative - on a downward trend (bear market). The following rules allow to consider the more subtle properties of the dynamics of the Index and to use them in trade rules.

2. If the market has a certain mood that indicates the index (bull or bear), the positions are open only in the direction of this mood.

3. If the index is at the top (high) field, the position can be opened in either direction, although it is preferable to line up. For a short position in this case requires a significant level of downside breakout of support or uptrend line on the chart.

4. If the index is at the bottom (low) field, the position can be opened in either direction, although the preferred direction is down. To go long in this case requires a significant break higher level of resistance or the downtrend line on the chart.

5. The output index beyond the extreme limits (above the upper limit of high or below the lower boundary of low) means strong overbought or oversold market and can predict particularly strong move in the opposite direction. However, this event is unlikely, since the index rarely falls outside those limits.

Each trader can supplement these general rules of the Index's own rules on the assumption under-speed, which he uses to trade, and then checking whether the index provides useful additional information to its trading system, to decide whether to apply the index in practice . Currently, some specific variants of the Index are based study. The results will be published.