Trading 101: Importance of "Market Sentiment Analysis" In Crypto Trading
Let's take a walk down memory lane. In 2017, some influential celebrities were all over the place about the importance of Bitcoin and how it changes everything. Popular amongst them were Paris Hilton, Floyd Mayweather, and DJ Khalid. What was the result of this campaign? A 10% increase in Bitcoin’s price. Coming down to 2021, the United States was at a period of uncertainty. A new government, excessive spending due to the coronavirus, and rumors of inflation.
It was perceived that the dollar would cease from being a good store of value and people moved in their numbers to cryptocurrency. There was a massive boom in the price of tokens and the popular Bitcoin increased over 10,000% from January of the previous year. In the same vein, when countries ban or accept crypto trading, the news always reflects on the price.
What is Market Sentiment?
Sentimental analysis in one sentence is "emotions first, reactions later". If you've heard the phrase "To the moon" or have seen social media pictures with Laser eyes, then you should understand the influence social media plays on cryptocurrencies. These unquantifiable acts guide the demand and supply of cryptocurrencies and hence, affect prices.
Traditionally, cryptocurrency traders use different analyses to determine what the market is saying and the direction it seems to be heading. The two major ones that stand out are Fundamental Analysis and Technical Analysis. While these two are non-negotiable as they look at the short-term and long-term direction of the stock, there is a third type of analysis that stands out as the fulcrum for the previous two and can alter charts in split seconds. And, that is Market Sentiment analysis.
Why Should You Know About It?
Information is a key part of trading and you can't accept one type of analysis at the expense of another. Cryptocurrency traders are familiar with FOMO (Fear of Missing out - where everyone wants to enter a trend so as not to be left behind). With sentimental analysis, you can：
- Have a Bird's-eye view of the market in the short term
- See opportunities either with a trend or against a trend.
- Reduce the influence of emotional trading.
- Understand the level of Fear to Greed In the market and channel your trades accordingly.
How to Perform Market Sentiment Analysis?
Every market is monitored and one way to know the general perception of traders to the current cryptocurrency market is through sentimental indicators. Hedge funds use indicators worth more than the average trader can afford so for this article, let's look at three free but very powerful indicators.
Fear and Greed Index
Remember one of the most successful investors' quotes? Be greedy when others are fearful and fearful when they are greedy. How do you know the minds of others? In the cryptocurrency world, the answer is the "Fear and Greed Index." The fear and greed index is a powerful sentimental analysis tool that takes the aggregate results of five distinct market forces. The forces include
- Market Volatility
- Trading Volume
- Social Media Sentiments
- Bitcoin Dominance
- Search Trends
The aggregates of these five are gauged into Fear or Greed. When volatility is high, Bitcoin dominance is high and the remaining three are negative or low, then the market is predicting a dip. If the reverse is the case, then we are either in a bull run or preparing for one. The Fear and Greed index is used over longer time frames as it is updated once every day.
Cryptoradar exists as both an app and in web version- is an easy-to-use tool that tracks the market sentiment for some of the biggest cryptocurrencies by market cap. There are two sides to it. The left side, which has a red ticker, is for negative sentiments and the right side is for positive sentiments. The further away from the center a cryptocurrency is, the more accurate the social media sentiments around it. Cryptoradar is very good for short-term trading, but for safety, it shouldn't be the only indicator you're using.
Bull and Bear Index
The bull and bear Index is a free sentimental analysis tool. Like the Fear and Greed index, this indicator also uses social media platforms, but unlike the former, the bull and Bear Index exclusively track Bitcoin. The Bull and Bear Index can be used for Short-term trading as you can quickly hop in on buying and selling before sentiments start reflecting on Bitcoin's price. This indicator works on a scale of Zero to One. When the reading is closer to zero, the market is extremely bearish and closer to one is extremely bullish.
Because the cryptocurrency market is relatively small when compared to other financial markets, the effect of market sentiment is prone to be more accurate and exaggerated than the others. Of course, this should help traders make more accurate predictions, and ultimately make a profit, especially when combined with fundamental and technical analysis. They will also enjoy the extra privilege of not being caught in a bull trap or a bear trap.
If, however, you keep getting your emotions involved when trading, there is a quick solution for that - the KuCoin Trading Bot.
Stay tuned and watch the KuCoin Blog for more interesting and valuable educational content. All the best!
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