Trading with Sentiment: How to use sentiment data to analyse stocks

Trading with stock sentiment analysis enables traders to assess directional biases and potential trends within the market. The aim is to understand the market psychology of traders and to use this analysis as a forecasting tool to determine possible future price movements of specific assets. Additionally, market sentiment indicators are used by traders to try to ascertain whether a stock is being influenced by emotion rather than rational decision making.

What is stock sentiment analysis?

Stock sentiment analysis is used to determine and understand the traders’ opinion of a specific stock or asset. There are a variety of factors that contribute to the overall stock sentiment, primarily industry, political and economic updates within the traditional media outlets and across social media platforms. These news stories and topics of debate are key influencers of stock sentiment due to the impact that these updates have on the specific company’s earnings, trading volume and volatility of both the asset and the market as a whole.

What effect does stock sentiment have on stock performance?

In classical finance theories and models, stock sentiment plays no role in the cross-section of stock prices, returns or potential returns. These classical theories are driven by the theoretical efficient market hypothesis, that market prices only react to new information. 

More contemporary analysis, especially those based in behavioural finance, take issue with this classical understanding of the role of stock sentiment in determining prices. Baker and Wurgler (2006) argue that market and stock sentiment leads to traders using optimism or pessimism whilst predicting prices, instead of the traditional fundamental analysis of factors such as EPS or P/E ratio. 

Despite the growing acceptance of stock sentiment analysis as an analytical trading tool, it would be unwise to assume that positive sentiment = price rises or vice versa. The imperfect irrationality of traders means stock sentiment alone should not be used when predicting price movements. However, when used in conjunction with other analytical trading tools, primarily technical analysis of past performance, stock sentiment can be a useful tool to help traders gain a competitive advantage. Empirical evidence does suggest that market sentiment is one of the most reliable indicators of future price shifts.

When is stock sentiment analysis most effective?

Investor sentiment analysis of any given stock of interest is most important within volatile markets, where even a single piece of information can have a major effect on stock prices. In periods of high volatility, stock performance can be much more susceptible to sudden changes, especially when driven by emotional reactions to new information. 

The most commonly cited example of this is Kylie Jenner’s now infamous tweet in February 2018 regarding Snapchat, where the social media star bemoaned that “sooo does anyone else not open Snapchat anymore? Or is it just me… ugh this is so sad.” The $SNAP stock immediately began to plummet, dropping by over 6%, adding up to roughly a $1.5 billion loss of market value according to Reuters.

With this in mind, stock sentiment analysis is primarily used by day traders, rather than long term investors. This is because day traders are looking to benefit from the short term changes in a stock price driven by a 24 hour news cycle of regular updates, whereas investors typically pursue long term buy and hold strategies.

How to get started with Stock Sentiment Analysis

StockGeist’s market sentiment monitoring platform provides users with a cutting-edge stock sentiment analysis tool that processes data from real time social media and news updates of over 2200 publicly traded companies. It is quick and easy to register on the dashboard, and you can get started with a free account.

Once on the dashboard, users can utilise StockGeist’s wide range of stock sentiment features that are equipped with various capabilities, namely:

Stock Sentiment Ranking

The live stock sentiment rankings gather, count and create a dynamic rank for each stock over a 5 minute, 1 hour and 1 day period, based on the online opinions being shared and discussed.

Watchlist

Users are able to create a watchlist of companies of interest, giving easy access to real time sentiment changes. In addition to the handy, bitesize information, the watchlist charts section offers further in-depth stock sentiment analysis opportunities. 

Stock Overview

Every trader old and new needs fundamental analysis. StockGeist’s online dashboard provides important data such as market capitalization, stock price, P/E at your fingertips. 

News

The news section collates relevant news stories from authoritative sources, and our smart AI system determines the financial sentiment of the content, highlighting key areas with the text.

Alternatively, incorporate our data into your own project with our stock news sentiment API.