Sentitrade blog english

Twitter #Hash Crash

sentitrade — Fri, 26 Apr 2013 17:49:41 +0000

This weeks’ #hash crash, shows the impact Twitter can have on financial markets. It also shows why event trading merits utmost caution. Last Wed. the AP Twitter account was hacked, issuing a bogus tweet about an attack on the White House. A brief panic ensued and the Dow dropped close to 150 points. As soon as it was discovered that the message was a hoax, the market immediately regained the loss. This all happened within the course of 2 minutes. Following this, we received a multitude of questions. Does this affect SentiTrade? Does it affect the SentiTrade models? Did SentiTrade detect the bogus tweet? The short answer is:

No, no and no. Why? Because, we do not rely on social media sources to interpret market psychology! Which brings up another question; If we don’t track social media, what information goes into our market sentiment reading? And how do we know that it’s relevant?

RIRO: rubbish in rubbish out

First, SentiTrade focus on the news that go out to professional trading terminals. We have found this to be the most efficient way to avoid manipulated, or “polluted” information. The #hash crash is one example of unreliable social media news, however, pump and dump schemes are already well known, especially in the world of penny stocks.

Secondly, we chose to concentrate on sources followed by institutional traders for a very specific reason. If we stick to what they see, we’ll have a good grasp of information that has potential to move the markets. Of course, it would be more “democratic” of us to include social media with opinions and commentary of the common man. However, that’s completely irrelevant with regard to what will influence the market.

Plain and simple, the market doesn’t care about the opinions and commentary of the common man. The reason is that there’s different amounts of money at risk. The voice of an individual with a €25K account, tweeting he’s “bearish on APPL, will be completely ignored if Bloomberg quotes a trader from the Norwegian pension fund (size: €500 billion) who sees it as a buying opportunity.

The #hash crash showed us that someone thought it appropriate to use “trusted and verified” Twitter accounts for algorithmic trading. Needless to say we’re of a different opinion. It’s just a lot easier to hack access to a social media identity, than it is sidestepping the editorial team of a professional news organization.

Contact@sentitrade.com for more information on the SentiTrade market sentiment analysis and managed futures. You may also drop us a line in the contact form. If you have a NinjaTrader license, sign up for 14 day trial of SentiTrade here!

Market Sentiment: Spring jitters

sentitrade — Thu, 18 Apr 2013 13:28:31 +0000

Yesterday, we witnessed a 2,5% drop on the DAX within the course of 5 minutes. There wasn’t a single news story that explained the sudden drop, so conspiracy theories and rumors naturally had to surface. Surely it was a “robot” that had run amok, or was it the immanent downgrade of Germany, or (non-existing?) rockets fired at Eliat in Israel…

Looking at the negative trend currently dominating the market sentiment, it doesn’t take much to stir investor nervousness. In our last blog post, we discussed the recent decline in sentiment and over the last 2 weeks, the trend has continued (panel 3 in the chart below). The SentiTrade 200 vs. 50 day moving average (measuring the ratio of positive vs. negative news items), clearly indicate cooling.

In addition, we see more sentiment volatility (panel 2 in the chart below). This means that emotional language increasingly jump from hope to doom and gloom. Previous scenarios, similar to what we experience now, show that high volatility levels contribute to market nervousness.

Magenta: 200 day average / Cyan: 50 day average

Gentlemen, you can't fight in here! This is the war room!

Trends with benefits

sentitrade — Wed, 03 Apr 2013 13:59:21 +0000

And the markets keep on rallying… however, there’s a looming divergence with overall market psychology. The ratio between positive and negative financial news articles is in a clear decline – the 50 day average sentiment reading has crossed below the 200 line, see panel 3 in the chart below. At the same time we see less sentiment volatility, i.e. tonality swings from positive to negative are becoming less frequent. This reading confirms that a negative sentiment trend is underway… Under normal circumstances such a reading of the SentiTrade data could be used as a leading indicator. However, these are not normal circumstances. Central banks in the US, EU and Japan continue to flood the markets with liquidity. Still, we do not believe the markets can run on fumes forever, there will be a correction. The IJC data tomorrow and nonfarm payroll on Fri. could be the “perfect” set-up to put a dent in the current rally and align it with the overall market sentiment.

Market Sentiment situation prior to IJC and Nonfarm Payroll

Contact@sentitrade.com or drop us a line in the contact form for more information on SentiTrade’s market sentiment analysis and system trading services. If you have a NinjaTrader license, you may sign up for 14 day trial of SentiTrade here !

Sentiment report from a nearby central bank

Market sentiment report – adjusted for inflation

sentitrade — Thu, 07 Mar 2013 15:28:49 +0000

As the Dow broke new highs earlier this week, the talking heads went wild. But whenever there’s a new all time high, the “experts” don’t adjust for inflation. If I were to say, “you know this is great, I’ve now got the same salary as I did in the great dotcom year of 1999”, it would raise eyebrows. The same standard does not apply for the Dow, however, it should. Here’s why:

Adjusted for inflation, we’re looking for levels around 15.500 to mark a new all time high. That’s well over 1200 points away from the current level of 14.300. Still, at SentiTrade we’re as intrigued by high Dow levels as the next guy, which is why we made a comparison between market sentiment during 2007/08 and now.

In the chart, we’re looking at daily bars and compare the 50/200 day sentiment average (cyan and magenta). In the second panel we placed a volatility indicator to determine whether there is a stable trend in reporting, or if tonality in financial news language is frequently shifting. In the first chart from 2007/2008 we see a cross below of the 50/200 market sentiment daily average in September 2007. The 50 day exponential moving average then stays below the 200 line for the better part of two years. As of March 2008 we also see a consistently more volatile news landscape. This indicates market nervousness as the news constantly swings between hope and panic. The effect this had on the Dow is also plain to see.

Market Sentiment 2007/2008

In the second chart from 2012/2013 we see a sideways pattern in the 50/200 market sentiment daily average. There is not a clear trend as to whether sentiment is improving or worsening. However, we do see that the emotional volatility started to quiet down as of April last year. Swings between hopeful and panicky reporting became less frequent, although this changed again recently. Consequently, we now have a volatile and undecided market sentiment. Should the 50 day average make a clear break below the 200 average, and the volatility in reporting continue, we would read it as an corrective omen.

Market Sentiment 2012/13

SentiTrade the Gap: Webinar

sentitrade — Tue, 26 Feb 2013 11:52:27 +0000

Trading the gap is one of the best known setups around. There are a few different variations of the concept however, the main point is always the same; use the offset between yesterday’s close and today’s open to identify a high probability reversal. If that sounds too abstract, take a look at the lady on the photo and picture the following…

Last night you made a new acquaintance, Olga, an impressive waitress working at the local coffee parlor. Olga first caught your attention by serving Irish coffee in a most unusual way. You snapped a picture of her, and soon you started talking. As the night proceeded, rounds accumulated and the vibe between the two of you only got better and better. At some point her corset must have loosened, because she suddenly could not balance the drinks as she did earlier. You remember being a bit disappointed… there was an expectation gap. After that you don’t remember much, but today is a new day and when dropping by the coffee parlor to see Olga, your confidence is restored. She is serving drinks in the most unusual way again and the world is in order.

In terms of a trading set-up, we look at where the market closed yesterday (Olga with a loosened corset), and compare it with the opening level today (Olga back at work). Most of the time, the difference between yesterday’s closing and today’s opening, will be equalized sometime within the day (meet up with Olga after work). It does not make sense to trade all gaps however. We will pass gaps that are too small, as well those that are over a certain point size. Small gaps do not make a statement as to which direction the market may react, and big gaps have only a small chance of closing within the day.

Also, 24 hour trading and increased liquidity during the night session has made conventional gap trading strategies less effective. It is getting more and more important to understand market sentiment in order to identify high probability gaps.

To learn more about this, mark you calendar for a special webinar on Friday March 1st at 10.15 PM CET (4.15 EST). Kristoffer J. Lassen, co-founder of SentiTrade, will demonstrate how they use market sentiment trade the gap on the DAX future. Register now to attend, space is limited!

Leading up to this event, explore the different possibilities offered by the NinjaTrader platform. A webinar hosted by Raymond Stein on February 28th at 9.00 PM CET (3.00 PM EST) will cover Advanced Trading Techniques and Market Analytics, register now to reserve your space.

Special offer for attendees only: NinjaTrader is offering a special discount and free trial to all those in attendance. More information about this exclusive discount will be shared during the event only. Click here to download NinjaTrader for the event and get started for FREE!

If the mountain will not come to you…

sentitrade — Wed, 16 Jan 2013 12:02:49 +0000

Let’s get right into how SentiTrade performed last year. Our fully automated trading system went live last summer and has to date produced a return of 47.65%. But before we get into the details of the performance summary, lets have a look at the philosophy behind what we call the “Crowd ShakeOut” system.

Originally a software company, SentiTrade was developed to interpret tonality in financial new stories. By measuring the ratio between positive and negative news articles, we wanted to translate the market sentiment into specific number values.

... then you have to come to the mountain!

Next, by analyzing historical data going back to 2005, we found certain connections between extreme emotional language in financial news, and behavioral patterns on the financial markets. Abnormal uses of positive and/or negative language had historically increased the likelihood of certain types of investor behavior, i.e. crowd psychology.

Whereas most trading algorithms are based on price information only, SentiTrade measures something yet to be quoted, namely the power of imagination caused by emotional language. Armed with this data, we programmed strategies aligning with oversold – overbought scenarios.

Specifically, the “Crowd ShakeOut” system exploits inherent elements of fear and greed among market participants. Applying well known oversold – overbought indicators and combining them with the market sentiment data, SentiTrade is able to significantly reduce the percentage of false signals.

To date, the system has a sharpe ratio of 1.61 with a monthly return of ca. 11.08%. Max potential drawdown for this period was 20.24% with a 0.2 correlation to the S&P500. To review a 1 page report on the “Crowd ShakeOut” system, review this link.

Should you have any questions re. the SentiTrade trading systems, get in touch with us via our contact form, or at contact@sentitrade.com

Market sentiment outlook for 2013: Speech is silver, trading is gold

sentitrade — Tue, 18 Dec 2012 15:32:45 +0000

Following our last post, the markets pulled back considerably and our fully automated systems responded in kind. For example, on Nov. 15th, a system developed for the Mini Dow detected that real-time sentiment dropped below the critical 0,35 level (black dots, panel two). This is when only 35% of the news stories can be categorized as being positive. At the time, market sentiment had been worsening throughout the day (red line, also panel two) whereas the pre-open market was trading above the 60 min average. In the event of such contradiction, i.e. disagreement between journalists and boots, our system will look for a short opportunity (profit targets are set according to point values, no extra exit conditions).

In December, the volatility in the SentiTrade index has pulled back considerably and the market sentiment has improved considerably. The short term measurement between positive and negative news stories, blew through the 200 day average and pulled the market with it. Ahead of a several highly anticipated news events for the balance of the week, the question is whether the trend is sustainable or if we’ll see profit taking.

An integral part of the SentiTrade system and philosophy is maintaining a realistic outlook while keeping emotions in check. In 2013 we anticipate the occupy Wall Street movement to become a distant memory of what was yet to come. Increasingly we see a struggle between the younger generations and aging baby boomers. The mismatch is clear for everyone to see, particularly in Europe, where hordes of youngsters are out of work, while pensioners haggle for early retirement benefits. Accordingly, our outlook for next year is rather dramatic, where a continued extend-and-pretend macro policy is set to meet accelerating social tensions head on.

Market sentiment & financial cliff

sentitrade — Tue, 13 Nov 2012 17:57:02 +0000

Over the past two weeks, market sentiment has become increasingly clouded. Two critical indicators, namely volatility in the SentiTrade index, as well as declining moving average values contribute to this view. Volatility in in market sentiment (V-SQ) is measured by the frequency with which financial news swing from positive to negative. Historically, high volatility indicates nervousness as market commentary quickly go from jubilant to gloomy (and vice versa) in very short time intervals.

Currently the V-SQ has passed the 100 level and is thereby at the same height as during the Lehman crisis in 2008 (check out the following post for historical sentiment volatility):

Frequent sentiment swings make investors nervous

At the same time, the 38 day moving average ratio between positive vs. negative news stories trail well below the 200 line, and is historically a clearly bearish signal:

38/200 average of ratio between bullish and bearish news

In 2012 the V-SQ approached the 100 level in both May and July. In May, uncertainty associated with the elections in Greece and France caused the market to plummet. In July on the other hand, Draghi came out with a Bazooka of support for the Euro, causing the markets to rally.

This time around we have a hard time identifying which measures the Fed or the European Central Bank could bring to soothe the markets nervousness. Instead markets have to brace themselves for a slew of potentially dismal earnings reports, uncertainty related to the looming financial cliff and the eternal European sovereign debt crisis. In other words, rather than a end of the year rally, we see a market slump for the immediate short term.

Check the below links to avoid this situation

Contact@sentitrade.com or drop us a line in the contact form for more information on you may use SentiTrade’s market sentiment data to to optimize your investment strategy. If you use NinjaTrader, you can sign up for 14 day trial and start using SentiTrade immediately!

Market Sandyment

sentitrade — Thu, 01 Nov 2012 15:45:42 +0000

With investors returning to markets after hurricane Sandy, we see a hefty struggle between the bulls and the bears. On one hand, opportunities are found in construction related businesses working to repair hurricane damage. On the other hand, airlines, insurers and retailers are hurting because of cancelled trips, incoming damage claims and presumably less discretionary spending towards the holiday season.

The below tag clouds are snapshots of SentiTrade’s automated interpretation of words that appear in positive and negative financial news stories this week. Not surprisingly we find more negative than positive coverage of Sandy. Apart from that, the third quarter reporting dominate the “good” news, whereas the situation in Greece weigh in on the pessimistic reports.

Negative news coverage

Positive news coverage

Looking towards SentiTrade’s indicator, where market sentiment is translated into firm number values by measuring the ratio between positive and negative news items, we see a heightened volatility at this time.

Historically, high volatility levels in the market sentiment indicator, show that positive and negative reporting continually contradicts one another. In other words we see sudden swings from a bullish to bearish sentiment and vice versa. Needless to say this adds to market nervousness and warn of a market set-back.

As the chart illustrates, this was the case in May of this year, whereas in July a heightened volatility was calmed by one of the Italian bazookas (Monti or Draghi, we forget which one but, but same difference). Please review the following posts from last year to review volatility levels since 2005.

Generally, low market sentiment volatility levels can be used as a confirmation for long positions, when combined with traditional technical indicators. High market sentiment volatility, may be used for confirmation of short positions. In both cases, SentiTrade data dramatically improve portfolio performance.

Open Range Breakout & Market Psychology

sentitrade — Tue, 16 Oct 2012 16:53:41 +0000

The opening range breakout (ORB) is one of the best known trading methods around. There are many different variations but the main point always stays the same; define an offset from the opening range and use it to identify the daily trend. You buy at a given level above market open and sell at a given level below.

In recent years, 24 hour trading and increased liquidity during the night session has made the traditional RTH open less important and consequently, ORB strategies have become less effective. In our upcoming webinar, sponsored by NinjaTrader, we will show you how insights on market psychology may be used to optimize open range breakout strategies. You will learn how SentiTrade analyzes market news sentiment and then see how it applies to ORB strategies. Register for the webinar here!

SentiTrade interprets real time financial news sentiment, giving investors unique insights on current market psychology. In this webinar, we will look at how SentiTrade’s unique market sentiment data may be used to optimize open range breakout strategies.

Contact@sentitrade.com for more information on our market sentiment analysis and Opening Range Breakout managed futures. You may also drop us a line in the contact form. If you have a NinjaTrader license, and want to create your own strategies, sign up for 14 day SentiTrade trial here!