Sentiment Analysis in Cryptocurrency
“When everyone thinks alike, everyone is likely to be wrong.”
“The public is often right during the trends, but wrong at both ends”
“A ‘crowd’ thinks with its heart (that is, is influenced by emotions) while an individual thinks with his brain.”
-Humphrey B. Neill
Why use Sentiment in your trading?
Sentiment analysis in trading is an underused part of a trader’s arsenal. There are also many misconceptions about sentiment. The crowd thinks that when sentiment is high, it is time to buy and when it is low is time to sell. I am very anti crowd mentality, that is why I prefer to be a solitary trader. I have tried to trade while interacting with other traders, but in general it has not been for me as it causes me to be swayed by group think.
Now I want to get one thing clear from the start. The crowd is not always wrong. It is just when the crowd reaches extreme levels that you often see them be wrong. Sentiment analysis should not be your primary method for analyzing any trade-able asset. It is an outstanding complementary tool, however. Like anything else though, it has to be applied properly. Often times it is applied incorrectly.
There are three primary schools of thought that one can use to analyze a cryptocurrency or any other asset. These are fundamental analysis, technical analysis, and sentiment analysis. I have always focused heavily on Technical Analysis as the other two schools are often baked into the price and volume trends and patterns. I do utilize fundamental research, but I will admit it is not my primary focus.
TA is my primary method for trading cryptos, and remains so. However, during the bear market I spent a considerable amount of time researching sentiment among many other things. Sentiment was instrumental in allowing me to get an excellent average price on my re-entry into BTC from a full FIAT position near the recent bottom from 6.5K to 7K. So I am a huge fan of sentiment analysis.
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