Free Trading School · Level 11: Sentiment, Intermarket and Divergence
Measuring sentiment
Sentiment is how optimistic or pessimistic traders are. At extremes it can be a contrarian signal: when almost everyone is already long, there are few buyers left to push price higher.
- Commitments of Traders (COT): a weekly US report showing how large speculators and commercial hedgers are positioned in futures, including currency futures.
- Retail positioning: many brokers publish the share of their clients who are long or short. Retail crowds are often positioned against the trend.
- The VIX: the "fear index" for the S&P 500. High readings mean fear and large expected moves.
- Put/call ratio: more puts than calls suggests investors are buying protection.
Sentiment can stay extreme for a long time. Use it as a warning light or a filter, never as an entry signal on its own.
Extreme one-sided sentiment raises the risk of a sharp reversal. Let price confirm before acting.
Quick answers
Sentiment is how optimistic or pessimistic traders are. At extremes it can be a contrarian signal: when almost everyone is already long, there are few buyers left to push price higher.
Extreme one-sided sentiment raises the risk of a sharp reversal. Let price confirm before acting.
Few buyers are left, raising reversal risk. Extreme positioning leaves little fuel for further moves in the same direction.
Next lesson: Intermarket correlations