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Trading on Sentiment: The Power of Minds Over Markets

ISBN: 978-1-119-12276-0
368 pages
March 2016
Trading on Sentiment: The Power of Minds Over Markets (1119122767) cover image

Description

In his debut book on trading psychology, Inside the Investor’s Brain, Rich­ard Peterson demonstrated how managing emotions helps top investors outperform. Now, in Trading on Sentiment, he takes you inside the science of crowd psychol­ogy and demonstrates that not only do price patterns exist, but the most predictable ones are rooted in our shared human nature.

Peterson’s team developed text analysis engines to mine data - topics, beliefs, and emotions - from social media.  Based on that data, they put together a market-neutral social media-based hedge fund that beat the S&P 500 by more than twenty-four percent—through the 2008 financial crisis. In this groundbreaking guide, he shows you how they did it and why it worked. Applying algorithms to so­cial media data opened up an unprecedented world of insight into the elusive patterns of investor sentiment driving repeating market moves. Inside, you gain a privi­leged look at the media content that moves investors, along with time-tested techniques to make the smart moves—even when it doesn’t feel right. This book digs underneath technicals and fundamentals to explain the primary mover of market prices - the global information flow and how investors react to it.  It provides the expert guidance you need to develop a competitive edge, manage risk, and overcome our sometimes-flawed human nature.  Learn how traders are using sentiment analysis and statistical tools to extract value from media data in order to:

  • Foresee important price moves using an understanding of how investors process news.
  • Make more profitable investment decisions by identifying when prices are trending, when trends are turning, and when sharp market moves are likely to reverse.
  • Use media sentiment to improve value and momentum investing returns.
  • Avoid the pitfalls of unique price patterns found in commodities, currencies, and during speculative bubbles

Trading on Sentiment deepens your understanding of markets and supplies you with the tools and techniques to beat global markets— whether they’re going up, down, or sideways.

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Table of Contents

About the Author xi

Preface xiii

Acknowledgments xxiii

PART ONE Foundations

CHAPTER 1 Perception and the Brain 3

CHAPTER 2 Mind and Emotion 19

CHAPTER 3 Information Processing 30

CHAPTER 4 Sentimental Markets 47

CHAPTER 5 Finding Signal in the Noise 61

PART TWO Short-term Patterns

CHAPTER 6 Information Impact 81

CHAPTER 7 Daily Reversals 99

CHAPTER 8 Weekly Deceptions 106

CHAPTER 9 The Only Thing to Fear 115

CHAPTER 10 Buy on the Rumor 127

PART THREE Long-term Patterns

CHAPTER 11 Trends and Price Momentum 139

CHAPTER 12 Value Investing 151

CHAPTER 13 Anger and Mistrust 159

CHAPTER 14 The Psychology of Leadership 171

CHAPTER 15 Navigating Uncertainty 184

PART FOUR Complex Patterns and Unique Assets

CHAPTER 16 Optionality 197

CHAPTER 17 Blowing Bubbles 205

CHAPTER 18 Timing Bubble Tops 218

CHAPTER 19 Commodity Sentiment Analysis 232

CHAPTER 20 Currency Characteristics 243

CHAPTER 21 Economic Indicators 254

CHAPTER 22 Sentiment Regimes 269

PART FIVE Managing the Mind

CHAPTER 23 Mental Hygiene 283

Postscript 295

Appendix A Understanding the Thomson Reuters MarketPsych Indices 297

Appendix B Methods for Modeling Economic Activity 316

Glossary 323

Index 331

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Author Information

RICHARD L. PETERSON is CEO of MarketPsych and a behavioral finance expert, investment adviser, psychiatrist, and consultant to the financial industry. His two previous books, Inside the Investor's Brain and MarketPsych, were named top financial books of the year by Kiplinger.

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