Trading on Sentiment: The Power of Minds Over Markets
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 percentthrough 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 moveseven 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.
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
Appendix A Understanding the Thomson Reuters MarketPsych Indices 297
Appendix B Methods for Modeling Economic Activity 316
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.