“It can be described as the overall opinions, views and mood of the public which make in total the market psychology. There is no exact way to measure the public feelings toward financial markets in total or a particular asset, so we cannot say that there is a correct or incorrect way to define sentiment analysis. But, there are other paths which can reflect the overall mood of the traders.

Sentiment analysis shows how market participants react towards the risk. When traders are feeling to go ahead in the market by the idea that the price movements will be in the same direction with what they have predicted, they usually make big moves on capital investments and they choose significant assets, since they are feeling confident about their actions. On the other side, if they feel panic over the market, they will invest their money in safe-haven assets and in small amounts of money.

Aside from that, knowing if the risk is at the door or not, you need to figure out how traders are behaving towards certain news, reports or sudden economic events. When risk appetite is strong, assets may have a stronger reaction to take the most out of the report insight that confirms what they were thinking about. When risk aversion is in play, traders seem to have a stronger negative reaction to weak data which reinforce their bias while being less impressed by upbeat reports.

What tools can help you understand and use market sentiment? A smart choice would be checking on the stocks market and indices market, since they are considered as riskier assets, so they are able to better mirror the risk appetite of the traders. Falling stocks may reflect risk aversion, meanwhile rallying stocks may indicate high risk appetite.