Three factors affect the stock price movement: the technical factors, fundamental factors, and market sentiments. Technical analysis tries to forecast security’s future price by analyzing the statistics of past performance. Fundamental analysis, on the other hand, measures the intrinsic value of the stock by examining financial and economic factors that may affect the stock price. The third aspect (market sentiment) is currently difficult to measure as it deals with crowd psychology, human emotions and not always based on fundamentals.
Market Sentiments and Stock Trade
Inability to gauge the market sentiments is often cited as the main reason traders lose. Some financial analysts purport that, even if all traders knew how to trade successfully based on the current conditions, a good number would still lose in the long run, due to inability to accurately predict the social mood. In the past, some companies had their earnings exceed all expectations, yet the stock fell the very next morning, due to market sentiments.
How sentiment analysis will help traders
Use of sentiment data to predict models for financially risky assets didn’t receive much coverage until some three researchers undertook a study on how Twitter mood predicts the stock market. Perhaps many didn’t take research findings seriously until three years later when many companies had their value wiped to the tune of hundreds of billions of dollars following a fake tweet on White House explosion.
Computer scientists are working on an algorithm that will analyze sentiments across social platforms such as Twitter, Facebook, Stocktwits, among others, that will advise the investor which companies to invest and which ones to avoid. The algorithm will classify millions of messages into three: positive, neutral, and negative. Given that positive sentiment or emotions about a company reflects on its stock price, the future software will use this basis to advise the investor the move to take.