A Sentiment Analysis Approach: Unlocking the Secret of Hidden Volatility

In this article, we will discuss

In today's fast-paced financial world, understanding market volatility is crucial for traders and investors. However, fluctuations in the market are not always obvious. That's where sentiment analysis comes in. This approach involves analysing people's sentiments and opinions about a particular company stock or industry. It can help you analyse the broader market and even find hidden volatility in quiet markets.

In this article, we'll explore how sentiment approach can unlock the secrets of hidden volatility, enabling traders to stay ahead of the curve. We will discuss how to use Samco’s Andekha Sach to get personalised insights for self-improvement.

What Is the Sentiment Analysis Approach?

The sentiment approach is about understanding and studying emotions, opinions, and attitudes found in text media. It is also known as opinion mining; it's aim is to figure out the polarity of a market sentiment which can be positive, negative or even neutral.

In the stock market, sentiment analysis looks at posts, text sources, news reports and articles to assess the opinions of experts, media personalities, corporations and individual traders/investors. It's become really popular in finance because it can be used in lots of ways. One big use is predicting how stock prices might change.

By studying the feelings expressed in social media posts and news articles, sentiment analysis tools can spot connections and patterns between stock price movements and sentiment. Investors and traders can use various algorithms, indicators and data mining tools to measure market sentiments. Using surveys, polls, social media comments and other sources, it is possible to get accurate data from market participants.

By analysing market sentiment, you can get trading signals and identify patterns for future stock price movements. For instance, if there are lots of positive sentiments that can be identified about a company, it might mean its stock price will witness a bull run.

Using Sentiment Analysis to Forecast the Stock Market;

Listed are the different ways in which investors and traders analyse market sentiments:

  • Sentiment Approach in Social Media

    Social media is a great place for people to express their perspectives and opinions. If there are many social media posts about a particular company stock, it can affect its market price either positively or negatively. Whenever investors feel positive about a stock, its price usually goes up and vice versa.;

    Hence, social media analysis can help you with valuable analytics and help you to predict how the stock market might behave in the future.

  • Analysis of Financial Reports

    Similar to social media sentiment analysis, you can analyse financial reports to assess investors’ sentiments. For instance, when a company declares its earnings or when analysts give their opinions, it changes people’s opinions.

    By analysing such financial reports like earning reports, annual reports or any earnings announcement, experts can determine how people feel about a company's financial health. It helps them predict how the stock market might react in the days to come.

  • Market Sentiment Indicators

    Many traders and investors use different indicators to assess the market sentiment. This allows them to identify the most undervalued stocks for trading. The following are the most frequently used market sentiment indicators:

    • Volatility Index:

      This is a market index that shows the implied volatility of a market index. India VIX is an example of a volatility index for the Nifty index.
    • Moving Averages:

      It is a basic but popular technician indicator that shows the average price of a stock over a period. Most investors and traders use the 50-day moving average and 200-day moving average to understand market momentum and sentiments.
    • Bullish Percentage Index:

      This shows the percentage of stocks on a given index showing short-term bullish patterns. BPI levels of 70% or above show highly positive market sentiments, while a BPI of 30% or below shows highly negative sentiments.
    • High-Low Index:

      This technical indicator shows overall market strength by comparing the number of stocks that reached their 52-week highs against stocks that reached their 52-week lows.

Volatility in Stock Prices Due to Sentiment Analysis

Recently, research was conducted which unveiled how stock prices change or the volatility level of a stock. The study would identify a connection between what people say on social media and how it influences stock prices.

It was observed when people feel positive about a stock on social media, the prices don't change as much. But if people are negative, the stock prices become highly volatile and rapid price fluctuations are observed.

Integrating Traditional Market Analysis with Sentiment Analysis

Combining this sentiment approach with technical analysis enables analysts to better understand how the stock market works. Here’s how to incorporate sentiment approach with fundamental and technical analysis:

Technical Analysis

Technical analysis of a company stock refers to the analysis of historical price movement and market data to guess what might happen next. It is based on the principle that "History tends to repeat itself"

When you integrate this approach to technical analysis, you can spot trends and patterns that might be affected by how investors feel. There is always a tendency to spread negative information about a particular company stock. This can help you get actionable information providing you with lucrative opportunities.

For instance, when stock price drops due to investors’ overreaction, you can purchase it for a lower price. Similarly, when these large investors are looking forward to book profits they start spreading positive rumours about the company in order to sell off their stake at a higher value.

Hence it is advisable to utilise sentiment analysis alongside other analytical techniques to enhance decision-making. By utilising multiple techniques, you can get broader insights on price movements;

Fundamental Analysis

Fundamental analysis is simply the opposite of technical analysis, as it is all about analysing and determining the intrinsic value of a particular company stock. This is carried out based on certain factors like the financial statements of the company and deriving important ratios from the company financials. 

Some of the key financial ratios include working capital ratio, price-to-earnings ratio, debt-to-equity ratio, price-to-book ratio etc. Apart from these, there are several other factors taken into consideration such as industry trends and other various macroeconomic factors.

If you can integrate this sentiment approach with fundamental analysis, altogether it will help you derive trading insights and findings about a stock's potential opportunities or risks. For fundamental analysis, you will want to assess long-term market sentiments about an asset.

The Future of Sentiment Analysis in Stock Market Prediction

The future of sentiment approach in predicting stock market trends is looking bright due to these two main factors:

  • Improvements in Understanding Language:

    Technology improvement in NLP or natural language processing is getting better and better. This means NLP models are getting smarter at figuring out the feelings behind the words people use, which makes predicting market sentiment more accurate.
  • Implementing Artificial Intelligence and ML:

    We're also leveraging smart tech powered by machine learning and AI. These programs can learn from a lot of data and get better at recognising different sentiments, which helps in making more accurate predictions about the stock market.

Limitations of Sentiment Analysis in the Stock Market

The main hurdle in sentiment analysis within the stock market lies in the subjective nature of text-based data. Sentiments conveyed in financial reports articles and posts are often subjective and context-dependent. Hence, it is important to precisely interpret the intended meaning behind words and grasp the context in which it is utilised.

The presence of metaphorical expressions, irony and sarcasm in speech adds another layer of complexity. People’s true sentiments often contradict their literal interpretation. Moreover, this approach is highly dependent on text-based data from various sources such as news articles and social media platforms. Such sources contain biased opinions, irrelevant information, or noise, which can adversely affect the approach.

Furthermore, the existence of manipulative content, fake news and spam can cause distortions and incorrect analysis. To tackle these problems, language models used for market analysis are continually evolving and refining through machine learning strategies.

Advanced computer programs and complex learning systems are being created to make this sentiment approach more accurate and able to adjust to changes in the market. Also, people often mix sentiment analysis with other financial information and ways of studying the market to get an overall better view.

Know Your Trading’s Andekha Sach With Samco

Sentimental analysis can be an important tool to predict market movements. Similarly, it is important for you as a trader to understand your trading behaviour. Insights of your trades are auto-generated by Samco’s Unseen Insights feature known as Andekha Sach. Get to know your trading’s Andekha Sach integrated in various sections of the application such as My Trade Story and Trade Spreadsheet.

If you are looking forward to starting your trading/investment journey be it through technical analysis or fundamental analysis, you can consider using the New Gen Samco Trading App. It provides you with a clean and feature-loaded user interface and analysis tools like Andekha Sach and Personal Index.

Final Words

Using sentiment analysis to understand hidden volatility can help traders make smarter decisions. By analysing people's feelings and opinions about a particular company stock or a market, we can uncover potential shifts in volatility that might not be immediately apparent. This approach allows traders and investors to better anticipate and react to market changes, ultimately leading to more successful investment outcomes.

Frequently Asked Questions

1. What is sentiment in the stock market?

Ans. The term ‘sentiment’ in the stock market refers to the sentiment of investors in the market. In other words, it is the overall attitude of the investors regarding a particular stock or the overall industry or sector. It is the optimism and pessimism of investors which drives the overall price trends in the stock market.

2. What is the sentiment score of a stock?

Ans. The sentiment score or S-score of a stock represents the sentiment of that particular company stock over social media over a particular period. It mainly captures the changes or deviations in the sentiment intensity for a stock. A stronger reaction is reflected by a higher level of sentiment. A higher positive sentiment indicates that the particular stock is expected to take an upward trend. Similarly, a higher negative sentiment can depict a declining trend.

3. What is sentiment analysis for intraday trading?

Ans. Intraday trading involves using various indicators to make informed decisions in intraday trading. Therefore, traders aim to capitalise on the market sentiment and derive benefits on intraday price movement based on the current sentiment.

4. What is the bullish sentiment indicator?

Ans. A bullish sentiment is reflected when there is a high positive sentiment on a particular company stock, at that time an upward trend can be expected. For instance, a bullish market can be identified when more than 60% of the company stocks are trading above its 200-day moving average or any other similar indications.

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