Sentiment in the Forex Market: Indicators and Strategies to Profit from Crowd Behavior and Market Extremes

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c04 JWBK195-Saettele May 25, 2008 10:13 Printer: Yet to come

CHAPTER 4

Using News

Headlines to

Generate Signals

T

he magazine indicator is powerful, but rare. The rareness of course

contributes to the powerfulness of the indicator. However, traders

want action and cannot afford to wait for a magazine cover to help

them make a trading decision. More importantly, even though every maga-

zine cover featuring a financial trend results in a reversal of some degree,

every reversal is not accompanied by a magazine cover that features a fi-

nancial trend. The magazine cover indicator works as a contrarian indica-

tor because of mob psychology. Magazines are in the business of selling

magazines, so editors are going to feature on the cover what the crowd is

obsessed with at the time. In financial markets; the trend reverses once ev-

eryone catches on to it. Using the same logic, the financial media provides

contrarian signals through other mediums.

Grant Noble wrote a 1989 article for Stocks & Commodities magazine

titled “The Best Trading Indicator—The Media.” He wrote,

I believe there is a market sentiment indicator that is more accurate,

timely and better able to give long-term predications. The American

media gives you three indicators:

Long-term. The “popular press” (such as Time, Newsweek and

the TV networks) normally have major front page articles on finan-

cial markets at the top or ...