Technical Analysis For Dummies, 3rd Edition

Chapter 3

Going with the Flow: Market Sentiment

In This Chapter

Looking into market sentiment

Turning up the volume

Understanding chance

Your goal as a technical trader is to identify what the crowd is doing and take advantage of it — without falling prey to the market's emotions. The primary technical tools for identifying sentiment are patterns and indicators, and the discussion of these tools forms the core of technical analysis (and this book). You have two other methods of measuring sentiment, however — sentiment indicators describe the market as a whole, and volume directly represents the extent of trader participation. Volume is a powerful indicator in its own right and adds confirmation to price indicators.

Sentiment and volume indicators operate on the principle that “The trend is your friend — until the end,” meaning that the crowd is wrong at price extremes and simply clueless when markets are non-trending. Sentiment indicators, also called “market indicators,” describe the overall environment in which your specific securities are being priced, and can be helpful to evaluate ...