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In a trading period of two years, from 2014 to 2016, I've tested a sentiment trading indicators. One was live traded, the Options Sentiment Indicator (OSI), and one was backtested during the same period. This other indicator was able to generate buy and sell signals on the Euro every single trading day, the sentiment proxy of the universe of texts courtesy of SMA.
What was interesting is in theory the OSI, a proprietary indicator, acted as a noise trading indicator, able to profit in times of non-linearity, or during see-saw trends in the market for the Euro. And, the sentiment proxy from SMA, was able to capture a greater risk-reward ratio then a non-directional Euro from 2014 to 2016.
Here's the EUR/USD chart for the corresponding time period of the study:
Now, to introduce the signal detection theory, it's important to note that this perception science has everything to do with signals presented, and signal responses. Similar to getting an eye exam, where the optometrist presents a series of signals on an x-y coordinate, the signal detection theory tests whether there were matching responses (a "hit"), or a failure to recognize the signal (a "miss"). Whats more, th…
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Sebine avatar
Sebine 15 Feb.

Good article and interesting:₽

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Many indicators gauge market and investor sentiment; but few are as robust as they possibly could be. Most of the indicators look at the balance of trades on order books, and some look at put-call ratios in the options market; but, most of them gauge a ratio or number without any context as to the actual intention of the trader. The indicator tested for this research has sought to more accurately explain the ratio of buys and sells in the options market of the underlying index. This indicator has proven to show tendencies for price activity of the Euro to go above or below key price levels, depending on up or down consensus measured in the options market.
One major indicator, the traditional put-call ratio, simply sums up and calculates all of the puts and all of the calls as a ratio. This has been criticized for being too crude of a method for gauging market sentiment, since the summation of the open interest is assumed to be long only. Assuming all the options are bought to open—a lot of them could be sold to open—results in a different sentiment entirely. A put-call ratio of 0.75 means the options market is bullish on the underlying stock, but this isn’t necessarily true. If, fo…
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Efegen avatar
Efegen 11 July

It is very complicated and diligent article. I want to know more about how can simply use this to profit more openly. I would love to see your thoughts in your next article. Could please check my article as well, it is about my trading strategy I am working for a long time:)

hrustiashka avatar

Good job!

pshan avatar
pshan 16 July

Thank you!

scramble avatar
scramble 20 July

Interesting topic, I would appreciate bit more explanations just like the reader (me) knows nothing of what you are talking about :)

samymahrous avatar

good job

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