The market feels bullish today." That's a nice thought, but how do you turn a feeling into a trading decision? This is where quantification comes in. Sentiment analysis doesn't just label text as "positive" or "negative"; it assigns a score. This score, often on a scale (e.g., -1 to +1, or 0 to 100), allows for comparison and trend identification. A stock might have a sentiment score of +0.7, indicating strong positive sentiment, while another might be at -0.3, suggesting mild negativity.
These scores can then be aggregated over time to reveal trends. Is sentiment for a company consistently improving, suggesting growing investor confidence? Or is it steadily declining, perhaps signaling underlying problems? By tracking these scores, traders can identify shifts before they become widely apparent in price action. Furthermore, sentiment scores can be integrated into quantitative trading models alongside traditional financial metrics like price, volume, and volatility. This allows for the creation of sophisticated strategies that respond not just to what's happening, but to how people are feeling about what's happening. It transforms a subjective interpretation into an objective, actionable data point.
