Trader mood indices attempt to measure the emotional pulse of the markets; How bullish are traders on $GOOG? or How bearish are traders on $SPY? and Are people equally bullish and bearish on $AAPL?
In order to see what trader mood indices might look like in a trading strategy, I collaborated with the folks over at PsychSignal and backtested a trading strategy based off their data.
The strategy is pretty simple. The PsychSignal dataset is derived from a natural language processing engine that detects bullish/bearish trader moods from raw messages. I follow the BULLISH indicators within the NASDAQ 100 to create a long-only strategy. The raw messages that the scores are based off of are from Stocktwits - you can check out previous work with them here.
PsychSignal has datasets that date back to 2009 with sources like StockTwits, Twitter, T3Live Chat and other private stock chat rooms.
Here are the strategy notes:
Data Fields Used:
- Bullish Intensity (-5 - 5) – The PsychSignal bullish sentiment score
- Bullish Minus Bearish Intensity score (-5 - 5) – The PsychSignal bullish minus bearish sentiment score
- Number of Message Analyzed – The total number of messages analyzed
- Look for where total messages over the last 30 days are greater than 50
- Look for where the average bullish - bearish signal is greater than 0
- Score each security by it's bullish_intensity level and the number of bull messages
- Go long on the top 7 securities scored by our factor ranking
While the backtest outperforms the market, there are still many more roads to explore. Roads that any interested quant is free to travel down. On that note, Dr. Checkley from PsychSignal comments that:
“There are no short positions, which goes hand-in-hand with the beta problem. But clearly, it would be no great challenge to, say, “invert” the analysis above and seek-out strong bear signals for short trades. And there is unlimited scope for changing filters, the buy and sell rules, the universe of stocks, etc. As you get comfortable with using these sentiment metrics, we recommend blending the bull and bear measures with other indicators, such as long and short-term price trend or trade volume. You can also use a more sophisticated model, such as a Neural Network, to create your predictions and trading signals. With hundreds of heavily-tweeted stocks and assets to choose from, and your full arsenal of analytical tools and algorithm-refinements, you can improve on our results in short-order.”
Request access to the sample data used in this backtest by sending an email to [email protected]
I'd love to hear all of your thoughts and questions on this strategy and/or dataset!