These are the primary decision-making gauges, which are driven by proprietary information, analysis, formulas and algorithms. There are five sentiment spectrum gauges in the Stealth Trader© cockpit that are grouped into the Long-Term, Medium-Term and Short-Term sentiment analysis information panels. It is important to fully understand how these gauges function and be trained to recognize the trading information presented by them. The gauges show “Spectrum of Sentiment” — a unique way of looking at the trading activities that are taking place in the markets.
How it Works
To form the spectrum of sentiment, the real time flow rate of the Bid and Ask orders by all traders on the Exchange Electronic Trading Book is measured. These orders are weighted by:
· Proximity to the inside Bid/Ask levels
· Time elapsed since order origination
All weighted orders that have been registered in the book over a period of time (called the Sentiment Compression Interval) are then totaled to create a weighted sum of Bids and a weighted sum of Asks. The ratio between the weighted sum of Bids and the weighted sum of Asks is referred to as the Trader’s Sentiment and it is used to analyze the built-up pressure to buy or sell a security. This ratio is then further filtered by the series of filters of different length.
The longest filter has 58 Sentiment Compression Intervals and the shortest filter has only 3 intervals. These filters create the measure of the trading patterns that could be associated with the activities of different groups of traders that exhibit various frequency order placement on the book. The software cannot identify those groups but can clearly filter their behavioral patterns.
Evidently, active day traders place their orders more frequently than swing traders. Using this kind of information to filter the overall trading activity creates a unique opportunity to see the intent of different groups of traders and to display this intent in a form of a very concise and informative gauge. So just like a speedometer in your car, information is available at a glance.
In order to form the display of the Traders’ Sentiment, the software uses the value produced by the longest filter (reference level) and measures the values produced by all the other filters against this reference level. These measurements are updated in real time creating the sliding time window that creates the reference points for the current sentiment levels. The results of these measurements are in turn displayed in the form of a histogram (called Spectrum of Sentiment).
In the histogram below, the value of the shortest activity filter (the sentiment measure of the group trading most frequently that is registered in the current compression interval) is placed in the middle of the histogram. The values of longer filters are on the left and right of this central bar. This creates a graph where the sentiment of the most active traders is displayed in the center and the sentiments of other less frequent traders are placed on its sides. The lower the trading frequency of a trading group filtered by the corresponding filter, the further this group is represented from the central bar. This type of ordered display makes the visual representation of the entire Spectrum of Sentiment very intuitive to use.
Use of Colors
In the middle of this gauge is a dark-green horizontal line that represents the reference level (i.e., neutral baseline) of the measured sentiment. Generally speaking, if all of the bars in the Sentiment Spectrum are located above this reference level, then the overall sentiment exhibited by the traders of all the activity groups is bullish. The strongest bullish sentiment is presented by a spectrum in which all the bars form an almost perfect triangle pointing upwards.
Another very important characteristic of the sentiment spectrum is the color of the bars. The color represents the rate of change of the sentiment compared to its previous level over one Sentiment Compression Interval.
There are two distinct color palettes used in this gauge:
· The blue or bullish palette that consists of colors ranging from dark purple and dark blue colors to very light blue and almost bluish-white colors.
· The red or bearish palette that consists of colors ranging from dark purple and dark red colors to orange, bright yellow and almost yellowish-white colors.
In either palette, the brighter the color the greater the movement of the traders’ intent towards either bullish or bearish sentiment. This unique way of presenting the picture of the real time sentiment enables you to anticipate the change in buying or selling activities prior to any actual price movements.
There is an infinite variety of shape and color combinations in the spectrum of sentiment. However, by observing the behavior of this informative gauge and associating its shapes and colors with the following price moves, an average-skilled Stealth Trader© user can develop very accurate anticipation skills in 2–3 weeks of self-training and use.
The Main Spectrum Gauge produces numerous images. Note that the shapes and colors of the Sentiment Spectrums do not depend on the actual security. They are universal and indicate the bullish or bearish sentiment the same way for all securities.
The following example is a description of a typical situation that you might observe in real market conditions.
The central part of the graph is below the horizontal reference line and is pointing downwards. The colors of the graph are mostly red with a very bright shade of red right in the middle of the spectrum.
The outside bars of this histogram are still above the reference line and have a dark shade of purple.
This Sentiment Spectrum could mean that the current sentiment of the S&P 500 E-Mini futures traders is changing from being recently mildly bullish to a pronounced bearish sentiment. Although some infrequent groups of traders (the outside wings of this graph) are still somewhat bullish (the bars that represent their sentiment are still above the reference line), their sentiment is not increasing towards further buying (the color of their bars is purple, which is neutral). At the same time, the more frequent traders (scalpers, day traders, swing traders, etc.) are bearish with an increased intensity in their Sell orders. This is indicated by the bright red and orange-yellow middle bars below the reference line.
The picture that is shown above is of the Short-Term Sentiment Spectrum Gauge. The compression of this gauge is set to 50t. This means that the gauge is designed to display very rapid changes in the sentiment. It could be equivalent to a few seconds or less in fast trading markets.
Importance of Checking Multiple Time Intervals
It is advisable that you also check the other sentiments displayed by the Middle-Term and Long-Term Sentiment Gauges. This is important because the combination of those gauges provide a good feel for the possible direction of the market’s sentiment in general.
The Middle-Term and Long-Term Sentiment Gauges are located respectively on the top left and top right corners of the Stealth Trader© cockpit. The Middle-Term Sentiment Gauges have compressions of 5 and 15 minutes where the Long-Term Sentiment Gauges are set to 30 and 60 minutes compression.
It is very important to understand the relationship between the Middle and Long-Term time frame sentiments and the Short-Term sentiment before making a trading decision.
Example: If the Middle-Term Sentiments are overall bullish and the Short-Term Sentiment is at its bearish extreme, the conclusion can be made that the shorter-term traders are selling into the rally, thus creating an indication for Stealth Trader© traders to consider this as a Buy opportunity.
Other Features of the Short-Term Sentiment Spectrum Gauge
The top-left corner of the gauge displays the ticker symbol of the security that is currently selected. This means that all Stealth Trader© gauges are focused on this security (e.g., ES U2 as shown in the example above).
On the top-right corner of the gauge is the arrow that indicates whether the price for this particular security is up or down compared to its previous trading day closing price. The change in price (compared to the previous close price) can be found to the right of the up/down arrow.
In the bottom-left corner is an indicator of the cumulative trading volume registered since the beginning of the current trading day and in the bottom-right corner is the compression label of this gauge. If this number appears in green it means that there is enough data in the calculation engine of this gauge to produce correct measurements of the sentiment at this compression level.
When the Sentiment of any time frame is at its peak, which indicates extreme bullish or bearish activity of the traders, a small dot will appear either at the top or at the bottom of the gauge.
These dots indicate possible sentiment reversals when the sentiment cannot get any more bearish or any more bullish (i.e., the sentiment exhaustion point). This creates a sentiment reversal possibility.
The example of this type of situation is illustrated below when the bullish Short-Term Sentiment of the MSFT traders has reached the exhaustion point, indicating a possible pullback in their buying activity.
Using the Sentiment Spectrum Gauges Effectively
It is important to spend considerable time observing the behavior of those gauges. The key to thoroughly understanding how they work is your ability to develop associations between the images the gauges are displaying and the price moves that occur as a result of the traders’ collective sentiment. More time spent observing Sentiment Spectrum Gauges will lead to more accurate trading decisions.