CryptoMood is launching a new set of crypto trading tools including sentiment analysis, whale wallet watch and a news aggregator. The market sentiment reports will include both market impact analysis of news stories and also social media sentiment. Their tools will analysis content from 50,000 news sources, hundreds of blogs and four major social networking sites for traders looking to get an edge and make more money.

But even though many people today have heard of sentiment analysis, many might not be entirely clear on how to use it. Of course the basic interpretation is just to say that positive sentiment makes something a better buy and negative sentiment may mean it is time to sell, but as with everything in life it is not always so simple. Making the most of this kind of data requires a more nuanced strategy.

So here are some top tips on how to use sentiment analysis for crypto trading:

1 Confirming a new trend: Traders often look at price data and chart patterns to identify trends. But not all trends in the price data are equal – some are stronger than others. There are various ways that you can seek to ‘confirm’ whether a trend or a breakout is real and if it is powerful enough to be worth trading on. For example, one method is to look at trading volume. Another way to do this is through sentiment analysis, and personally I think this can work particularly well in crypto.

For example, if you see an upwards breakout in the charts but there is not a significant improvement in sentiment; perhaps there is just a small uptick starting after the price movement, this may indicate that the breakout was just the work of a whale or small number of traders and not representative of the market as a whole. If, however, an increase in sentiment is followed by a breakout with sentiment remaining strong after the breakout then this may indicate a more fundamental shift in the market that you should pay attention to.

2 Confirming fomo: Contrarian traders may also look for extremes in sentiment as an indicator of overbought or oversold conditions which may lead to a reversal in the market. If a long bull market culminating in a rapid surge upwards is combined with extreme bullishness and very few people showing negative sentiment (as happened with bitcoin at the end of 2017) then this may indicate that a bubble has formed and the market is due for a substantial correction when it finally turns.

3 Looking for divergences: If the price has been trending upwards while sentiment has been declining then this may indicate that the bull market has continued longer than it should have and prices have become overly inflated. On the other hand a flat or falling price trend combined with steadily improving sentiment may indicate that there is plenty of upside potential and traders should be looking for an opportunity to buy.

I hope these tips, combined with tools such as those provided by CryptoMood, will prove to be useful to you. Please feel free to share your own thoughts and experiences about using this kind of data in the comments below.