In Washington, there’s a man with a wrinkled brow, wearing black glasses, and a fondness for purple ties.
At the podium, when he speaks about the economy, the market prepares for celebration or turbulence. Market watchers wait for his judgement on a number that will go up or down or remain the same.
When Jerome Powell, the Federal Reserve Chair announces that interest rates will drop, the U.S. indices shoot up in jubilation. When he announces a rate increase, the indices drop. In fact, even the anticipation of this announcement causes disruptions in markets the day before.
This, and other similar examples of important events and announcements, show the power of mood on the financial world—and on your profit margin.
This is what market sentiment is all about. In this article, we’ll uncover what it means, and introduce the best market sentiment indicators that day traders like you should pay attention to.
Market Sentiment and Its Impact on Trading
Market sentiment refers to the overall attitude and emotions of investors toward a particular financial market or asset, at a given moment.
Positive sentiment can drive prices higher as more buyers enter the market, while negative sentiment can lead to sharp declines.
There are two main types of sentiment in the market:
- Risk-on sentiment indicates risk readiness. It is characterized by a strong performance in the stock market and a weaker U.S. dollar.
- Risk-off sentiment indicates risk averseness. In this period, people turn defensive and embrace the so-called safe havens like value stocks and bonds.
Factors like news events, earnings reports, economic data, and social media discussions all contribute to shaping sentiment, making it an essential element for understanding short-term market fluctuations.
The market as a whole is deeply tied to market sentiment, influencing price action through collective behavior. Ambition, fear, and herd mentality often lead to rapid price movements, making it vital for day traders to assess sentiment effectively.
What Is a Market Sentiment Indicator?
A market sentiment indicator is a tool that is used to measure the overall feeling or mood among investors and traders.
The indicators look at several factors, including social media posts, put and call options, safe haven demand, and media mentions, among others.
Keep in mind that market sentiment indicators are different from technical indicators, as they are not based on mathematical calculations. Instead, they are based on the mood in the market—psychological aspects rather than scientific.
That said, there are a few market sentiment indicators that are widely used among successful day traders, as this helps them to profit from the market.
Six Key Market Sentiment Indicators for Day Traders
As you are trading, do you know whether the market at that very moment is risk-on or risk-off?
How will you hedge your trading capital before, during, and after a macro event, or for that matter, a social media post from an influencer or politician?
These indicators will help you make the most informed decisions.
1. Social Media
Social media has forever changed every aspect of human connection.
Platforms like Meta and X are now very influential in the financial market, especially for day traders. In fact, social media is more important to traders than traditional media channels like The Wall Street Journal and Financial Times.
Another very important social media tool is StockTwits, which is like X but for the trading community.
As a day trader, you need to look at social media before making any trading decision. But be cautious about what and how it’s being said.
For example, in early April 2025, after the Trump-dubbed Liberation Day tariffs were implemented, a user on X called Walter Bloomberg falsely posted that the tariffs were suspended for all countries, except China, for 90 days. The U.S. markets immediately rallied, but tanked again after the White House declared it “fake news”.
2. CBOE Volatility Index
The CBOE Volatility Index, also known as the VIX, is one of the most important market sentiment indicators.
Also known as the “fear index” among traders, it gauges the degree of volatility in the financial market from the amount of investor protection within the next 30 days. For instance, if there is a major economic or financial event, chances are that the VIX figure will go up.
One such example was in August 2024, when the VIX shot up to 60—surpassing the previous spike seen during the onset of COVID19 in March 2020. This was due to rising market volatility, softening of the labor market, and a cautionary inflation report in mid-July 2024. In this context, the NASDAQ 100 lost nearly 5%.
Therefore, you should always refer to the VIX as a crucial market sentiment indicator before making any entry or exit decision.
3. High/Low Sentiment Ratio
Every day, a number of stocks will hit their 52-day high and lows. This indicator compares the number of stocks making their 52-day high and those making their 52-day low.
If more stocks are in the high zone, it means that the market is bullish, with risk-on sentiment.
If more stocks are hitting their 52-day low, it means that the market is bearish, with risk-off sentiment.
4. NYSE Bullish Percentage (NBP)
As the name suggests, the NBP measures the percentage of companies that have a bullish pattern on the New York Stocks Exchange (NYSE). This number is established by technical analysis on point and figure graphs.
Normally, the percentage is in the range of 40 and 60%. This is because in a normal market environment, there will always be companies that are doing well and others that aren’t. When this number goes very high (>80%), it is an indication of an overbought market.
When it goes very low (below 20%), it indicates an oversold market to day traders.
5. Fear and Greed Index
The fear and greed index is one of the most popular market sentiment indicators in the financial market, developed by CNN Money.
The index, ranging 0-100, is calculated by grading several aspects of the financial market:
- Stock price strength, determined by the number of stocks hitting their 52-week highs.
- Stock price breadth, calculated using the McClellan Volume Summation index.
- Put and call options.
- Market momentum.
- Junk bond demand.
- Market volatility.
- Safe haven demand.
When the fear and greed index is close to zero, like it was during the 2020 stock market crash, it signals fear in the markets, i.e.risk-off.
A level close to 100 signals greed in the market; often a sign to sell.
6. Buffett Indicator
This indicator, proposed by world-famous investor Warren Buffett, is usually a ratio of the U.S. stock market valuation to the total GDP. Multiply the result by 100 to express it as a percentage.
As of March 2025, the U.S. has a total annualized GDP of about $29.51 trillion, and a total market cap of all public stocks at $59.10 trillion.
This means that the Buffett indicator is 200%—approximately 57.05% (~1.8 standard deviations) above the historical trend line, suggesting that the stock market is overvalued relative to GDP.
Learn To Read the Market’s Mood
A day trader’s job is always a mix of objective and subjective indicators.
A successful trader knows how to measure, and understands how to gauge. There are underlying moods from social media, news events, and other sources that tip key market sentiment indicators.
We know that it can feel overwhelming trying to keep track of everything.
That’s why at Real Trading we’ve designed a structured learning program taught by the best day traders in our global community.
Once you pass our basic and advanced courses, you’ll take your new knowledge of sentiment indicators and apply it on our TMS simulator.
Practise with live market data in the heat of changing market moods without the worry of losing trading capital. Make mistakes and learn from them so that you can be a pillar of calm when you trade live. Join and learn at Real Trading.
