Intraday Impuslive Sentiment Trading

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Tick-by-tick Sentiment data can allow us to identify entry points throughout the day when there are spike in Sentiment. These spikes can be caused by the release of good or bad news that will drive trading and price movement.

This post will look to examine the performence of an impulsive sentiment strategy, trading when there are large spikes in sentiment, on the cryptocurrency pair BTCUSD.

How to measure spikes in Sentiment

A spike in sentiment simply means that there is a sudden and large change in sentiment. Hence, we will use the following measure:

Change in Sentiment = Current Sentiment - 10 tick average Sentiment

The average sentiment is a measure of the value that the sentiment should be at. If the last tick of sentiment is much larger or smaller than this average, it means that there is a large spike on the last tick

Another interpretation of the measure is that it is a measure of relative sentiment. The concept of Relative Sentiment means that when we look at current sentiment data, we need to also consider the sentiment data of the recent past before we can determine how good or bad current sentiment data is. For example, if the past sentiment has been extremely bad for successive days and the sentiment today is not as bad, we will view this as a good sign and cound the current sentiment as good even though the absolute value of the sentiment is not high.

When the current sentiment is above the average, the current sentiment is improving from the past. By the concept of Relative Sentiment, this means that the sentiment for the asset is good. Coversely, when the current sentiment is below the average, the current sentiment is poorer than the past and by the convept of Relative Sentiment, this means that the sentiment for the asset is bad.

Straightforward Trading Strategy

We construct the following trading strategy:

Whenever we receive a new tick of sentiment, we evaluate the change in sentiment.

If (Change in Sentiment) > 20: Long the Asset at end of current bar

If (Change in Sentiment) < -20: Short the Asset at end of current bar

Testing Methodology

We test using 15-minute bars of tick-by-tick price data of BTCUSD and tick-by-tick sentiment data from the Derivative Lab's API and backtest from 1/1/2017 to 12/1/2017

Performance

Unfortunately, it appears that our straightforward strategy does not seem to work well. At the same time, it appears to be extremely consistent. Therefore, a good change is to reverse our positions taken, taking on a contrarian approach instead.

Contrarian Trading Strategy

For our contrarian strategy, we look to take reverse positions to our initial strategy:

Whenever we receive a new tick of sentiment, we evaluate the change in sentiment.

If (Change in Sentiment) > 20: Short the Asset at end of current price bar

If (Change in Sentiment) < -20: Long the asset at end of current price bar

Performance

Unsurprisingly, simply reversing the trades taken managed to turn our previously terrible strategy around. A simple explanation for the success of the contrarian approach is overreaction to news. The market simply overreacts to both good and bad news leading to prices and either increase or devrease too much. These prices will return to fair value in time and this allows our contrarian strategy to profit from this inefficiency.

This also strong evidence of the speed that the market reacts to news. As we enter positions on the end of the current price bar, at the worst case, our strategy will enter positions 15 minutes after the release of news. Even being 15 minutes slower is too much to be able to catch the price movements.

Conclusion

While tick-by-tick sentiment trading can detect price movements, the market reacts to news extremely fast. Straightforward strategies of buying when sentiment is good and selling when sentiment is bad might not be able to catch price movements before they occur. For such an approach, speed of executions is extremely important and a high frequency setup will be required.

For lower frequency trading, consider a contrarian approach to news as there can and always will be overreaction of both good and bad news.

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