Market Sentiments Distribution Law

Jorge Reyes-Molina

doi:10.3390/e18090324

Abstract

The Stock Exchange is basically ruled by the extreme market sentiments of euphoria and fear. The type of sentiment is given by the color of the candlestick (white = bullish sentiments, black = bearish sentiments), meanwhile the intensity of the sentiment is given by the size of it. In this paper you will see that the intensity of any sentiment is astonishingly distributed in a robust, systematic and universal way, according to a law of exponential decay, the conclusion of which is supported by the analysis of the Lyapunov exponent, the information entropy and the frequency distribution of candlestick size.

Highlights

As it is known, Japanese candlesticks allow the identification of the open-high-low-close chart (OHLC) prices and the trend [1,2,3]
The working hypothesis states that the intensity of sentiments is distributed according to an exponential decay law
The working hypothesis is: “The intensity of the sentiments is distributed according to an exponential decay law” where we do the following basic equivalences [4,26]: exponential decay law” where we do the following basic equivalences [4,26]: (i) Black candlestick is equal to bearish sentiments

Summary

Introduction

Japanese candlesticks allow the identification of the open-high-low-close chart (OHLC) prices and the trend (black or bearish vs. white or bullish) [1,2,3]. To understand the concepts underlying the hypothesis, the following situations must be considered: Case A: Imagine that in D1 view the Japanese candlesticks show a decline in the gold price at a rate of USD 1 per day (i.e., black candlesticks will be observed where Open − Close = 1). Case B: Imagine that in the same D1 view is observed a decline in the gold price at a rate of USD 50 per day (i.e., black candlesticks will be observed where Open − Close = 50). On the other hand, continuing with the cases A and B, it is evident that in a specified period of observation (e.g., one year), the case A will occur at a higher frequency than the case B, which shows that the frequency that traders experience great emotions decreases with increasing intensity of emotion (or the size of the candlestick)

Methods

Results

Discussion

Conclusion