Sentiment Indicator Combination System

Individual sentiment indicators are suggestive; together they form a system. The challenge is combining them coherently — knowing which to weight, how to handle conflicts, and how to integrate sentiment with the price analysis that still drives entries. A workable sentiment combination system is not a trading system in itself but a sentiment overlay that filters and sizes price-based trades.

System Components

The system integrates the sentiment measures covered in this series:

1. COT report — institutional and speculative positioning, weekly.
2. VIX — options-implied fear, daily, with term structure.
3. Put/call ratio — options flow, daily.
4. Retail sentiment — retail broker positioning, daily.
5. Open interest — committed positions, daily.
6. CNN Fear and Greed Index — composite, daily.
7. Social sentiment — narrative and attention, intraday.

Each captures a different facet and timeframe. None is sufficient alone.

The Scoring Framework

A practical system scores each measure on a simple scale:

• +1 — bullish contrarian signal (sentiment washed out bearish).
• 0 — neutral.
• -1 — bearish contrarian signal (sentiment at extreme bullish).

For example, at a potential bottom:

• COT speculative at extreme short → +1
• VIX spiking above 30 → +1
• Put/call above 1.2 → +1
• Retail 80% short → +1
• Open interest falling (liquidation) → +1
• Fear and Greed below 25 → +1
• Social unanimously bearish → +1

Total score: +7 (maximum bullish contrarian). At a potential top, the score flips to -7.

Scores between -3 and +3 indicate mixed sentiment — no edge from the sentiment layer.

Using the Score

The sentiment score modifies how price-based trades are treated:

• Score of +5 or higher — bullish bias. Take long price signals with full conviction; reduce or skip short signals.
• Score of -5 or lower — bearish bias. Take short price signals with full conviction; reduce or skip long signals.
• Score between -4 and +4 — neutral. Trade price signals normally; sentiment offers no edge.

The sentiment score does not generate entries — price action does. It filters which entries to take and how aggressively.

Handling Conflicts

Sentiment measures sometimes conflict — VIX elevated but put/call neutral, or COT extreme but retail not yet washed out. The system handles conflicts by:

• Requiring a minimum number of aligned measures (e.g., at least 5 of 7) before treating the score as extreme.
• Discounting the score when measures conflict, treating it as neutral rather than forcing a directional read.
• Waiting for conflicts to resolve before acting — sentiment extremes typically converge as a move exhausts.

Integration with Price

The full trade framework:

1. Sentiment scoring — weekly assessment of the sentiment backdrop.
2. Price structure — daily identification of structural levels and trend.
3. Entry trigger — intraday price action signal at a structural level.
4. Position sizing — scaled by sentiment conviction (full size at extreme scores, reduced at neutral).
5. Risk management — defined stops below structure, sentiment-informed targets.

Sentiment provides the conviction layer. Price provides the timing. Risk management provides the safety.

Practical Workflow

1. Weekly: review COT, VIX term structure, and update the sentiment score.
2. Daily: refresh VIX, put/call, retail sentiment, Fear and Greed; update score.
3. Intraday: monitor social sentiment and price action for entries.
4. On each trade: confirm sentiment score supports the direction; size accordingly.
5. Journal: log sentiment score with each trade for later review of the system's edge.

Limitations and Calibration

The system requires calibration:

• Extreme thresholds drift over time as markets evolve — recalibrate percentile ranks annually.
• Some measures are unavailable in certain markets (no real volume in FX, no centralized sentiment in some assets).
• The system is a filter, not a forecast — it improves odds but does not guarantee outcomes.

The Honest Read

A sentiment combination system adds genuine value by filtering trades and sizing positions based on positioning extremes. It does not replace price analysis — it contextualizes it. The trader who takes only high-conviction price signals at sentiment extremes, with proper risk management, captures better risk-reward opportunities than one trading on price alone. The system's edge comes from the patience to wait for genuine multi-measure extremes and the discipline to scale exposure accordingly. Sentiment is a layer, not a strategy — but it is a layer that meaningfully improves the strategy beneath it.