Sentiment trading is the practice of buying and selling financial instruments on the basis of measured investor mood, and it is covered mainly under sentiment analysis, the technique that turns news, filings and social media posts into positive or negative scores. That entry explains how the scores are produced, the research evidence and the limitations.
The term describes the strategy built on those scores, not the measurement itself. A sentiment trader may follow the mood, buying assets whose coverage has turned positive, in a manner similar to momentum trading. Others take the opposite, contrarian side when optimism or pessimism reaches an extreme, on the view that crowded opinion tends to reverse. Rapid reaction to individual headlines is usually described separately as news-based trading.
Sentiment trading also draws on measures that involve no text at all, including surveys of investors, the balance of put and call option volume, fund flows and short interest. The ideas behind it come from behavioral finance. No sentiment measure reliably predicts prices, and any such rule requires testing with realistic costs.