Crypto Basics Crypto Metrics

Fear & Greed Index

The Fear & Greed Index was developed to help investors analyze the market from the perspective of sentiment. Fear and greed are two emotions that have the power to impact human behavior and cause investors to lose their money by operating solely on feelings. 

In this article, you will learn how the Fear & Greed index works, how it affects the market, and how to include it in your investment strategy. 

What is the Fear & Greed Index

To measure market sentiment, CNNMoney developed the Fear & Greed index. The index gauges price movements and assesses the fairness of share prices. According to the logic behind the Fear & Greed Index, excessive fear lowers market prices while too much greed raises market prices. 

How is the Fear & Greed Index Calculated

The Fear & Greed Index is a compilation of seven indicators measuring stock market behavior. The seven indicators are: 

  • Safe haven demand:  the demand for assets that can maintain or  increase value during market downturns.
  • Stock price momentum: measures the rate of the rise or fall in stock prices over a period of time. 
  • Stock price strength: measures an asset’s strength as a percentage of another asset.
  • Stock price breadth: trading volumes in rising stocks against declining stocks.
  • Put and Call Options: measures the number of individuals purchasing and selling options with a specific asset as the underlying.
  • Junk Bond Demand:  the demand for bonds with a higher default risk than most bonds.
  • Market Volatility:  how much the price of an asset fluctuates over time.

Each of the seven indicators has the same weight in the final result, and they’re scored on a scale of 0 to 100, where 0 indicates extreme fear, 50 indicates neutrality, and 100 indicates extreme greed.

Crypto Fear & Greed Index

There is a Bitcoin Fear and Greed Index developed by the website Alternative.me. The index works the same way as the regular Fear and Greed Index because you can easily measure investor sentiment in the crypto market. The crypto Fear and Greed Index is calculated using five different data sources: 

  • Market volume: The current market volume is compared to the market momentum. When buying volume exceeds longer-term momentum, it’s a sign that the market is becoming greedy.
  • Volatility: A high volatility is a sign of a fearful market.
  • Dominance: When Bitcoin dominance rises, it’s a sign of a fearful market because investors are moving to safer assets. In contrast, a  fall in Bitcoin dominance is seen as a greedy market because investors are betting on Altcoins.
  • Trends: Google Trends data determines the volume of interest in Bitcoin. For example, an increase in Google searches for ‘Bitcoin price prediction’ is a bullish sign.
  • Social media: Alternative.me uses a sentiment data analysis tool on Twitter. High interaction rates are signs of a greedy market.

How to Use the Fear & Greed Index 

A fearful market can lead to the assets becoming oversold or undervalued, which gives a great buying opportunity. A greedy market can result in assets being overbought or overvalued, which can trigger a bear market trend due to mass selling orders. 

Here is how the creator of the BTC Fear & Greed Index suggests using it: 

  • Extreme fear can be a sign that investors are too worried. That could be a buying opportunity.
  • When investors are getting too greedy, that means the market is due for a correction. That could be a selling opportunity.

Do Fear and Greed Affect Investors?

Fear and greed are two powerful emotions that investors or traders must overcome to succeed. These emotions can affect their decisions by acting with pure emotion instead of reason. The best way to overcome these emotions is by creating a trading plan and following it. A trading strategy can stop you from taking significant losses, doubling your positions, removing stop losses, acting impulsively, and more. Also, reducing the trade size and having a trade journal are good ways to overcome this problem. 

The Bottom Line 

The Fear & Greed Index can help you assess market sentiment and identify good selling or buying opportunities. However, remember that you shouldn’t rely solely on the Fear & Greed Index (sentiment analysis) when making investment decisions; always use other metrics, analytic tools, or fundamental analysis to support your choice.

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