The Fear and Greed Index – is it the first assistant to the trader?

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19.10.2021
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Fear and Greed Index.

Analyzing the situation in the stock market is the first thing traders pay attention to before buying or selling digital assets. Today, the best tool to do this is the fear and greed index. To find out what the term means, how to use it, and how accurate it is, continue,please, reading the article.

Fear and Greed Index – what is it?

The Fear & Greed Index is a number from 0 to 100 (0 is the maximum fear, 100 is the maximum greed) used as an indicator of the situation in the stock market and is formed under the influence of the following determinants:

  1. The volume of purchases and sales. The prevalence of the urge to buy indicates greed.
  2. Bitcoin dominance. A high indicator indicates a general preference for bitcoin over other cryptocurrencies. A fall in this value, on the other hand, indicates the desire to invest in altcoins.
  3. Analysis of search queries. It is necessary to monitor the growth of public interest in the coin.

What is the purpose of a fear and greed index in cryptocurrency?

Like all people, traders do not have a lack of emotions. And understanding the mood of other market participants is the right way to make the corresponding decision whether to buy or sell an asset.

With the growth of the market, people believe in a constant increase in the value of digital assets, they want additional earnings, so they wait for the crypto to cost more in order to sell it at a higher price.

When the market falls, many people panic, believe that the benefits are slipping away from them, and sell their assets.

Thus, the motto of experienced digital currency market players is: “Buy when everyone is selling and sell when everyone is buying”.

Fear and greed over time
Before the market decline in March 2020, the index had dropped sharply. According to the results of September 2021, it was about 40, which corresponds to a low level of fear. Source: CNN Business.

Fear & Greed Index: how to use it?

The indicator is calculated taking into account seven categories:

  1. Stock Price Strength. This is the ratio of the number of stocks that hit annual highs and those that fell to annual lows. If the former prevails over the latter, that is a signal about an urge to buy.
  2. Stock Price Breadth. It is the ratio of trading volume between rising and falling stocks. In case the volume of the first type prevails, it can be concluded that there is a common wish to buy.
  3. Market Momentum. The term refers to the ability of a particular market to maintain a continuous increase or decrease in prices over a period of time. The index expresses the difference between the current price of an asset and its fluctuations over the past few days.
  4. Put and Call Options (put and call options). These are agreements to sell (put) or buy (call) specific assets at a given moment at a price agreed in advance. The prevalence of the former speaks of fear, the latter - of greed.
  5. Safe Haven Demand - demand for risk-free assets. The general interest in buying more risky stocks and selling less risky ones speaks of favorable conditions for selling.
  6. Demand for Junk Bond Demand (junk bonds). When the difference in profit from both types is minimal, the greed rate is at its maximum.
  7. Volatility is a range of changing values ​​fixed in a specific time period. Less than 20% – sales time. More than 40% – shopping time.

How accurate is the Fear and Greed Index and where can I find it?

Specialized sites periodically post information about stock market indicators, which can be used to track general trends in the sphere. These include Profinvestment.com, Alternative.me. Today the Fear & Greed Index is one of the best ways to analyze the market dynamics. However, we remind you that the final decision on the transaction must be based on a comprehensive assessment of the asset.

Fear and greed index
In September, Bitcoin's Fear and Greed Index was equal to 53, which corresponds to the neutral market sentiments.

Experts about the behavior at the market

Stock market experts are human too and can be wrong. Nevertheless, one can make conclusions about the best behavior in the market from their statements.

For example, Warren Buffett, an American entrepreneur and the world's largest investor, talks about the importance of discipline to an investor. Analyzing the market is, of course, useful, but only in conjunction with the development of your own behavior strategy.

David Harding, a British billionaire businessman, talks about the advisability of forming an investment portfolio from different assets, which allows you to minimize risks in any trends in the stock market.

Peter Lynch, an American financier and investor, advises to "avoid fashion companies in fashion industries." Again, this is about having information about the situation, but developing your own strategy.

Thus, the fear and greed index is an important indicator that reflects the market situation. However, when making a decision, one should be guided not only by the dominant trends, but also by one's own point of view on a particular deal.

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