A highly popular index (Fear and Greed index) has recently been considered by most traders as a leading indicator of how the market is likely to swing, as a result of traders’ psychological decisions.
What is the Fear & Greed Index?
The Fear and Greed Index, developed by CNNMoney, is used to gauge whether investors are too bullish or bearish on any market. The index ranges from 0 (extreme fear) to 100 (extreme greed). When applied to the crypto market, the Fear and Greed Index serves as a barometer for the market being fairly priced and trading in the right direction by observing investors’ emotions. Contrary to popular belief, this index is viewed as a contrarian index by most smart and analytical traders.
As a result, when investors become afraid, they sell crypto holdings in their portfolio, which drives prices down to the point where they may be below their intrinsic value. The opposite is also true when investors are greedy. Accordingly, fear is a buy indicator for the Index, and greed is a sell indicator.
Understanding the Fear & Greed Index
The basic understanding of the Fear and Greed Index is commonly used by market traders to time the entry into the market. Whereas the Index is more notable as less of an investment research tool and more of a market-timing tool. Subsequently, this has given certain individuals the status of an authority in market analysis like Warren Buffet who once said, “Be fearful when others are greedy, and greedy when others are fearful.”
The crypto market behavior is very emotional. People tend to get greedy when the market is rising which results in FOMO (Fear of missing out). Also, people often sell their coins in the irrational reaction of seeing red numbers. An understanding of the Fear and Greed Index will apparently try to save traders from their own emotional overreactions. Based on these two simple assumptions:
- Extreme fear can be a sign that investors are too worried about the state of the market. Which could be a buying opportunity.
- When Investors are getting too greedy by throwing in more money into an overbought market, that means the market is due for a correction.
Certain data sources are used to produce the Fear & Greed Index which include but are not limited to the following:
The data is used for measuring the current volatility and maximum drawdowns of crypto (in this case Bitcoin) and comparing it with the corresponding average values of the last 30 days and 90 days. The possibility of an unusual rise in volatility is a sign of a fearful market.
There is also measuring the current volume and market momentum (which would involve a comparison with the last 30/90 day average values) and putting those two values together. It is often opinionated that when we see high buying volumes in a positive market on a daily basis, we conclude that the market acts overly greedy / too bullish.
There is also the aspect of what the people are saying on the streets of social media which could be factored in a virtual perspective similar to what is obtainable in the street of traditional markets, such that data gathered and the count on various posts using various hashtags for each coin and check how fast and how many interactions they receive in certain time frames. An unusually high interaction rate results in a grown public interest for that particular coin and oftentimes corresponds to greedy market behavior.
In conclusion, we would like to encourage traders to always carry out due diligence and proper research on market trends before investing and executing trades in order to avoid excess losses from traders’ inability to carry out their own proper research. The Klever community and the team is always willing to educate new users and prospective investors on the various analysis for trading to minimize loss.
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