Index fear and greed: how to use for more money

Written by Anna Komashko
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Investing reporter
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3   min.
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Index fear and greed: how to use for more money
Content

Introduction

According to many experts, the movement of markets is largely determined by emotions. Emotions, in turn, shape investor sentiment. It’s called market sentiment.

In this article, we will analyze what the Index fear and greed is and tell you how to use it to increase the profitability of your investments.

Definition of crypto Fear and greed Index

Crypto greed index acts as an indicator of the mood in the stock market at the moment. Greed index determine where the market will move.

This is one of the most popular market indices and it helps not only traders, but also long-term crypto investors not to loose common sense. It came from the Stock market and early used to check stock price breadth and stock price strength.

Purpose

The developers of the fear greed index are confident that understanding the general mood of crypto investors helps to correctly predict market movements up or down.

Thus, when crypto fear dominates, cryptocurrencies fall in price and trade below their fair value. If greed dominates among investors, then cryptocurrencies are actively bought up and they are traded much more expensive than they actually cost.

What data does the crypto Fear and greed Index show?

So, let’s analyze what the crypto fear greed index factors show to investors. The index itself is expressed as a percentage from 0 to 100, where 0 is extreme fear and 100 is extreme greed. The index looks like a speedometer with an arrow.

The closer the arrow is to 0, the higher the crypto fear and people want to sell, the closer to 100, the greater the greed and buying opportunity. There are intermediate zones between the extreme values of 0 and 100. But how is greed calculated?

Factors that form the Greed index

Market volatility and how it affects the greed index

Volatility (25%) The current volatility of bitcoin (yes, the greed index is mainly focused on BTC) is compared with the average fluctuations for 30 and 90 days. The stronger the last fluctuations, the more the greed index shifts to the level of crypto fear.

Capitalization and how it affects the greed index

Capitalization (25%) Everything is simple here: if large trading volume of assets are bought up in a growing market, then traders are too optimistic – the greed index shifts towards greed.

Social Networks and how them affect the greed index

The reaction of social networks (15%) The unexpected increase in the number of tweets about crypto, their reposts and comments, analysts attribute to greed sweeping the market.

Pools and how them affects the greed index

Polls (15%) Together with strawpoll.com, the Alternative team conducts surveys that reach 2,000-3,000 industry representatives. At the moment they are suspended and are not included in the index.

Domimance or Safe haven demand and how it affects the greed index

Dominance (10%) And again, bitcoin analysts associate the rise of its share in the general market with extreme fear among the players. Fearful, market traders abandon overly speculative altcoins and invest more in safe BTC.

Trends (10%) This is where Google Trends data comes into play. A variety of requests related to cryptocurrency are taken into account.

Conclusion

The greed index has little effect on the cryptocurrency market, as it is just one of the indicators of the state of the market. Index shows the mood of investors, greed and fear level of the market.

Of course, based on greed index, you can build your investment strategy, but only if you do not trade on investor sentiments.

However, because of the market volatility many investors loose self control and make emotional decisions based on the irrational reaction (it’s called market sentiment). Institutional investors are the least affected. And that’s how greed index works.

Example

An example of this is the fall of the crypto market in 2017, when the holders were mostly private investors. Most of them panicked and began to sell assets. Safe haven demand has grown with volatility.

Although there were no fundamental reasons for this, it wasn’t fairly priced and, as we see today, they did it in vain, trying to find safe haven. So let’s look historical values. Bitcoin has doubled or tripled since its peak in 2017 (there it was too much greed).

Extreme fear and extreme greed is what makes the markets what they are. If everyone traded without emotions, starting only from their investment strategies, then we would never see strong volatility, incomes and losses would be much less for all market participants and there won’t be market sentiment. Imagine a world where everyone only invests in Buy and Hold strategy.

Greed Index is a great tool that allows you to outperform the market in terms of profitability. The problem is that it is very difficult to follow fear and greed index. It’s hard to buy while maximum fear rise and hard to sell when maximum greed.


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