Along with the indicators on the chart, the Fear and Greed Index is also one of the parameters that help you shape the current market. This article will help you know what the Fear and Greed Index is, how to read it, and how accurate it is.
What is the Fear & Greed Index?
Fear & Greed Index (or greed and fear index) is one of the indicators used by many people to know market sentiment. As the name suggests, this indicator will help you understand whether the market is fearful or greedy when looking at the indicator. From there, a suitable trading strategy can be devised.
The Fear & Greed Index did not appear for the first time in Crypto but was created by CNNMoney to analyze the traditional stock market. Later, Alternative.me created a corresponding version of the Crypto side.
How to read the Fear & Greed Index
First, you visit here. Then scroll down to see this chart:
In order from left to right:
Figure 1: Fear & Greed Index chart.
Figure 2: Fear & Greed Index Values: Present, Yesterday, Last Week, Last Month.
Figure 3: Time for the next Fear & Greed Index update.
The Fear & Greed Index is a number that runs from 0 – 100:
From 0 – 49 represents Fear (Fear).
From 51 – 100 represents Greed (Greed).
50 corresponds to a neutral market.
However, if broken down more closely, the colors on the chart have the following meanings:
0 – 24: Extreme Fear (orange).
25 – 49: Fear (yellow).
50 – 74: Greed (light blue).
75 – 100: Extreme Greed (green).
Fear means the market is showing bad signs, most asset values are falling, and people tend to sell everything. In contrast, a greedy market is home to FOMO buying everything; property prices constantly increase daily.
Factors that make up the Fear & Greed Index
To create the Fear & Greed Index, Alternative.me used the following six parameters:
Volatility (25%).
Market Momentum/Volume (25%).
Social Media (15%). Respond to the market gradually becoming greedy. Currently only available on Twitter.
Dominance (10%).
Trend (10%). Other popular searches are suggested.
Survey (15%). Strawpoll.com is also part of Alternative.me
Fear & Greed Index Accuracy
Like other indicators, the Fear & Greed Index has high accuracy but is not always the right indicator. To make trading decisions, analysts often combine several other indicators, such as chart analysis and on-chain data of BTC and ETH, to see the general situation and on-chain data of the desired asset. Transaction,…
Because the Fear & Greed Index shows the general market situation and updates very slowly, it only provides a general market overview suitable for long-term players. This indicator is unnecessary if you are a short-term trader, closing orders within a day or a few days.
In addition, there is no data to show how much the numbers will move in the market. This means we all know when the market is greedy, there will be a time of solid correction. The problem is how much the Fear & Greed Index will be adjusted. That’s something we don’t know. So Fear & Greed Index is not used to help you guess when the market will correct.
Also, in a Bull or Bear market, we sometimes see the indicator leaning in the opposite direction. But that doesn’t mean the market has ended its trend and changed direction. It could be a minor correction to establish a more sustainable big up/down trend.
The Benefits and Drawbacks of Using the Fear and Greed Index
The Fear and Greed Index, like any other financial resource, has advantages and disadvantages. Here are the primary benefits and drawbacks to be aware of.
Advantages
A consistent gauge of investor sentiment can be used to supplement fundamental analysis. The Fear and Greed Index, in particular for value investors and contrarians, can corroborate buying opportunities discovered through other analyses.
The Fear and Greed Index can be applied to a variety of trading methods. As previously stated, the Fear and Greed Index can be used to value, momentum, contrarian, swing, and other trading techniques.
Disadvantages
It’s easy to overestimate the Fear and Greed Index. The Fear and Greed Index is most effective when used in conjunction with other research and analysis. For example, a low index value does not necessarily indicate that it is a good moment for value investors to buy.
Summary
The Fear & Greed Index is an indicator that, although not exactly true, is perhaps one of the most interesting as it describes the general mood of the market at a given time. And this will also help a lot with the view of the market. However, we must analyze many other factors to make the right investment decision.
