How can the fear and greed index improve your trading strategy?

Crypto trading isn’t an easy thing. The marketplace has captured the attention of investors from all over the world who are looking to give cyber assets a chance. The fact that the blockchain, the ecosystem that hosts these tokens and allows them to be traded, is so different from standard investment methods is one of the key reasons as well. Once data has been entered into the decentralized ledger, it cannot be modified in any way, a feature that crypto fans associate with transparency and safety.

However, being a successful crypto trader means doing your research, understanding the intricacies of the trading environment, and coming up with a strategy that can help you achieve your financial goals. The fear and greed index is one of the fundamental metrics that you must become familiar with if you want to minimize your losses and increase your gains. But although it is so well-known, it doesn’t mean that it is all that simple to use. In fact, calculating the figures and then making them work for you can be quite complicated.

What is fear and greed?

The fear and greed index is a way to determine the impact of the overarching market sentiment on the crypto ecosystem at any given time. Although buying, selling, and trading ventures of any kind would, ideally, be powered by purely objective analysis, that is, more often than not, not really the truth. Most investors react emotionally in this marketplace since volatility is so steep, and the fear of missing out is also unbelievably strong. Being so disciplined so as to avoid these pitfalls is quite rare and is a trait that is most common in long-term investors who have been involved with cryptocurrencies for many years and have succeeded in accumulating considerable amounts of capital to the point where they’re comfortable enough to not need to do anything risky anymore.

The index generates values between 0 and 100. Depending on these scores, the market is considered to experience scenarios ranging from extreme fear to extreme greed. When the index is between 0 and 24, the coin is dealing with extreme fear. Anything above 24 and up to 50 signals fear, with 50 being the region of full market neutrality. Greed arises between 51 and 74, and if the figures move above 75 and up to 100, then it means that the market is going through extreme greed. During periods of fear, traders will start selling their holdings, while greed will compel them to buy more assets.

The metrics

There are several different metrics involved in calculating the fear and greed index. A quarter of it is made up of the total market volatility, a figure that is typically used as a fear indicator. Fluctuations and price changes will always be noteworthy when it comes to cryptocurrencies since they are so changeable, so it only makes sense that the volatility would be such an important part of the fear and greed index. Social media is also crucial, having a 15% influence on the index. This is also unsurprising since the platforms are known for their impact on daily life and ability to influence people in all aspects of life, ranging from where they shop to their political affiliations.

Aspects like engagement, hashtags, and mentions across different networks are always taken into consideration when looking to establish fear and greed. Market momentum represents 25% of the index value as well. It shows a coin’s ability to maintain a price trend over the long term, examining market health and the general direction a token is expected to take. Surveys make up 15% of the fear and greed index, but they need to have more than 2000 participants in order to be considered valid. Market dominance is 10%, the same as the trending phrases used in Google searches. In the case of the former, a drop in dominance indicates growing greed, while boosts in Google searches have been corroborated with steep volatility.

Reliable insights

When you become a crypto trader, you end up looking for predictions and estimations all the time. It’s important to remember that they’re never 100% accurate, but the constant changes occurring in the marketplace make traders wish for some stability. These predictions make investors feel secure in their choices, particularly since they are typically the result of technical analysis and the careful examination of historical data. So, can the fear and greed index provide reliable insights into the future prices of crypto tokens?

Significant price rallies may be more challenging to spot if you’re a long-term investor who relies solely or predominantly on the fear and greed index. On the other hand, it can be considered a valuable tool for day traders who are looking for different buy and sell positions within a short amount of time. If you’ve chosen to be a day trader who utilizes the fear and greed index first and foremost, then you need to know that any income derived from crypto trading can be subject to capital gains tax. Fundamental traders can use the metric to guide investment decisions, but they may still end up losing more money than technical traders.

The fear and greed index provides a valuable understanding of the larger crypto market and its movements, but you should still do your research and use several tools that are aligned with your personal goals.

Fear and greed in trading

Using the fear and greed index when trading is nothing new, and the metric is actually a good way to increase your odds of success. When values are low, the price is likely to rise, meaning it’s a good time to start selling in order to make a profit. When the index is high, it can signify that the value will fall soon, making it a great time to start buying. Market sentiment drives rallies and lows, and you can make both these scenarios work to your advantage. However, when it comes to long-term analysis, things get trickier. A single bear or bull market episode can have several rounds of fear and greed, meaning that swing traders are most likely to benefit.

When you take your first steps into the crypto environment, you’ll no doubt consider it complex and convoluted. But learning about what it entails and knowing how to operate metrics such as the fear and greed index will help tremendously.

Author Profile

Adam Regan

Deputy Editor

Features and account management. 3 years media experience. Previously covered features for online and print editions.

Email Adam@MarkMeets.com