While not accurately predicting the future of the market, some indices are still very useful for investors’ decisions, including the Fear and Greed Index.
What is the Fear and Greed Index in crypto trading?
The fear and Greed Index (FGI) is measured between 1 and 100. Value 1 reflects the market is extremely scared, people are trying to sell off cryptocurrencies. The other extreme speaks to the level of extreme greed that is going on, as people flock to invest in the coin.
FGI is a tool developed by CNNMoney to evaluate the market by measuring two key emotions that influence trading decisions: greed and fear. This indicator is updated daily, weekly, monthly and annually. Initially, FGI was used for the stock market, after which the index was applied to the cryptocurrency trading market.
The principle of operation is based on excessive fear causing the price of cryptocurrencies to fall below their real value, and excessive greed is the opposite.
The general rule is that when The FGI value is 1, it means that the time of collection is very good. And FGI reaching 100 is a good opportunity to sell at a high profit.
As Warren Buffet once said, “Buy when there’s blood on the street,” it implies a belief that the worse the market is, the better an opportunity to make a profit, however, some are sceptical and argue that FGI is consistent with a short investment strategy, Rather than the long term.
Fear and Greed Index measurement factor in cryptocurrencies
From July 2021, FGI is for cryptocurrencies using only information about Bitcoin, not the entire market. The main reason is the large correlation between the price and emotions of Bitcoin and that of the cryptocurrency market. In the future, the index may expand to other major altcoins such as BNB or ETH.
The level assessment table has the following scales:
- 0-24: Extreme fear (orange)
- 25-49: Fear (amber/gold)
- 50-74: Greedy (light blue)
- 75-100: Extreme greed (green)
The index is calculated based on 5 factors:
- Volatility (25%): Bitcoin’s current level of value volatility has averaged over the previous 30 and 90 days. Here, the degree of volatility is used as the standard to measure the level of market volatility.
- Momentum/Market Volume (25%): Criteria for comparing market momentum, and trading volume of Bitcoin currently with the average in the previous 30 and 90 days. The high trading volume indicates that market sentiment is volatile or greedy.
- Social media (15%): This factor is based on the number of Hashtags associated with Bitcoin and their interactions on Twitter. Hashtag appearances and unusually high engagements largely show the greed of the market.
- Survey results (accounting for 15%): The survey is conducted weekly with the participation of 2000 – 3000 people. The more survey results, the greater the level of interest and greed of the market, and the higher the index.
- Google trends (10%): Rely on Google Trend’s Bitcoin-related data to clarify market sentiment. Many searches prove that Bitcoin is interested, and the market is about to change. However, positive or negative changes need to be based on the content of the keyword. For example, the soaring keyword “Bitcoin scam” indicates that the market is scared.
- Dominance (10%): The factor that measures Bitcoin’s dominance in the current cryptocurrency market. The increased dominance shows that Bitcoin receives more investment. That means altcoins are losing market share and the market is scared.
Before deciding to apply this indicator to the analysis, you need to consider a few things as follows:
- Are you a trader or an investor? If you are a trader and constantly place orders to trade this indicator can help you. Conversely, if you’re a long-term investor, chasing the index can cause you to miss the big waves of the market and ultimately reduce profits.
- Tax issues: By making a lot of trades, you’re more likely to be taxed on short-term income on each of your short-term profits. This is also very important for you to consider.
- Is the school of trading you follow Fundamental Analysis or technical analysis? FGI is a technical indicator, it is not based on any fundamentals of the market or the digital currency itself. For example, if you decide to invest based on a microeconomic or macro situation, it is clear that FGI does not influence your assessment.
How to overcome fear and greed in trading?
How to overcome greed in investing
Do not use large leverage when trading
Limit continuous buying and selling of many orders
Create a sensible trading plan
All orders must have full entry, take-profit and stop-loss
Maintain and monitor daily transaction log
Have an effective capital management plan
How to overcome the fear of investing
Good psychological control when trading
No FOMO to chase
Limiting losses and continuous DCA when the market is in the downtrend
The FGI helps investors quickly see and evaluate the current market sentiment. However, if included in the analysis you should combine multiple indicators and data to make more accurate decisions. Some argue that the index is better suited to short-term rather than long-term transactions. Since in a long-term cycle of increase or decrease, there are still many small cycles of greed and fear.