Market Sentiment. How is the Fear&Greed Index calculated?
The Fear & Greed Index is one of the popular indicators that allows you to interpret the current mood of market participants on a scale from 0 to 100, where “0” is the maximum fear, and “100” is the maximum greed.
One may ask why an individual participant should know someone else’s mood if his mood is perfectly known to him? What is the practical benefit of this?
The main benefit lies in the ability to evaluate your decisions about opening and closing deals more adequately. After all, it is evident that periods for buying and selling can be more favorable and vice versa. And it’s not about Mercury retrograde in Venus at all.
It would seem that there is no high math: buy low, sell high. That’s right. But, for some reason, many more people were willing to buy bitcoin at $65,000 in 2021 than those who are ready to do so after falling to $20,000 in 2022.
Paradox? No. This is how human psychology works: discounts of 70% work well in shopping centers. But buying an exchange asset falling by 70% can be scary.
It turns out that it is better to buy when you want to sell and to sell when you want to buy. You may have to re-read the last sentence to allow this thought to “rest” and settle in your mind.
But the concept of “want” is too unscientific to rely on when making trading decisions. That is why a mathematically calculated index was developed, showing most investors’ objective state.
Until recently, this logic applied more to the stock market. But today, this index constantly appears in any average analytical review of the cryptocurrency market.
The extremum zones are of particular interest. This is where market reversal zones and the best opportunities are formed. The neutral and “hot” zones are more important for assessing the dynamics. The indicator can get there both from the zone of fear and the opposite pole.
Extreme greed can be attributed to the “overbought” phase of the market when it is undesirable to open buys, and it also makes no sense to hold already opened long positions. And the maximum fear can be attributed to “oversold” when sales become unpromising, and the profit on previously opened short trades is maximum.
Principle of index calculation
The Fear&Greed Index is compiled from seven indicators: market volatility, volumes, market momentum, social media sentiment analysis, bitcoin, and altcoin dominance, Google search trends, and profile surveys.
As a result, full-fledged trading zones of support or resistance are obtained, built not graphically but algorithmically.
Remember that it is always important to do your research on the chosen cryptocurrency project before investing. Sometimes something is too cheap just because it is worth it. The right approach is to search for undervalued tokens and not mindlessly absorb everything the market puts up for sale.