Beside other indicators, the Fear and Greed Index is the parameter that helps you detect the market sentiment. This article will help you understand what the Fear & Greed Index is, and how to use it.
What is Fear and Greed index?
Fear and Greed Index is one of the most popular indicators to get the market sentiment. As its name suggests, this indicator helps you know whether the market is fearful or greedy at the time. Hence, users can have greater accurate actions.
The Fear and Greed Index not only appears in crypto, but also in the stock market, which was first created by CNNMoney to analyze that market. Later, Alternative.me created a corresponding version of the crypto side.
Understanding Fear and Greed index
First, go alternative.me/crypto/fear-and-greed-index and pull down.
From left to right:
- Figure 1: Fear and Greed Index chart → shows the current index.
- Figure 2: Fear and Greed Index Historical Values → shows the index at some point in time.
- Figure 3: Time until the next Fear and Greed Index update.
So, what is Fear and Greed index? The Fear & Greed Index is a number from 0 - 100, in which:
- From 0 to 49 represents Fear.
- From 51 to 100 represents Greed
- 50 represents 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 green).
- 75 - 100: Extreme greed (green).
Fear means the market is showing bad signs, most token values decrease and people tend to sell everything. In contrast, a greedy market shows signs of “FOMO”, that means people buy everything because token prices increase everyday.
Which factors create Fear and Greed index?
To create Fear & Greed index, Alternative.me used the following six parameters:
- Volatility (25%): Measured by comparing the current price volatility and maximum price drop of BTC with the previous 30 and 90-day averages, respectively.
- Market Momentum/Volume (25%): Combine BTC's current momentum and trading volume, then compares it to the previous 30 and 90-day averages.
- Social Media (15%): This index is based on social network metrics like likes, hashtags, what people are talking about, number of posts, etc. Therefore, if the above indicators increase, the corresponding market gradually becomes greedy. Currently only available for Twitter.
- Dominance (10%): The percentage of BTC's market share is compared to the total cryptocurrency market capitalization, also known as BTC Dominance.
- Trend (10%): Alternative.me takes Google Trends data for various Bitcoin-related search queries and processes those numbers, specifically the change in search volume and other popular searches suggested.
- Survey (15%) - now suspended: Alternative.me uses the strawpoll.com voting platform to poll people about the market. Strawpoll.com is also part of Alternative.me
How accurate is Fear and Greed index in Crypto?
Although Fear and Greed Index has a high accuracy, we should not totally depend on this index. To make great trading decisions, analysts often combine various indicators such as chart analysis, the on-chain data of BTC, ETH to see the general sentiment, the on-chain data of a specific asset,…
Because the Fear and Greed Index shows the general market situation and updates very slowly, it only provides an overview of the market, suitable for long-term players. If you are short-term traders, this indicator is not really necessary.
In addition, there is no data to show how much Fear and Greed index is going to change in the market. Which means we all know when the market is greedy, there will be a time of strong correction. The problem is how much Fear and Greed Index will change? That's something we don't know. So Fear and Greed Index is not used to help determine when the market corrects.
Also, in a Bull or Bear market, sometimes we still see the indicator showing the opposite side. However, that doesn't mean the market has ended its trend and changed direction. It could be a small correction to establish a more sustainable big up/down trend.
To sum up
The Fear & Greed Index is an indicator that is, although not totally exacting, perhaps one of the most interesting as it describes the general mood of the market at a given time. This helps users in getting a general view of the market. However, we need to consider other factors to make the right investment decision.