Humans has been built with all type of emotions such as love, anger, fear, bravery etc which are sometimes what determines the action taken by an individual. This emotions sometimes makes humans take decisions that are favourable to them and most time it makes them take decisions that are detrimental.
As we all know that crypto is very volatile and this is also caused by the emotions put in by humans as crypto solely depends on the pressure on the demand and supply of the asset. There are two types of emotion which has been found in the crypto space which has been determined based on the psychology of people, this emotions are known as FEAR and GREED.
Let's Briefly Look at Fear
FEAR comes to play when there is a sudden decline in price of an asset due to either a fundamental analysis or a little set back in the project or s lower demand of the asset which causes the decline in price as a result of this emotion sets in and alot of traders are overwhelm by fear of loosing the money they invested or the profit gathered and hence they begin to sell of the asset which leads to more decline in the market and more traders begin to sell of which increase the volume of selling and brings the price down even further, this is seen Everytime in the crypto space.
Let's briefly look at Greed
GREED comes to play when there is a rise in an asset due to new investors coming in and investing largely or a fundamental analysis about the project or news going around that an influential person has invested in a project thsi causes a rise in the price and more investors are clouded with the greed emotions on how to tap into the project and get profit from the project then smaller traders begin to enter the project which takes the price of the asset even higher than expected and it keep.rising as more people keep.entering the project.
This psychology effect has then been looked into and bring forth the creation of a technical analysis which is called the Fear and Greed index which acts as a buy and sell signal for those who aren't mined by emotions.
IS THE FEAR AND GREED INDEX A GOOD INDICATOR OF MARKET EMOTION?
Before we know if the fear and greed index is a good indicator, we need to have further insight about the indicator and know it's operandi modulus.
The fear and greed index was first created for the stock and shares market to analyze the market sentiment by CNNMoney, then a new version was made out of it by Alternative.me which has been employed in the crypto market.
This index makes use of various indicators and trends to determine the market sentiment whether the traders are feeling greedy or overwhelmed with fear.
Whenever the index shows a fearful market this indicates that the particular coin is currently undervalued as a result of panic which leads to over selling of the asset. When the index indicates fear it doesn't mean that the market is in a long term bearish trend except the traders keep.selling to keep it in that level for a long time, sometimes the fear can be a mid term or short term reference to makret sentiment.
While for a Greed index indication, this means that traders are becoming greedy which leads to over valuation of the asset or an overbought situation. This is linked to the popular crypto term FOMO (fear of missing out) and this causes lot of investors to keep buying the asset which further makes the asset pump higher. As we know higher demand leads to increase in price so when the demand becomes greater than the supply the price keeps moving up.
ANATOMY OF THE GREED AND FEAR INDEX
The fear and greed index is scaled into four categories which will be explained below, it is scaled from 0 - 100.
0 - 24 is tagged Extreme fear which is the range with orange color
25 - 49 is tagged fear which is the range with an Amber or yellow color
50 - 74 is tagged green and this is the range of the light green color
75-100 is tagged Extreme greed which is the range of the green color.
You might be wondering how the sentiment is been calculated to get the market emotion of traders, this is done by combining six market factors together which are
Volatility: this takes 25% of the index, this is measered using the current value of Bitcoin with averages from the last 30 days and 90 days.
Market volume/ momentum: this also takes 25% of the index, this uses Bitcoin trading volume and market momentum which is compared with the last 30 and 90 days to get an average value.
Social media: This takes up 15% of the index, you might be wondering why social media is considered, crypto has been confirmed to be moved by news stirred up in social media platforms and other hype from them.
This factor looks at the hashtags on Twitter which are related to Bitcoin and it's engagement rate. The higher the interaction with this hashtags usually relate to more greed than fear.
- Bitcoin dominance: this takes 10% of the index, the increase in the dominance shows that new investors are coming in and this will also influence the greed rate.
- Google Trends: this takes up 10% of the index, it looks at goodle trend data for searches that are related to Bitcoin, the search done determines which level either greed or fear, more searches on will.bitcoin get to $100,000 shows greed.
- Survey: this also takes 15% of the index, although this factor has been on hold for sometime.
This shows that the fear and greed index is mainly about fundamental analysis and it is quite a good indicator of the market sentiment since all the factors listed above are put into consideration. It is a good use especially when used with other indicators to properly analyze the market.
WHAT SHOULD BE ADDED TO THE FEAR AND GREED INDEX
According to me the only shortcoming in the index is that it is based solely on Bitcoin for now which isn't too good for the general market as there are a lot of cryptocurrency that has been created, although BTC is considered as it has the highest dominance on the market, but it will be good if other crypto can be put into consideration, even if not all but the top 50 coin should also have their own index this is because during Alt season Bitcoin might not have a say over the index of the other crypto.
TECHNICAL ANALYSIS USING THE FEAR AND GREED INDEX WITH OTHER INDICATOR
We will be using the index with another indicator to make a technical analysis and enter a trade, as we know that it is best to trade with two indicators for proper analysis. In this section we will be making use of the moving average and the fear and greed index. Moving average is a type of trend indicator that also shows the trend of an asset this is best used with the index.
According to the index we saw that the market is in the greed level but has reduced from.level 79 to 74. After looking at the chart and the indicator we find out that the market was in an uptrend and there is about to be a crossing of the line which will be the start of a downtrend which indicates that the market greed level is reducing.
The line has crossed and now we can take a position, so I will be entering the trade at the market price and will be going short on the market as the price will decline. The position has been taken and there seems to be a gradual loss.
After sometime we can notice that there is a profit in the trade taken and the profit can be taken by a trader but I will.leave the trade as I believe there will.be more fall in the price of the asset.
In conclusion, the index is a good indicator for taking a position in a market but there need to be addition of other indicators so as to get confirmation before entry.