Fear and greed index image

How to use fear and greed index in crypto trading.

Fear and greed index, if used very well, can indicate entry and exit. 

The cryptocurrency market is a very volatile market and analysing might be a difficult task. 

Most important thing in crypto trading is profit or what is the benefit of any investment without profit. 

It is a pity that most people have lost their money to the big players in the cryptocurrency space. 

A knowledge of fear and greed index and how to use it can be a life saver. 

It is important to note what index is and how the fear and greed index generates data for analysis. 

What is an index?

Index is a simple representation of different analysis results of different data points. 

It is a calculated value for easy understanding of market analysis. 

Type of market analysis 

There are three different analyses used in any financial instrument. 

Fundamental analysis 

This is trading using economic news as a basis for trading. 

Technical analysis 

This is the use of previous trend in price to predict future trend in price. 

It is believed that markets move in similar trends at different points in time. 

Sentimental analysis

This is less common among professional traders as market placed using sentimental are more prone to changes. 

It is the used for general sentiment for entry and exit in crypto trading. 

How does the fear and greed index work? 

The fear and greed index is computed everyday by alternate.me using the following metrics. 

  • Volatility (25% of the index). 

25% of the overall analysis is based on the volatility of bitcoin within the last 30-90days.

Volatility measures the current value of Bitcoin with averages from the last 30 and 90 days. Here, the index uses volatility as a stand-in for uncertainty in the market.

  • Market momentum/volume (25% of the index). 

The data available from the volatility is combined with the trading volume and the momentum of the market. 

The momentum of the market indicates how fast the market is moving. 

Increasing buying pressure signals greed while reducing buying pressure indicates fear. 

  • Social media (15% of the index).

Taking out the basic factors in cryptocurrency would have been a weakness for the index. 

In order to give a reliable index, the fear and greed index is calculated using the interaction of different people on social media (twitter). 

This serves as inculcating sentimental analysis into the fear and greed index. 

  • Bitcoin dominance (10% of the index). 

The cryptocurrency without bitcoin is not complete. Bitcoin dominates more than 40% of the entire cryptocurrency market. 

An increase in bitcoin dominance is perceived as a shift from altcoins to bitcoin by investors. 

  • Google Trends (10% of the index). 

Another important input in calculating fear and greed index is the Google trend. 

It is the analysis of a change in the search for bitcoin related search queries. 

Search for words against bitcoin can be an indication of fear while a more compelling search can be an indication of greed. 

Increased search for bitcoin history can be an indication of adoption by another set of people. 

  • Survey results (15% Index Score). 

This input is currently paused and has been used for some time.

How to use fear and greed index? 

Every day, alternate.me calculates fear and greed index and gives a value which ranges from 0-100.

An index of 0-24 indicates extreme fear. 

24-49 indicates fear while 50-74 indicates greed. 

75-100 is an indication of extreme greed. 

When everyone is fearful, be greedy. When everyone is greedy, be fearful. 

In simple term, buy when there is fear and sell when there is greed. 

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