Fear and Greed Index: What it is and How to Use it in Crypto Trading

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The frequent fluctuations in the value of cryptocurrencies make trading in digital assets look quite risky. In the process of making tactical and strategic decisions, professional traders actively use various signals, parameters and indices that assess market conditions on all sorts of aspects.

Such indicators include the Crypto Fear & Greed Index. What information does it provide, in what cases and situations it should be used and how effective is this indicator? Let’s find out together.

What is the Fear & Greed Index (F&G Index)?

The F&G Index is based on the knowledge of group psychology of people:

  • when the market is rising, traders under the influence of greed and FOMO (fear of lost profits) start buying up the asset;
  • in a falling market, it’s the other way around – users, driven by fear, sell off the asset en masse in an effort to minimize losses.

The F&G index is calculated in absolute units – from 1 to 100. As a rule, the following gradation is used:

  • 0-24 – extreme fear;
  • 25-50 – fear;
  • 51-74 – greed;
  • 75-100 – extreme greed.

The closer the index value is to 100, the higher the probability of a serious correction. It is connected with the fact that traders are buying more and more assets and, correspondingly, the market is overheating.

The index value below 50 points to the probability of sell-off – the closer to 1, the more realistic the scenario of the coming market collapse looks.

How is the F&G Index calculated?

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To determine the value of the F&G Index many indicators are used at the moment: Google search queries, market dynamics, surveys of traders, activity in social networks, volatility and others.

For example, an increase in the number of internet searches for the word “bitcoin” indicates a high degree of investor greed. This indicator has a 10% weight in the F&G Index process.

Another factor is market dynamics: it shows the ability of the market to maintain the current trend in the long term. Simply put, it is the “temperature”, indicating the “health” of assets. Its share in the Index is 25%.

“Social media has a 15% weighting on the Index, proving that it has a high degree of influence on our lives. It takes into account aspects such as hashtags and mentions of an asset, user engagement and many other parameters.

Market volatility has a 25% share and is calculated as a comparison of the current price of an asset to its changes over the previous 30-90 days.

Bitcoin has a 10% share in calculating the F&G Index. A decrease in this index indicates a buying up of altcoins by market participants.

The remaining 15% comes from opinion polls. The more surveys are conducted (with 2,000 or more respondents), the higher the greed of investors.

The total value of the F&G Index is derived based on the dynamic values of the above indicators, and reflects the sentiment of traders at the moment.

How to use the F&G Index?

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This indicator helps to trace the changes in the traders’ mood in the market. For example, low values indicate that the price of a crypto-asset is likely to rise soon. High values indicate an increase in prices at the moment. This leads to market overheating and correction, so it is important to sell the asset at a price close to the local highs in time.

The F&G index is best suited for intraday trading. It is not recommended to use it for the mid- and long-term periods. This indicator analyzes only the sentiment of market participants.

Technical and fundamental analysis does not depend on traders emotions and is more suitable for long-term forecasts. Professional traders never use just one indicator. For a more reliable picture it is better to analyze several indicators and parameters. But to select from dozens of existing indicators those that fit a particular strategy is a real art that requires certain skills.

The way to success with F&G

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It would be naive to see indicators as a panacea and rely only on them. To be a successful trader you must develop your own trading strategy and stick to it, write down all your trades and use experience of other market participants.

Here are a few tips to help reduce the chances of making bad decisions:

  • Cryptocurrency volatility increases the risk of large trades. It is better to close a few small orders and remain calm than to make an accidental and unfortunate mistake due to emotional overexcitement during a large trade.
  • Having a detailed strategy is a key prerequisite for success. Without a clear plan, the risk of making a mistake is very high.
  • Recording trading decisions allows you to sharpen and improve your strategy. Studying your actions and their consequences will allow you to avoid miscalculations in future trades.
  • Don’t try to copy someone else’s decisions and strategies, because there is no universal recipe for successful cryptocurrency trading. Sift out what you don’t need and leave only what will help you improve your own trading strategy.

Meanwhile we present Cryptex cryptocurrency exchange. It has a wide range of useful tools as well as a user-friendly interface. Cryptex is completely anonymous and gives its users the opportunity to invest in cryptocurrency without a long registration and confirmation of their identity. You can buy cryptocurrency at a bargain price any moment here.

In addition, always remember that any indicators and signals are not an indication to buy or sell. They are only necessary for analyzing the market situation. The F&G Index is no exception. Use it wisely and success will surely come!