What Does the Fear and Greed Index Portray?
There’s a fear and greed index for the US Stock Market. The crypto version was established because of the high level of volatility in the digital currency market.
The Fear and Greed Index skim through several trends and indicators to determine if traders tend toward greed or fear. The scale is from 0 to 100, with 0 being extreme fear and 100 being extreme greed. If the scale is 50, it means the market is perfectly balanced.
A market with a high level of fear could depict that digital currencies are experiencing undervaluation. When investors are fearful, short-term selling usually occurs, triggering a cascade of sell orders.
A market with a high level of greed could mean that virtual currencies are overvalued. When this happens, it could be a matter of time until the high prices come crashing down.
The fear and greed index is determined by various sources, including the volatility of the crypto market, social media, market volume, and Bitcoin’s dominance.
How to Utilize the Crypto Fear and Greed Index as a Trader
The crypto fear and greed index works better than its stock market counterpart because the digital currency market has many more retail investors. As a trader, you can spot a swing on the index and use that to capitalise on a trend before most of the market follows suit.
The fear and greed index is better suited to short-term analysis. There’ll be cases of greed and anxiety when there’s an extended uptrend or downtrend. Hence, you can take advantage of this to predict the start of higher highs/higher lows or lower highs/lower lows.
It doesn’t perform well in the long term since multiple factors can influence a market’s fear or greed.
Traders use the crypto fear and greed index to determine the direction in which the market will go. Many factors, such as Google Trends, social media, market volume, and Bitcoin’s dominance, make up the index. As a trader, you can use this index to enter and exit markets in the short term.