What is the Fear and Greed Index? All You Need To Know

Introduction to Market Index and Indicator

An index is a scale that takes multiple data points and consolidates them into a single unit of measurement. Anyone dealing in stocks has heard about the Dow Jones Industrial Index (DJIA). It is a price-weighted index that lists 30 companies from the stock market listings of firms in the United States.

Market indicators are used in market analysis to measure the price performance of a given asset class such as virtual currencies.

Analysts may quantify various factors affecting the value of a given investment product and convert them into an indicator. Indicator exists for all types of market analysis such as technical, fundamental, and sentiment, etc. 

What is the Fear and Greed Index?

Fear and Greed index is a weighted measurement of market data. It was created by CNNMoney to analyze the market sentiment in stock trading. It contains a basket of several indicators that allow the investors to determine if the overall market sentiment is leaning towards fear or greed. 

A score of 50 indicates that markets are neutral. On the other hand, a score of 0 indicates extreme fear while the score of 100 suggests extreme greed.

When sentiment is leaning towards fear, it means that a given cryptocurrency is undervalued. At the same time, fear points in the market can lead to massive sell-offs and cause panic among the investors. However, fear score does not mean that markets are going to trade in bearish streak for the longer run.

On the other hand, markets may treat greed as the opposite of fear. When investors are accumulating more trading positions or acquiring an additional amount of cryptocurrencies, it means that investors are affected by FOMO or Fear of Missing Out. Such a scenario can lead to pumps creating excessive demands for a given virtual currency.

How Does Fear and Greed Index Work?

The Fear and Greed Index is made up of the following weighted indicators or factors mentioned as under:

Volatility

Market volatility is the measure of the potential of price trend change for a given cryptocurrency. Greed and Fear Index account for 25% on this indicator. It tracks price volatility data from the last 30-90 days and accounts for uncertainty.

Momentum/ Volume

Price momentum and trading volume are the next indicators that account for 25% of FGI. The data accounting for 30-90 days averages values is compiled and compared. If the graph indicates high volume it is translated into massive buying sprees and increasing demand.  

Social Media

Blockchain investors usually communicate and access news through social media platforms. Social media account for 15% of FGI. When social media interaction is increased it shows greater demand but the mentions should be predominantly positive. 

Bitcoin Dominance

Bitcoin is the first born coin that accounts for 10% of FGI. This metric measures the Bitcoin dominance of market. If Bitcoin’s dominance in the market is increased the inflow from the altcoin markets increase and vice versa.

Google Trends

Google trends accounts for 10% of FGI. When google searches for a given virtual currency such as Bitcoin increases in the marketplace, it can lead to price appreciation. However, it is important that the search volume is regarding positive developments with the coin such as the latest updates or token burning that increases the trust of the investors.

Survey Results

Survey results make up for the 15% of FGI. It entails collecting feedback from the investors. However, this method has been put on hold recently on account of biased and unclear projections.

Conclusion

FGI is a valuable tool for every investor to have in their arsenal. It allows investors to check the market sentiment and track changes that can impact the value of their trading positions. In this manner, investors can find the ideal spots for entering or exiting positions and mitigate risks associated with the trading.