Trading is one of the most difficult jobs in the world, whether it is on the traditional market, the centralized exchange platforms or on the DeFi platforms.
When you are in the crypto-currency business, it is interesting to monitor the movements of BTC, but not only. In classical finance, there is an index of "fear" which is none other than the VIX. This index is a way to gauge the state of panic in the financial markets.
There is the same version for the crypto market which is none other than the Bitcoin Fear & Greed index. Today we will discuss the BTC Fear & Greed after briefly explaining how this type of index (VIX) works. Are you ready? Let's get started!
What is the VIX
The CBOE (Chicago Board Options Exchange), which invented the VIX indicator in 1993, uses the S&P 500 to gauge the volatility of the US financial market. The CBOE calculates it every day. It is even possible to trade this indicator, it has a great deal of success.
In actuality, the volatility it measures is a gauge of market anxiety. In fact, if it was initially created as an indicator, we can now discuss an index in its entirety. The VIX is expressed as a percentage. It is intended to roughly reflect the S&P 500's fluctuations over the next 30 days, which will then be annualized.
Other volatility indices, indexed on other stock market indices have also been created, such as the VNX which measures the volatility on the NASDAQ 100 or the VXD which measures the volatility on the Dow Jones 30 index.
What is the Fear and Greed index?
The Fear and Greed Index is a gauge that tries to put market mood into numbers. Its users use the assumption that the price of a cryptocurrency like Bitcoin (BTC) will often decrease when fear controls the markets. On the other hand, the price of a cryptocurrency would benefit from greed or greed taking over the markets.
The Fear and Greed index is based on a variety of data from many sources, such as volatility comparing a cryptocurrency's average value over the previous 30 and 90 days, volumes traded during these times, mood on social media, etc.
Sites like alternative.me provide daily, the value of the indicator. This gives an overview of the prevailing sentiments on the markets.
Fear and Greed Index: a trend indicator?
The values of the indicator are interpreted on the basis of this reading grid:
0 to 24 = Extreme fear
25 to 49 = Fear
50 to 74 = greed
75 to 100 = extreme greed
How to use it in trading?
Data from alternative.me shows that the Fear and Greed Index can, for example, anticipate local peaks and troughs in Bitcoin. The degree of reliability is then relatively good.
Instead of opening or closing positions based on predicted trends, some traders and investors might nevertheless choose to bet against the tide: sell when sentiment is much more inclined towards greed, and buy when fear dominates.
Conclusion : The ultimate indicator?
The Fear and Greed Index might be useful for spotting trends. It does not, however, assist in establishing the precise magnitudes of significant local lows or highs. Unwary traders or investors may thus suffer if they incorrectly predict the timing of a bullish or bearish reversal or the length and size of an impending bullish or bearish move.
The Fear and Greed Index is neither a miracle cure nor a precise depiction of a cryptocurrency's swings in value. The indicator can most closely be compared to a compass. Those indexes must be carefully examined and used in conjunction with other tools, just like any other tools. In trading, relying solely on one strategy is never ideal.