Read between the lines. Some traders and investors use the fear and greed index to anticipate trends in the cryptocurrency markets. Le Journal du Coin today offers its readers an article that will allow them to quickly discover the essence of a tool that they could use, or vice versa, if they consider it irrelevant or unreliable.
What is the Fear and Greed Index?
The Fear and Greed Index is an indicator that attempts to quantify market sentiment. Traders and investors who use it assume that when fear prevails in the markets, the price of a cryptocurrency like Bitcoin (BTC) will tend to fall. On the contrary, greed or greed (Greed) dominating the markets would be beneficial during the cryptocurrency.
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Measurement and interpretation of the indicator
The Fear and Greed Index is calculated based on various data from various sources, including volatility comparing the average value of a cryptocurrency over the past 30 and the past 90 days, trading volumes over these periods or social media sentiment, etc.
Sites like Lookintobitcoin.com provide the indicator value daily. Thus, they give an overview of the prevailing sentiment in the markets.
The indicator values are interpreted based on this reading grid:
- 0 to 24 = extreme fear
- 25 to 49 = Fear,
- 50 to 74 = greed
- 75 to 100 = extreme greed.
Fear and Greed Index and Trading Strategies
The data from Lookintobitcoin.com shows that the Fear and Greed Index can be used, for example, to predict bitcoin local highs and lows. Then the degree of reliability is relatively satisfactory.
Instead of entering or exiting positions based on predicted trends, some traders and investors may nonetheless bet against the tide, selling when sentiment is much more greedy and buying when fear prevails.
Market sentiment: indicator limits
The Fear and Greed Index can help anticipate trends. However, it cannot determine the exact levels of important local troughs or peaks.
Thus, misjudging the timing of a bullish or bearish reversal, or even misjudging the duration and magnitude of an upcoming advance or decline, can punish unwary traders or investors.
The Fear and Greed Index is neither a magic wand nor an accurate map of cryptocurrency fluctuations. At best, the indicator can be compared to a compass.
Follow the Bitcoin Daily Bulletin at the end of the evening or subscribe to the Journal du Coin Newsletter to learn about other important indicators used daily by professional traders and analysts or simple enthusiasts to analyze the BTC price.
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