Hello everyone, I am Paul Miyi, a small coder. This is our second day of learning blockchain from scratch. Today we will talk about what the Fear and Greed Index is.

I. What is the Fear and Greed Index?

The Fear and Greed Index quantitatively measures market sentiment, reflecting the psychological changes of investors in the market:

  • Fear: Investors are uneasy, worried about market declines, and tend to sell assets.

  • Greed: Investors are overly optimistic, rushing to buy, which may lead to asset prices being overestimated.

Index Range: 0-100

  • 0-24: Extreme Fear (investors are overly pessimistic)

  • 25-49: Fear (cautious sentiment predominates)

  • 50-74: Greed (optimistic sentiment)

  • 75-100: Extreme Greed (the market is overheated and may be close to a bubble)

II. Factors in Index Calculation

The following factors are included in the calculation of the Fear and Greed Index (using the cryptocurrency market as an example):

  1. Volatility (weight 25%) The volatility of Bitcoin prices compared to recent historical performance.
    High volatility usually means increased fear.

  2. Trading Volume and Momentum (weight 25%) Comparing the day's trading volume to the 30-day or 90-day average.
    High trading volume usually indicates heightened investor sentiment (greed).

  3. Social Media Sentiment (weight 15%) Analyzing keyword sentiment from platforms like Twitter (e.g., 'BTC up', 'plummet', etc.).
    The higher the proportion of positive sentiment, the more the market tends towards greed.

  4. Market Dominance (weight 10%) The proportion of Bitcoin's market capitalization in the entire cryptocurrency market.
    An increase in dominance indicates a more conservative market, while a decrease indicates that investors are more willing to take risks.

  5. Google Search Trends (weight 10%) For example, a surge in the search volume for 'Bitcoin price' may indicate increased greed.

  6. Surveys (weight 15%) Direct surveys regarding market sentiment (some platforms may use this).

III. Example Analysis: Practical Application of the Fear and Greed Index

Case 1: Bitcoin Bull Market in 2021 (dominated by greed)

  • Background: Bitcoin began to rise steadily at the beginning of 2021, climbing from $30,000 to a historical high of $65,000 in April.
    The Fear and Greed Index has repeatedly reachedabove 90, indicating that the market is in a state of extreme greed.

  • Market Performance: Investor sentiment is high, believing that prices will continue to rise.
    A large number of new and short-term investors rush in, driving prices up.

  • Result: At the peak of greed (April), Bitcoin quickly corrected to $30,000 after reaching its historical high.
    This process indicates that extreme greed may signal an overheated market and overestimated prices.

Case 2: Bitcoin Bear Market in 2022 (dominated by fear)

  • Background: In 2022, affected by macroeconomic factors (interest rate hikes, inflation) and internal turmoil in the cryptocurrency market (such as the LUNA crash), Bitcoin's price fell from $60,000 to $16,000.
    The Fear and Greed Index has fallen below10, indicating extreme fear in the market.

  • Market Performance: Investors lost confidence in the market, leading to massive asset sell-offs and continuous price declines.
    As sentiment deteriorates, the market generally turns bearish, and panic selling intensifies.

  • Result: During extreme fear (such as November 2022), Bitcoin's price bottomed out and gradually rebounded to $20,000.
    This phase provided buying opportunities for contrarian investors.

IV. How to Use the Fear and Greed Index for Trading?

1. Buy during extreme fear (bottom buying opportunity)

When the index is below 20, the market may be underestimated due to fear.

  • Logic: Excessive panic in the market leads to sell-offs, and prices may be below actual value.

  • Strategy: Gradually build positions, buying quality assets (like BTC or ETH) step by step.

  • Risk: It's difficult to determine the bottom; confirm with technical analysis (e.g., support levels, RSI oversold).

2. Sell during extreme greed (risk management)

When the index is above 80, the market may be overestimated due to greed.

  • Logic: Investors are overly optimistic, and prices may be far above actual value, increasing risk.

  • Strategy: Gradually reduce positions or take profits, avoiding losses from chasing highs.

  • Risk: In a bull market, sentiment may remain high for an extended period, missing out on further gains.

3. Assist in judging market trends

  • Volatile Market: When the index fluctuates in the range of 40-60, market sentiment is neutral, suitable for short-term operations.

  • Trend Market: The fear index gradually rises from low, or the greed index gradually falls, which may indicate a market reversal.

V. Example: Simulated Trading Strategy

Scenario 1: Bottom Buying Opportunity (November 2022, index at 10)

  • Bitcoin Price: $16,000.

  • The Fear and Greed Index shows extreme fear.

  • Strategy: Buy 1 BTC in batches (0.2 BTC each time).

Buying Plan:

  • November 1: Price $16,000, bought 0.2 BTC.

  • November 10: Price $15,000, bought 0.2 BTC.

  • November 20: Price $17,000, bought 0.2 BTC.

Result:

  • Subsequently, Bitcoin rebounded to $20,000, significantly increasing the value of your holdings.

Scenario 2: Profit-Taking Opportunity (April 2021, index at 90)

  • Bitcoin Price: $64,000.

  • The Fear and Greed Index shows extreme greed.

  • Strategy: Gradually reduce positions to lock in profits.

Selling Plan:

  • April 15: Price $64,000, sold 50% of holdings.

  • April 20: Price $60,000, sold the remaining 50%.

Result:

  • Subsequently, Bitcoin sharply corrected to $30,000, allowing you to successfully avoid losses.

VI. Notes

  1. Sentiment indicators are strongly supplementary: the Fear and Greed Index should not be used as the sole basis for trading; it needs to be combined with technical and fundamental analysis.

  2. Avoid emotional trading: buy when the index is low due to fear, rationally take profits when the index is high, and avoid losing control of emotions.

  3. Suitable for swing trading: this indicator greatly helps medium to short-term traders, while long-term holders should refer more to fundamentals.

The Fear and Greed Index provides investors with a tool to quantify market sentiment. In a bull market, it can help you avoid blindly chasing highs; in a bear market, it can guide you to rationally buy the dip. Through cases and strategic applications, you can better utilize the index to capture changes in market sentiment and provide references for investment decisions.