Fear and Greed Index

Fear and Greed Index

Undoubtedly, Fear and Greed Index is one of the most popular financial indicators which can measure the sentiment and emotional state of investors in the Financial Markets.

Although, it was first introduced as a tool at the Stock Financial Market by calculating price momentum, market volatility, and other indicators by taking an equal weighted average of each of them, it can also be used for Forex and Cryptocurrency markets.

It is designed to capture the level of fear or greed prevailing in the Market at any given time. The index attempts to quantify the emotions and sentiments that drive investor behavior, as these emotions can have significant impact on market movements.

The index ranges from 0 to 100, with extreme fear being associated with lower index’s values and extreme greed with higher values. An Index reading of 0 indicates maximum fear while suggesting that investors are extremely pessimistic about the Market conditions, and they may be selling aggressively. On the other hand, a reading of 100 suggests extreme greed. This is an indication that investors are optimistic about the Market, and they increase their exposure. A 50-level indication is a neutral market sentiment.

One of the biggest advantages of Fear and Greed Index is its simplicity. Many traders can divide the 0-100 zone into quadrants (0-25 level, 25-50 level, 50-75 level, 75-100 level) and apply specific trading plans and strategies for each quarter of the Index.

It is also useful as a Risk Management tool since investors can increase their cash allocation when Markets are trending downwards and increase their respective exposure allocation when the Markets are trending upwards. During a bear market, prices fall, and fear prevails. Following an investment strategy, according to the Index, an investor should increase its cash allocation to protect his/her portfolio. Once there are signs that the Market starts to recover, the strategy will switch from cash to buying power and to take advantage of the rising prices an investor’s exposure will be increased. When the Index reaches extreme levels, it may indicate that a potential reversal in Market sentiment is possible, and the price direction may change.

Taking into consideration the above, the Index can be used for timing Market entries and exits situations. By checking the Index level, a trader may spot a market and a trend reversal and may find a good opportunity to enter the Market.

It is important to note that the Fear and Greed Index is just one tool among many used by investors and traders to analyze the Market(s). It should be used together with other technical and fundamental Market analysis techniques to make investment decisions and not as standalone process.

Categories / Tags: Forex

Related articles

How to choose the best Forex broker and CFD provider

Nowadays trading has become quite easy, since all a trader needs is the comfort of his/her home and a decent internet connection. Once someone decides to become a part of the foreign exchange market (FOREX), there are numerous financial firms available to accept clients all over the world.

Successful forex trading

Continuing our previous post on how to choose the best forex broker, we will analyze certain basic concepts which reveal that forex trading can be challenging. The complexity of the trading platform will not be considered since each trader selects the trading environment which best suits his/her needs while feeling at the same time as comfortable as possible.

Forex trading strategies and styles

Which type of forex trader are you? One of the most basic concepts in forex trading is to understand the trading strategy a trader is about to follow, which in turn will characterize and distinguish his/her trading style and type.

Forex Trading Psychology and Behavioral Finance

Having a vast knowledge of forex and the financial industry is not enough to make you a successful trader. As many things in life, psychology is the key!

Know Your Customer/Client - KYC procedures

Upon registration and opening a trading account to a forex broker, one of the most important requirements is to get the broker’s Compliance Department approval.

Forex Trading Charts

There are many platforms developed for traders which offer many special features and services. Using a trading platform and a forex trading chart traders try to analyze the market and to identify any possible trends or price movements.

Useful Forex Trading Tips

Many traders try different trading strategies with one goal in their mind. Finding a way for profitable trades. However, no one can have continuous profitable trades. Therefore, another important part should be how to minimize losses and stay in the game. Profits and losses will inevitably occur one after the other.

What is a pip - pip’s value and pip calculations

The "percentage in point" or "price interest point" (PIP) is one of the most basic concepts in forex trading. In forex trading, a pip is the smallest price movement which can be recorded in a currency pair.