Fear and Greed Index Bitcoin/Cryptocurrency | Explained

Fear and Greed Index was developed by CNNMoney and it is a really great way to gauge investor sentiment. It was created for the sole purpose of measuring 2 of the main emotions that affect how much investors are ready to pay for stocks.

Fear and greed index is being gauged daily, weekly, monthly, and yearly.

Fear and Greed Index

Going into theory, you can use the index to measure if exactly the stock market is reasonably priced.

However, this is based on the logic that too much fear easily pulls down share prices. Also, too much greed tends to have the other way round effect.

Calculating Fear and Greed Index

The Fear and Greed index is centered on 7 different factors and each of the factors is measured from 0 – 100 and weighted equally to provide the index value. The factors include:

Stock Price Breadth

This is the trading volumes of increasing stocks relative to rejecting stocks on the NYSE. Higher trading volumes in increasing stocks vs decreasing stocks show greed and vice versa.

Stock Price strength

The number of stocks on the NYSE getting to 52 weeks highs relative to the ones hitting 52 weeks lows. A high number of stocks hitting 52 weeks highs vs 52 weeks lows shows greed and vice versa.

Put and Call Options

This is the Chicago Board Options Exchange put/call ratio. A greater put and call ratio shows fear and vice versa.

Market Momentum

This is the performance of the S&P 500 relative to its 125-day average. A higher relative performance shows greed and vice versa.

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Market Volatility

This is the “CBOE” “VIX”, that is, the Chicago Board Options Exchange Volatility Index. A greater VIX value shows fear and vice versa.

Junk Bond Demand

The yield escalates between investment-grade bonds as well as junk bonds. A higher yield spread shows lower junk bond demand, which is signal fear and vice versa.

Safe Haven Demand

The safe haven demand is the performance of stocks relative to bonds. Here, higher relative performance shows greed and vice versa.

Making Use of the Fear and Greed Index

The Fear and Greed Index is mainly used to time any entry into the market. At that, the Index is being seen as less of an investment research tool and very more of a market-0timing tool.

According to Warren Buffet, he said:

“Be fearful when others are greedy, and greedy when others are fearful”.

Let us take for instance when the index hits a value of 90, which is extreme greed, this may show that stocks are really overvalued. And it may make those investors who are following the index sell out their own stock holdings.

Fear and Greed Index CNN

The CNNMoney created a fear and greed index, but there is also a crypto fear and greed index.

How Do Fear and Greed Index Affect Investors’ decisions?

Well, a lot of investors are really psychological and at the same time reactional. And fear and greed are the major two principal emotions that affect investors.

Following what some researchers said, fear and greed can make you put away self-control and common sense and provoke change. When we talk about humans and money, fear and greed can really be strong instigators.

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Benefits of the Fear and Greed Index

According to expertise, greed has the ability to influence our minds in such a way that pushes or prompts us to put aside rational judgment and this leads to change.

Though, there is no usual accepted explanation of the natural chemistry of the feeling of greed. But it is said that fear and greed can be very great influencers on human thought processes when it comes to money.

So many financial specialists are very zealous and go about a traditional approach. Hence and greed is a very essential factor in the field.

And this discernment makes a strong case, having in mind the case of this CNN Index, as analyzed by Behavioural Economics and verified by so many years of evidence.

Disclaimer

Every piece of information in this content does not contain or promote any financial advice, investment advice, or even trading advice.

We only write to educate you. So, it is now left for you to choose and decide where to seek your trading and investment advice before hopping for it.