The Fear and Greed Index is a metric used to analyze investor sentiment in financial markets. It helps assess whether fear or greed is prevalent in the market and is commonly used in the stock and crypto markets.
Psychology of the index:
1. Fear - When investors fear future losses, they tend to sell their assets, which leads to a fall in prices. This condition is often associated with crises, volatility and uncertainty.
Signs: High demand for safe assets (gold, bonds), significant sell-offs in markets, sharp price drops.
2. Greed - When investors become overly optimistic and confident in future growth, they actively buy assets, even at high risks. This condition leads to higher prices and can create a "bubble".
Signs: Aggressive buying, euphoria in the market, often leading to overheating and speculation.
How the index works:
The index ranges from 0 to 100:
0-49 indicates the dominance of fear.
50-100 - for the dominance of greed.
Market Impact:
When the fear index is high (say below 20), it may indicate potential buying opportunities as assets are revalued downwards due to panic.
When the greed index is high (for example, above 80), it may signal that the market is overbought and a possible bubble, which requires caution.
Understanding this index allows you to predict potential market reversals and manage investments based on sentiment rather than just fundamental analysis.