How the Fear and Greed Index is Calculated

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The crypto market is extremely volatile. In an effort to help investors stomach this incredible volatility, the fear and greed index has become a fundamental part of investor research. The crypto market is highly emotional, and the fear and greed index can be used as a conformational tool for anyone who is willing to try their hand in crypto trading. Humans tend to get greedy when the crypto market is on the rise and this is normally caused by the Fear of Missing Out (FOMO). Due to often high soaring emotions, investors tend to make irrational decisions which often lead to more losses than wins.

The fear and greed index has a lot of utility. For ages, traders have relied on such indexes to make financial decisions that favor them. For crypto traders, it is always wise to keep your eye on the financial markets so that you can be aware of assets that are overbought or oversold. The fear and greed index is a great tool to use for market research because it contains data from beyond the market such as internet search trends. This data that is relevant to quickly growing assets can be hard to collect or comprehend, but the fear and greed index makes it easier for traders and plays a very important role in market analysis.

Fear and greed measures are a gauge of investor sentiment based on factors like demand, momentum, and volatility. Extreme fear can be a sign that investors are extremely worried and this could present a buying opportunity. When investors become too greedy, this could be a sign that the market needs correction. But these are not the only sentiments that are measured on the fear and greed index.

How is the crypto fear and greed index calculated?

The crypto fear and greed index measures factors contributing to investor sentiments:

1.               Volatility (25%) – calculating the current volatility and the maximum drawdowns of an asset then comparing these with the corresponding average values of the last 30 days and 90 days. An unusual rise in volatility could be a sign of fear in the market.

2.               Momentum/volume (25%) – high buying volumes in a positive market indicate that a market is overly greedy or too bullish.

3.               Social media analysis (15%) – social media is an incredible source of information and this can entail a lot of investor sentiment.

4.               Investor surveys (15%) – the opinions of investors about certain assets could have a huge impact on the asset’s prices and it is important to understand what the investors think.

5.               Dominance (10%) – reduced dominance means that the market is becoming greedier.

The fear and greed index analyzes the current sentiments and crunches the numbers to create a visual scale that ranges from 0 to 100. 0 represents extreme fear while 100 represents extreme greed.

The index can be used to traders’ advantage, but it is always important to rely on other tools for confirmation. One way of ensuring that you are making the right financial decisions is by studying the charts and using existing data and previous patterns to predict the market’s future.

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