The Fear and Greed Index: How to capitalize on the emotions of investors and traders

Emotions often affect the decisions of investors and traders. The main two types of emotions that drive the cryptocurrency market are fear and greed. To be a successful trader, you need to understand these emotions and how they affect the market.

How does the fear and greed index affect the cryptocurrency market?

When crypto assets fall in value over time, the fear index rises. A high fear index is a sign that investors are worried and inclined to sell their assets. Traders try to minimize their losses, but instead they make an emotional decision to sell and as a result — they lose money. Moreover, when a large number of investors start to sell their assets, the market reacts with a fall.

A high greed index indicates that the market needs a correction. The market continues to grow, but investors are trying to buy as many assets as possible, as they are confident that the market will not fall any time soon. In reality, if the greed index is high you actually do need to sell your assets since the fall is just around the corner.

Do you think the emotional component really has a strong influence on the decisions that investors and traders make?

Even an experienced trader remains human and can make an emotional decision to buy or sell assets. I see a lot of new crypto investors and these are not experienced traders, but common people with no investment experience, so this segment of traders is much more likely to make an emotional decision.

Any rational person who makes financial decisions tries to abstract from his/hers emotions, but unfortunately, this does not always work, especially when it comes to large amounts of money. To avoid emotional decisions for investors, my advice is to get a trading strategy.

Do you think that the Fear and Greed Index can be used as a complete forecasting tool for successful trading and investing?

The Fear and Greed Index shows what we can expect from the market — rise or fall. In the case of the cryptocurrency market, it is quite difficult to determine exactly when there will be a decline or correction. The cost of cryptocurrencies has almost no psychological ceiling because no one knows how much the price can rise.

There were times when bitcoin was worth a couple of thousand dollars, and the market was still in a state of high fear, because no one thought that it would continue to grow in price. Therefore, you should not completely rely on the fear and greed index when you make a decision to buy or sell your crypto assets, but in order to understand the general picture of the market at the moment, it is a great tool.