In the world of financial markets, grasping technical analysis is crucial if you want to make the right investment decisions. You can always turn to websites like walletinvestor and take a look at the most important indicators regarding the price movement on the crypto market. In this article, we focus on the fear and greed index to help you grasp the main concept of technical analysis.
What is the Fear and Greed Index?
However, psychology is a determining factor in the evolution of prices. You may already know this, but in the financial markets, if you find yourself in the middle of the herd (i.e. on the side of the majority of amateur investors), you have every chance of losing. One reason for this: only a minority can win. It is not possible to reward everyone!
The Fear & Greed indicator is like a barometer.
It reveals the current sentiment of retail investors towards an asset. We take Bitcoin as an example. It is broken down into five levels, ranging from 0 to 100:
- Extreme Greed (80-100): Retail investors are very greedy and buy in the belief that the price can only go up.
- Greed (60-80): Retail investors are confident; a majority are buying Bitcoin.
- Neutral (40-60): Retail investors are mixed, half thinking of buying, the other half thinking of selling.
- Fear (20-40): retail investors are worried; a majority sell their Bitcoin.
- Extreme fear (0-20): retail investors are very worried and capitulate by selling their Bitcoin, most of the time at a loss.
The peaks of sentiment (extreme fear and extreme Greed) very often correspond to the moments when Bitcoin finds its tops (market highs) and its bottoms (market lows) and then turns around. This barometer will thus allow you to buy and sell at the right time, unlike what the vast majority do.
When the Fear and Greed Index indicates extreme fearless than or equal to 10/100, this means that the vast majority of amateur investors are very bearish (very bearish feeling), convinced that Bitcoin will (continue to) fall. It is usually the moment of capitulation, that is to say, the moment when the situation becomes emotionally untenable, when keeping Bitcoin becomes too difficult, generally because their losses are already substantial.
Contrary to the appearances and beliefs of these investors, this is the best time to buy!
Periods of extreme fear correspond to the bottoms (low points) of Bitcoin. This was, for example, the case in December 2018, March 2020, June 2021 and September 2021.
Conversely, when the Fear and Greed Index indicates extreme Greed greater than or equal to 90/100, this means that the vast majority of amateur investors are very bullish (very bullish feeling), convinced that Bitcoin can only continue its rise. This phase is called FOMO (fear of missing out).
This is the best time to sell and collect your gains because it is very likely that the price is about to turn around to trigger a bearish phase, guided by the whales and the market makers who will thus punish this excessive Greed.
If you look at the history, you can see that the periods of extreme Greed correspond to the tops (high points) of Bitcoin. This was, for example, the case in December 2017, June 2019, December 2020 and February 2021.
