Crypto world sentiment thermometer: How to use the Fear & Greed Index?

Want to know if the market is in excessive panic or FOMO madness? Just take a look at the Fear & Greed index.

This index quantifies the sentiment in the cryptocurrency space on a scale of 0-100, divided into five tiers:

• 0-24 Extreme Fear = A buying opportunity may have arrived
• 25-49 FOMO = Investors are still watching.
• 50 Neutral = Market balanced on both sides
• 51-74 Greed = Decreased risk awareness
• 75-100 Extreme Greed = Caution! Adjustment is imminent.

How is this calculated?

Combines 6 dimensions (each with its weight):

1. Volatility (25%) - Compare the average volatility of BTC over the past 30/90 days, abnormal volatility = fear
2. Trading Volume + Momentum (25%) - Hot trading = Greed, Quiet trading = Fear
3. Social Media (15%) - Twitter/Reddit Discussion Heat
4. Survey (15%) - Regularly ask coin friends about their mental state
5. BTC Market Cap Share (10%) - An increase in share usually indicates that funds are seeking refuge in Bitcoin.
6. Google Trends (10%) - Searches for “Bitcoin crash” surge = market fears

Calculation Example: Suppose on a certain day the scores for various factors are volatility 20 points, trading volume 75 points, social 70 points, proportion 30 points, search 25 points. The weighted calculation is 20×0.25 + 75×0.25 + 70×0.15 + 30×0.1 + 25×0.1 = 39.75 points, which falls into the “fear” range, potentially indicating a good buying opportunity.

How to use it for trading?

Short-term Techniques: The best results come from using technical indicators like RSI and MACD in combination. For example, when BTC drops from 52K to 45K, and the F&G index falls to 20 (extreme fear), while RSI also drops below 30 (oversold), the probability of a rebound is quite high, and one can consider bottom fishing.

But here's the catch: This thing only reflects short-term market sentiment and has limited ability to predict long-term trends. Don't treat it as the sole basis for decision-making; it should be viewed in conjunction with fundamental analysis and long-term trends.

Where to watch?

Two major data sources:

• Alternative.me - Original version, focused on BTC
• CoinMarketCap - Proprietary version, covering more cryptocurrencies, with added derivatives analysis.

Key Suggestions

Three steps to stop emotional trading:

1. Write a good trading plan - When to buy, when to sell, how much to lose before running, write it out in advance.
2. Keep a Trading Journal - Record every transaction to analyze and find patterns.
3. Learn from the Experts - Don't mess around blindly, see how successful traders do it.

Core Conclusion: The Fear & Greed Index is a reference, not a bible. It excels in identifying extreme moments for buying the dip and selling the top, but it is not accurate for long-term trends. Combining it with technical analysis and fundamentals is the right way to approach it.