Fear and Greed Index - Crypto Academy / S4W5 - Homework Post for @wahyunahrul
Hi Everyone...
Today I'm going to present the task given by Professor @wahyunahrul, it's a truly interesting class to participate in and discussed after all.
Let's Start.
1. Explain why emotional states can affect cryptocurrency price movements?
Changes in market conditions are largely determined by the ability of a trader to make decisions to get profit, besides, the emotional state of a trader plays an important role in the success of a trader. Most traders have experienced the fear of making a decision, it was due to excessive worry in analyzing the market, causing losses. But when the market moves quite significantly according to the analysis, a trader becomes greedy to quickly take profits even though the price has moved far from the previous analysis. The above conditions are influenced by human nature, namely fear and greed. These two traits are opposites.
Fear
The fear or worry about losing money in trading make a trader try to avoid the risk of big losses. But also Fear in the right dose will be very useful and needed so that traders are more careful in trading. But excessive fear will also be very detrimental because it leads to doing reckless things such as things that shouldn't be done. Traders with this type of fear will not lose large amounts of capital, but they will lose the opportunity to make bigger profits.
Greed
Greed in trading is commonly happens to gets big profits. But excessive greed will lead to unnecessary things happening. Traders with this type of greed always have the desire to get big profits in a short time. Sometimes, the Greed traders become a loss or get a few profits because too greedy so they did not aware of an exit signal. In the bullish stage, the prices will become higher and higher, the traders will be faced with a euphoric situation, a sense of pleasure ultimately leads to a feeling of greed. Extreme fear is a sign that traders are too worried about the value of their assets dropping sharply. Traders are fearful when the market is depressed and greedy when the market is bubbly. However, strong fear among traders can also mean that there is a buying opportunity. Similarly, the market will undergo a correction when there is excessive greed among traders. At the correction stage, the price, which was originally high, began to decline, this is where Greed changed to Fear.
“Be fearful when others are greedy and greedy when others are fearful.”
Warren Buffett
Feed & Greed effect market:
a). Fear and greed, significantly affect the price of the cryptocurrency market, volatility, volume, and direction.While fear leads to price decreases, greed shows the opposite effect.
b). If there is extreme greed, the cryptocurrency market can get overbought and people tend to rush in to buy positions with greed.
c). If there is an extreme fear, people tend to avoid risky investments, from exiting coins to avoiding crypto markets completely.
a).Fear and Greed Index can be used to capture market cycles and trades will be able to see their current position.
2. In your personal opinion, is the Fear and Greed Index a good indicator of the market's emotional state? if not, try to give reasons and examples of other similar indicators for comparison.
Fear and greed make traders make unwise decisions. Some traders are often in a hurry to take the profit, for fear that their profits will turn into losses. As a result, traders cannot let the profit run and make only a small profit. Sometimes traders are reluctant to limit their losses and allow them to grow while speculating on a reversal.
Fear and Greed index, in my opinion, is indeed a good tool to measure emotional state, it’s a decent tool to manage the volatile market.
The reason why it’s a good indicator is as follow:
a). It can identify peak greed or fear that can be useful for traders who try to pick the optimal time to enter or exit the market or a position.
b). Fear and greed sentiment indicators can alert traders to their own emotions and biases that can influence their decisions. For example, an extreme fear indication could help investors avoid herd mentality when logic says to do otherwise.
c). Fear and Greed Index relies on the collective, equally-weighted readings of seven indicators, making it less susceptible to an overweighted influence of a single indicator.
d). Traders can use it to take a contrarian view of the markets, so when the rest of the herd appears fearful, they buy, or if they’re greedy, they sell. While it can be a useful tool to decide to time on certain investments, it shouldn’t be used as the only determinant in investment decisions.
3. Give your personal opinion on what data should be added to the Fear and Greed Indicator.
The kind of data that should be added to the Fear and Greed Index is as follows:
a). As Fear and Greed index is one of market sentiment in which cannot predict a black swan event, such as a pandemic or terror attack or other macro-economic events that can move the markets. It would be nice if it can be added such as trends or data of market-moving events.
b). Since the Feed and greed index right now is only to measure for bitcoin, it would help traders if it will be added more measure for other coins.
c). The time frame, as currently, available time frame only measures once in 24 hours, it would be better if there is a more detailed time frame, such as once per-6 hours, so that the traders will be easier to anticipate market prices and trends.
4. Do a technical analysis for 2 to 3 days (maybe more) using the Fear and Greed Index and the help of other indicators. Show how you decided to enter the cryptocurrency market and explain the results of your trade (Screenshot Required).
I made the analysis of two days trading in Paper Trading at Tradingview, by using two indicators of Bolinger Band and Stochastic to support Fear and Greed Index. As a picture is shown below, the Fear and Greed index analysis is taken on September 6th and 7th, 2021 which performed the Greed and Extreme Greed phase.
Bollinger Band is one of the lagging indicators which is used to measuring the volatility and predicts where the price trend will move and determine the overbought and oversold area. We can recognize it when the market is ranging (sideways), the price will move between two bands. It has an SMA (Simple Moving Average) which consists of two bands, each of which is on the lower line and the upper line of the SMA. The bands at the top are called the Upper Bollinger Bands, while the bands at the bottom are known as the Lower Bollinger Bands. The value of the upper band with the lower band is measured by subtracting and adding SMA values with a standard deviation. The standard deviation itself measures volatility and estimates how far the price moves from the true value.
Stochastic is one of the leading indicators which is used to perform the buy and sell signals through two intersecting lines. Since stochastic is the momentum indicator, it shows the last closing trading price which calculates the difference between the lowest and highest prices in a certain time.
The Calculation of Fear and Greed Index is Shown in the Table below:
| No | Market Emotion | Value |
|---|---|---|
| 1 | Extreme Fear | 0 - 24 |
| 2 | Fear | 25 - 49 |
| 3 | Normal | 50 |
| 4 | Greed | 51 - 74 |
| 5 | Extreme Greed | 75 - 100 |
When I did the analysis of Bitcoin (BTC), the market was Greed (68) and Extreme Greed (76) in two days, which means the price was in the Overbought area, and the bullish trend become moving up. When I take a look at the indicators showed over the resistance line. The stochastic indicator was showing overbought, it reached over 80 at the top and line stochastic crossed, the price will be bearish. The Bollinger Band showed bullish by the proximity of the price to above the resistance line and the Stochastic also indicates bullish, I remain open sell positions with short stop-loss levels. The result with this sell position gained the profit of $0.66.
The market this week just showed the Greed market and the price recently above the resistance line, it is possible to be a consolidation whether the price will continue and form new support and resistance levels or even pullback.
5. Conclusion.
The fear and greed index can be useful, as long as it's not the only tool used to make investment decisions. Traders are advised to keep an eye on fears of potential buying downside opportunities and view periods of greed as a potential indicator that the price may be overvalued. Fear and greed are powerful emotions that can influence the direction of the market. It attempts to harness those sentiments to inform traders when too much fear or greed may be driving the market, acting as a contra indicator to guide their buy and sell decisions. While the index can be a useful tool to measure market sentiment.
Thank you all for reading my blog presentation
Good day!
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