Fear and Greed Index - Crypto Academy / S4W5 - Homework Post for @wahyunahrul
Q.1. Explain why emotional states can affect cryptocurrency price movements?
Cryptocurrencies are traded based on human decisions. This is simply because they are only traded among humans. Trading cryptocurrencies is a function of demand and supply and thes have an explicit relationship with price movement.
When demand is low and supply increases or is constant, price moves downwards as there are more coins to be sold but less people to buy. Inversely, when demand is high and supply reduces or is constant, the price heads upwards as there are less coins to be sold but more people who are eager to buy. This is the law of demand and supply.
Given that demand and supply is made by humans, it's impossible to rule out human emotions in the decision making process. Some emotions like love and hate or hunger may not necessarily affect demand and supply but others like fear and greed can go a long way to determine whether demand or supply will be made.
When a trader is afraid of the future price of a coin (maybe due to news or bear season) there's a high tendency that they will sell. This will create an increase in supply and with constant demand, price will reduce.
So also, when a trader is very confident in the future price of a coin and they anticipate it will rise, greed can make them stack up that coin in their wallets. This will lead to an increase in demand and even if supply remains constant, there will be an increase in price.
Q.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.
Absolutely, fear and greed index is a good indicator of the market's emotional state. This is because these two emotions influence market decisions to a great extent.
Except if they're not there. If they're, their influence in the market cannot be overemphasized. Fear for instance is often a tool used to reduce the prices of coins by some set of people (whoever they are). That's why there are news and rumors here and there aimed at creating FUD (Fear, Uncertainty, Doubt).
Greed also can cause people to get in hard on a coin, causing the price to pump. Unfortunately, the trader might enter at the wrong time and be stuck at a higher price for the asset.
Q.3. Give your personal opinion on what data should be added to the Fear and Greed Indicator.
Personally, I think not everything is taken into consideration in the fear and greed indicator. The indicator only shows the action of fear and greed but does not show the cause of the action. Of course it maybe difficult to pinpoint what exactly made a trader sell or buy but then highlighting major news and/or rumours could give more insight into probable causes of the fear and greed.
Q.4. Do a technical analysis for 2 to 3 days (maybe more) using the Feer and Greed Index and the help of other indicators. Show how you made the decision to enter the cryptocurrency market and explain the results of your trade (Screenshot Required)
I was able to access the Bitcoin fear and greed index courtesy of alternate.me
I observed it for 3 days begining from October 7 - 9. The fear and greed index ranged from 72 - 76 which was the Greed zone. It also seemed to drop from 76 on Oct 7 to 72 on Oct 9.
Source
This was an indication that people were very optimistic of the price and were buying BTC. The drop also meant that people seemed to relent in buying BTC. Looking at Tradingview, I had reasons to believe that this was just a correction.
From the image above, of the three days, we can only see a red candle, so yes, there was a correction for that day and since then, the price has begun retracing back up. Now, it will be beneficial to employ an auxiliary indicator, so I decided to use the A/D indicator.
The A/D indicator showed that BTC was in a long term accumulation phase, i.e money was entering into the asset, supporting a bullish trend. I then had reasons to believe that BTC will come out from this correction to at least hit $60k and I'm the process, it won't get as low as $50k
I set up a demo trade using the paper trading broker on Tradingview, my entry point was at $54,917.52 with my take profit at $60,883.98 and my stoploss at $50k. I set my stoploss and take profit to be in an approximate 1:1.2 ratio.
RESULTS
This trade as at press time is yet to be completed. It's obviously not a scalp trade. It remains to be seen if my stoploss will be met or if my take profit will be met.
CONCLUSION
Fear and Greed index is a very important emotional indicator which shows the sentiment of market traders. Thanks to alternative.me, we can also have a crypto version of this indicator.
Whenever the indicator reads a fear it's just like saying a bear 🐻 because the price will be on its way down. However, if it reads a greed, it's also like saying green as the price will be upward bound.
When using this indicator, it is important to combine it with other indicators to ensure that one is not misled. Combining of indicators is a very safe practice in crypto trading. Some of the indicators that can be combined with the Fear and Greed index is the ADX and the A/D indicator.
Thanks for reading.
Cc:
@wahyunahrul
