Thank you Professor @wahyunahrul for this amazing lecture.
This post is in response to the task questions

Question 1: Why emotional states can affect cryptocurrency price movements?

R

Most times, different factors greatly affect the emotional state of an individual. And this emotional state also directly affects our environmental and social interactions. Positive traits like Love, happiness, contentment and negative ones like anger, sadness, Jealousy are few of the emotional states that accompany human nature.

Imagine walking into your local market with the intention to buy coconut oil. And you discover the available price of that item has drastically increased by over 50% since the last time you checked it probably about a week ago.

You might start to panic and wonder what if the price keeps going up. Then you decide to not just buy the one item you initially wanted to buy, but instead buy 5 items. When you go back home you’d let your friends and relations know of the panic move you made at the market. They then decide to go to the local market to make the same move you made.

They might even end up buying more than 5 bottles of coconut oil. Some could even buy cartons and cartons of it just out of fear of possible spike in price that could follow in the coming weeks. This item gets sold out quickly and there is a great demand for it. This great demand leads to great supply. The increase in demand leads to an increase in value and item price if the supply is limited.

This example illustrated can be applied to the cryptocurrency market. The only difference being that the item represents the different coins and token listed on the digital market. The law of demand and supply also kicks in here.

The Law of demand states the price and quantity demand of any item or service are inversely related to each other. When an item’s price increases, the demand of that product would fall. While the Law of supply tells us that the quantity of an item supplied rises as the market prices rises and falls as the market price falls.

The cryptocurrency market is greatly driven by this demand and supply law. Why this is so, is because human beings are greatly involved in the transaction activities of the crypto market.

Amongst the many positive and negative traits that govern human interaction in their local markets. FEAR and GREED are the two traits that stand out as the ones that affect or are directly involved in the cryptocurrency market through the laws of demand and supply.

A) If a situation like the one I illustrated above happens in the cryptocurrency market. You begin to see an upsurge in the demand for a cryptocurrency. This upsurge in demand increases the price. The emotional state behind this situation is GREED.

source

Cryptocurrency traders and investors are scared of not benefitting from the upsurge and therefore dive in to acquire more of that asset. This increases the price further.

B) If the situation is an increased supply of that asset, the price of that asset falls. The traders and holders start to panic. They fear losing their financial investment in that asset. They sell off their assets and exit the market.

The emotional state behind this situation is FEAR.

source

As they sell off their assets, the supply of that asset increases.

So, this is how and why the FEAR and GREED emotional state affect the cryptocurrency market.

Question 2: Is the fear and greed index a good indicator of the markets emotional state?

Fear and Greed Index

source

This is an indicator that comes in the form a meter. It is an emotion based indicator used in the cryptocurrency world by traders and investors. It can be used to measure the amount of emotion that is embedded in the crypto market and aids the users in predicting their next market move.

The numbers on the Fear and Greed index reads from 0-100. And these numbers represent the following:

0 – 20: Extreme Fear (At this range, it indicates that this is a perfect opportunity to buy)
20 – 40: Fear (This also indicates a good opportunity to buy into the market)
40 – 60: Neutral (This range is normal. It signifies there is no over bearing emotion in the market. Market is normal)
60 – 80: Greed (At this range, the opportunity to sell at a good opportunity presents itself)
80 – 100: Extreme Greed (The perfect opportunity to sell the asset)

This indicator was first introduced by a platform that provides current information on the stock market. This platform is called CNNMoney. Eventually a platform called Alternative.me modified and adapted the indicator to be applied in the cryptocurrency market.

In my personal opinion, I believe the Fear and Greed index is a good indicator of the markets emotional state. The indicator possesses an energetic quality that aids in providing prospective trading decisions by taking advantage of the present emotions in the market to enable future profit.

It is a strong and reliable technical analysis tool that many traders depend on. Because it provides information about the law of demand and supply on the cryptocurrency market, it proves inevitably useful in predicting next entry moves.

However using the Fear and Greed index alone to decide on your entry move should not be totally encouraged. There is no indicator that is perfect and 100% completely accurate. To confirm the signals, it is advisable to use other indicators alongside the Fear and Greed index. Indicators like RSI and Stochastic oscillator and many others can serve as extra confirmatory in order to solidify your entries.

Question 3: What my personal opinion is on what data should be added to the fear and greed indicator

Although the fear and greed index indicator is a very good technical analysis tool, there are quite a few limitations that can be improved on.
In my personal opinion, I believe the following data should be added:

- Improved Timeframe:

Currently, the Fear and Greed Index Indicator gives analysis on a 24 hour time frame. Its data suffices from monitoring the crypto currency on a daily basis. Adding more timeframes would accommodate other types of traders. There should be options of numerous timeframes available on the Fear and Greed Index Indicator.

-Accommodation of other cryptocurrencies

This technical analysis tool can only be applied to the bitcoin currency chart. In a pool of over a thousand cryptocurrencies, the Fear and Greed index indicator would be very useful in analyzing other cryptocurrencies. This would help those investors make better decisions and pool in profit.

-Times and Seasons

Since this indicator functions in reading traders emotions on the digital market, there should be a particular section for times and seasons. Emotions of people vary during different festive seasons like Christmas, Easter, Thanksgiving, Eid Mubarak. If the Fear and Greed Index indicator could show data on what the emotions are like during that period, it could help traders plan their entries and exits.

Question 4: Technical Analysis using the Fear and Greed Index

I noticed that for the past two days, there has been toral greed in the market with the rating getting to 72 and 74 the previous day.

r

Below, using tradingview, i used the volumes indicator and noticed that the volume was corresponding with a buy and the uptrend was also concvincing so i placed a sell and made profit as seen below

Conclusion

Emotional states would always play a very important role in our daily individual activities. It is quite amazing a technology exists that can utilize this and produce useful data. Prior to this lecture, my knowledge on how the trend comes about was not very broad.

Thanks to this lecture, I now know a significant amount of useful information on how trader’s emotions affect cryptocurrency. Learning about the Fear and Greed index indicator, what it is, how it works and so many other things from this lecture has been enlightening.

Thank you professor @wahyunahrul