Reading Time: 2 minutes
- The Crypto Fear and Greed Index has become a commonly referenced tool in the crypto world
- The index can indicate when sentiment is strongly in one direction, indicating a reversal
- Some traders are now using it as a sign that a reversal is imminent
The Crypto Fear and Greed Index has become one of the many barometers of market direction that traders and investors look to in order to dictate a next move, with more attention being paid to it now than ever before. In general the takes are good, in that people realize that a low number on the Crypto Fear and Greed Index usually indicates that a reversal in price action is likely, but the tool is now being misused by those who believe that is a predictor of imminent trend change.
Peaks and Troughs Can Continue for Weeks
The Crypto Fear and Greed Index is typified by spikes in values that precipitated a short term top or bottom, followed by a reversal:
This has led many to become bullish the moment that the Crypto Fear and Greed Index hits the teens or bullish when it hits the 80s, expecting price to react immediately. Indeed, on occasion this has happened, but price isn’t always this convenient, and it is becoming less so.
There are periods where extremely high or extremely low values have been maintained for weeks and sometimes months in a row, even as far back as December 2018 when the Crypto Fear and Greed Index remained below 20 for an entire month at the end of the year.
Crypto Fear and Greed Index Doesn’t Indicate Immediate Reversal
This pattern has been repeated in both directions several times, most notably in 2020 when it remained above 90 between November 20 and January 14. Last year the Crypto Fear and Greed Index hovered between 10 and 30 almost solidly between May 13 and July 27, an 11-week period where price continued falling. Anyone who had bought the moment the Crypto Fear and Greed Index hit 10 would have been down considerably.
The Crypto Fear and Greed Index is a good tool for indicating that sentiment has bottomed enough for a reversal to take place, but it is in no way an indicator of when that reversal will happen, and you shouldn’t base your short term trading plans around it.