Education

The Fear & Greed Index: today’s sentiment, tomorrow’s trends?

By Paul Reid

22 March 2024

fear and greed

CNN’s Fear & Greed Index serves as a valuable compass, providing traders with insights into market sentiment and potential turning points. This unique index, ranging from 0 (Extreme Fear) to 100 (Extreme Greed), aggregates seven key indicators that capture the collective sentiment of market participants. These indicators include volatility, momentum, safe-haven demand, put/call ratio, social media sentiment, stock market breadth, and surveys of professional traders.

When the Fear & Greed Index signals Extreme Fear (0 to 25), it indicates investors are excessively pessimistic, often leading to price undervaluations and potential buying opportunities. 

Conversely, Extreme Greed (75 or above) suggests that investors are overly optimistic, potentially pointing to an overvalued market and the risk of impending corrections.

The index's power lies in identifying potential turning points in market trends. When the index reaches extreme levels, it serves as a red flag, alerting traders to potential reversals that should be investigated without delay.

Does the Fear & Greed Index reflect the market?

Yes, the Fear & Greed Index reflects the market quite well, and the correlations show up on major indices. Look at this overlay of the S&P500 and Fear & Greed. There’s a definite relationship between the two. Can you see times when the Fear & Greed Index shifted before the S&P? Look closely.

In fact, there were several major trend shifts throughout 2023, and in most cases, the Fear & Greed Index trend shift preceded the market. Could it be that simple?

Manage Risk

Sentiment is a strong and uninterrupted market pulse worthy of a trader’s attention, but it is not a foolproof indicator. By understanding market sentiment, traders can strategically adjust their risk tolerance. During periods of ‘extreme greed,’ they may opt for more conservative strategies, while ‘extreme fear’ may present opportunities for bolder moves.

The Fear & Greed Index could also validate signals from other technical indicators, providing traders with a more comprehensive view of market conditions. By monitoring the index, traders can identify opportune moments to enter or exit positions.

Conclusion

The Fear & Greed Index is not a crystal ball but acts as a powerful tool for traders looking to navigate market currents. By understanding the index's signals and incorporating them into their decision-making process, traders can make more informed choices that align with market sentiment and potentially enhance their trading outcomes.

Today, sentiment is more powerful than ever. No matter how big or strong, no company or currency is immune to fear or greed. Whether Google or GBP, Boeing or bitcoin — when sentiment shifts, the markets show it.

Start tracking the Fear & Greed Index today, and check the status before making any significant trades. To test this and other strategies, risk-free, read about the Exness demo account and give it a try. You won’t regret it.


This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.


Author:

Paul Reid
Paul Reid

Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.