Question 1). Explain why emotional states can affect cryptocurrency price movements?
The market of cryptocurrency , like all other markets, is governed by the rules of supply and demand, which are the two most powerful factors in a market economy.
According to the rule of supply and demand, the larger the demand for a good or financial asset, the higher the value and, as a result, the higher the price of the commodity or financial asset. And the greater the supply of a commodity or financial asset, the lower its value and, as a result, the asset's price.
It's vital to remember that the crypto currency market is governed by human beings who follow the rule of demand and supply. There are two man characteristics or behaviours that can effect the crypto currency market through the laws of demand and supply, among the many human characters/traits. Fear and Greed are their names.
Traders rush to the market to buy the financial asset at a period of high demand, raising the price. The Greed emotion is driving this action, with traders experiencing Fear of Missing Out (FOMO). Everyone wants to profit from a growing market, therefore this behaviour raises the price of the financial item even more.
During a moment of strong supply, on the other hand, consumers are afraid of losing their money and investment in a financial asset. More traders try to abandon the market as a result of the FEAR emotion, increasing supply of the financial asset and lowering prices.
As a result, the Fear feeling has a negative impact on price movement, causing it to fall, whereas the Greed emotion has a positive impact on price movement, increasing demand for the financial asset, driving it to increase.
The greed and fear index is a market indicator that traders use all around the world to monitor market emotions. The market is thought to be driven by emotions, thus traders who have a good grasp of the market's emotions will be able to predict when to join and quit the market and profit.
Fear and Greed is a scale that ranges from 0 to 100. The figures range from.
0 to 20: There are excellent buy chances in Extreme Fear.
20 to 40: Fear emotions can also be used to present purchase possibilities.
40 to 60: Emotions that are neutral.
60 to 80: Emotions of greed while
Extreme Greed and Great Sell Opportunities 80-100: Extreme Greed and Great Sell Opportunities
The First used if the indicator was in the stock market by CNNMoney to monitor market emotions, and it was later used in the cryptocurrency market by Alternative.me.
Question 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.
The fear and greed indicator, in my opinion, is a good reflection of the market's emotions. Humans with emotions rule the crypto currency markets. Most investors and traders are emotional and reacting, and they become reactive to market price movement.
The Greed and Fear Index is a proactive indicator that allows traders to act ahead of time to capitalise on current emotions for future market benefit. Behavioral economists have done a lot of research on human behaviour in the market and have offered compelling arguments for investor behaviour over the years.
Historically, the Greed and Fear index has proven to be quite reliable for traders in both the stock and cryptocurrency markets. Using the fear and Greed index as a solo indicator, like any other indicator, is poor because no indicator is 100 percent accurate and dependable. As a result, it's always a good idea to pair the Fear and Greed index with other indicators like the Stochastic oscillator indicator, ADX, and RSI, to mention a few.
Question 3). Give your personal opinion on what data should be added to the Fear and Greed Indicator.
In time frame , Increase the timeframe, in my opinion, is one of the most significant data or parameters to be added to the Fear and Greed index. One of the most common criticisms of the indicator is that it only measures the emotional timeframe for one day, making it only suited for day traders rather than long-term investors.
Other crypto currencies are the second piece of data I'd like to have included to the Fear and Greed index (Altcoins). The Fear and Greed Index, as noted by the professor in his presentation, is an essential and accurate indicator, although it is now exclusively used by Bitcoin. I'd want to see additional crypto currencies implement the indicator since, as a newcomer in crypto currency, I believe it will be a useful tool. Determine where a trade's entry and exit points are.
Question 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 made the decision to enter the cryptocurrency market and explain the results of your trade (Screenshot Required)
To address this question, I'll analyse the market and place my trade utilising the Fear and Greed index in conjunction with the Stochastic oscillator indicator.
Traders in the crypto market use the Stochastic oscillator indicator as a technical analysis tool to discover overbought and oversold situations. The Stochastic oscillator has a range of 0-100, with readings from 20-0 indicating oversold levels and 80-100 indicating overbought positions.
First and foremost, I chose the Stochastic oscillator indicator because I am familiar with it.
Second, it is a momentum indicator that shows when a financial asset is overbought or oversold. When the Stochastic oscillator is combined with the Fear and Greed index, it exhibits Greed emotions when the Fear and Greed index is above 60 toward 100, and the stochastic oscillator is projected to be over 80 during this period.
I use the last week chart of the Fear and Greed index to analyse the emotions during the last two days. The Fear and Greed index was 68 on September 6, 2021, which was yesterday, indicating that the market's emotions are Greed. Looking at the market's Fear and Greed index at the time of this writing (7/10/2021), the Fear and Greed index is 76, indicating that market greed is increasing.
Also, looking at the stochastic oscillator indicator on the BTCUSDT on Tradingview, the percent k line and percent D line are both over 80, indicating that BTC is overbought. Furthermore, the percent D line has passed through the percent K line.
This is a sign that there may be a trend reversal on the horizon, and BTC prices are set to begin tumbling. As a result of this information, I chose to enter the market with a Sell position, with a Stop Loss above 54528.19 and a Take Profit below 54527.5.
My trade has yet to meet my Take profit objective, so it is still open; but, I can see that I am profiting from it.
From the professor's explanation and assignment, it is clear that the Fear and Greed index is a powerful indicator in the crypto currency markets. This is an old indicator that has proven to be reliable in the stock market. It is a highly essential and trustworthy indicator.
However, it is unfortunate that this indicator is now exclusively utilised to analyse Bitcoin. I hope it introduces additional altcoins to help it gain popularity.