Trading is not only the decisions you make, but also the decisions what other market participants make. Using financial instruments (Forex, CFDs, cryptocurrencies or something else) – you definitely need to feel the mood of other players in the market. In some ways the degree of your success will largely depend on the behavior of the market in the whole. The ability produce of any financial asset depends on the traders. The mood of the market is one of the main traders’ benchmarks.
The trend never arises of itself, but it is the product of many transactions carried out simultaneously by a huge number of traders. If the number of people who want to buy an asset is higher than the number of those who want to get rid of it, the tone is considered to be bullish. Otherwise, it is considered to be descending tops. During the periods of bullish tone the asset price goes up. During descending tops the asset price goes down. When financial advisors say “follow the trend”, they mean you should buy when the market mood is bullish, and sell when the mood becomes bearish.
Periods of bullish and bearish sentiment in the market are clearly visible on the BTC price chart. An extensive list of factors can influence over the market mood: economic and political news, previous rate of the specified asset, forecasts, and statements of the guru of the industry. Sometimes it is enough to look at the chart to determine the prevailing tone. However, it is usually recommended to see the whole picture. Indices — such as Global Dow, NASDAQ Composite, S&p 500 — are used to assess market sentiment.
The concept is clear, why do we use it? As we said above, the psychology of finance plays an extremely important role in the markets. Positive and negative trends are influenced by both objective factors and emotions. But emotions suggest the possibility of making mistakes. Mistakes that you-as a trader-can take advantage of. Benjamin Graham writes in his book “The Intelligent Investor”, that during a recession, people tend to overestimate their losses in the same way that they overestimate potential profits during an economic boom. What is the main reason? It is emotionalism.
Thus, you can use the fear and greed index to monitor periods of bullish and bearish sentiment in the securities market. It is both informative and easy – to – handle. When the index goes up to 50, traders are more likely to make rational decisions. Most well-known companies have a fair price. When the index falls below 50, it strikes fear in the market. With a high probability, some traders will sell their assets at a reduced price. It is usually considered to be a good time to buy. When the index breaks the threshold of 50, it signals the probable overheating of the market. Reckless and greedy investors will gamble in stocks at an inflated price. Thus, a smart investor can focus on the market sentiment to buy assets cheap and sell dear. People are emotional, make mistakes and follow the crowd. It will be a reasonable solution to pay attention to people’s mood during the trading.
However, you should also remember that trading is not only tracking market sentiment. Knowing the mood of the market can be a great help, but does not guarantee success in itself.