Skeptics of the fear and greed index consider it to be an investment tool that simply encourages a market-timing strategy instead of a buy-and-hold strategy. The market timing strategy should be avoided at all times. This is because investors who try to time the market in order to score short term gains tend to acquire more losses in the long run due to the unpredictable and volatile nature of financial markets. While the fear and greed index can be a useful investment tool when it comes to determining entry and exit times, it is important to use it alongside other valid indicators such as RSI, support and resistance.

Using the fear and greed index to time your entry point requires you to wait for the index to tip towards fear. Warren Buffet has previously stated that he doesn’t want to buy stocks when they are low, he wants to buy them when they are at their lowest. This is the same strategy that you should use when timing your investment entry point if you want to make a huge profit. When an asset price is at its lowest, the fear and greed index will tip towards fear, and this might be the best time to buy.

Irrational anxiety has been proven to grossly affect the decision making process of rather reasonable investors. When using this index it is wise to keep an eye out for undervalued assets and strong currents of fear in order to uncover great investment opportunities that would otherwise be hidden. If you intend to buy and hold, your investment entry point needs to be at an asset’s lowest.

The Fear and Greed Index and Behavioral Finance

Although the crypto fear and greed index may seem like a fun investment metric, there still needs a lot more research to determine its merit. A lot of research has gone into the field of behavioral finance, and it is only right that a lot of research goes into the measures of fear and greed.

In 1979, there was a significant breakthrough in behavioral finance when psychologists Daniel Kahneman and Amos Tversky developed the ‘prospect theory’. The prospect theory explains how a person can be both risk-averse and risk-taking. This depends on whether a decision is more likely to lead to gains or losses. Humans tend to avoid losses, we are loss-averse, and with this behavioral trait, we tend to accept more risk in order to avoid losses. However, the risk we are willing to take in order to realize a gain seems to be lower. This is evident when the fear and greed index tips towards fear.

The fear and greed index measures numerous factors, and although most of the data collected is accurate, how we use the index is entirely up to how we interpret the data. Investors require a lot of information before taking a risk, and tools like the fear and greed index make it easier to make decisions that have an impact on their financial success. A major rule we should always hold is: “Be fearful when others are greedy, and greedy when others are fearful”.