Fear and greed index history - From 2012 to today
The fear and greed index was launched in 2012 by CNN Money and provides a seamless measure of investor emotion and sentiment across seven major indicators. When applied to 2009 market data, the index identified panic during the 2008 financial crisis. Over next decades, the index showed key turning points: it dipped below 10 during the COVID pandemic in 2020 when it bottomed at 8 and spiked above 80 during 2017 FAANG rallies. As we can see, the indicator is powerful to determine trends and signal major market movements. There is even research that found a weekly futures strategy based on the index yielded net positive returns across multiple futures. In 2012, during the European debt crisis, fear reading was substantial reflecting the widespread fears and debt concerns. Correctly interpreting the Fear & Greed Index is crucial to enhance the win rate of financial trading strategies. While it might be dangerous to jump in too late during extreme readings of fear and greed, the indicator can be a good confirmation for entries when it is between 25 and 75. We will explore signals later in this guide.
Overall, the index has a history of correctly determining the major panics and greed moments in financial markets, which emphasizes its validity as an indicator of extreme human emotions in trading and financial markets.
Interpreting the Fear & Greed index signals
If we follow Warren Buffet advice: “be fearful when others are greedy and greedy when others are fearful”, then fear and greed index is the tool to use. However, without proper interpretation, it might produce false signals. As a result, it should not be used as a standalone indicator, rather it is best to use it as a confirming indicator for trading signals. Readings under 25 indicate extreme fears and readings beyond 75 signals strong greed. Despite this, it is not a good idea to search for buy signals when the indicator indicates extreme fear, instead, traders should get this as a signal for strong downtrends, meaning bearish momentum is strong and trades should be taken in a direction of a major bear trend. At some point, the indicator will bottom out and start to rebound which might make the bearish trend obsolete but it is impossible to determine which reading will be the bottom. So, it is always a better approach to exercise a strong risk management plan and ensure when price rebounds, losses are cut short early. The ranges between 25 and 49 indicate mild fear while 50-74 readings - mild greed. The 50 is a middle level indicating a balance between buyers and sellers and is generally not the best time for trading unless you are using viable range trading strategies. If you still were not convinced and decided to start buying when the flea and green index reads below 20, then holding the position till the indicator is above 60 might be a profitable approach.
How to use Fear and Greed Index in trading
The best way for using fear and greed index just with any other indicators is to use it as an additional confirmation for your trading strategy. To integrate the index in your trading, check the live reading on CNN’s markets page each morning before the opening stock trading. However, the index can also be used in other correlated markets. Stock markets are closely intertwined with other markets as their overall trends affect other assets as well. When the dollar is in inflation, stocks usually rise, so the index can also be used in FX trading. When trading using Fear and Greed index in Forex, ensure to interpret the indicator correctly. Many trading platforms such as TradingView offer community scripts that overlay the index readings on price charts and trigger alerts at 25/75 thresholds. When an alert fires, ensure to confirm it with other trend filters such as moving averages, RSI, support and resistance levels and so on before entering. Another crucial aspect of trading using the fear and and greed index is to always use stop-loss orders, to limit losses. Cutting losses early is the main reason why successful traders stay in the game for the long run. Position size should also be taken into account and traders should avoid risking more than 2-3% on each trade.
Fear and Greed Index and market timing
Timing the markets is a complex subject and traders should carefully determine when to enter buy and sell orders to avoid excessive losses. Fear of missing out is also an important emotion that can mess up the trading strategy's performance that relies on fear and greed index. The indicator is mostly effective for longer timeframes such as daily and weekly and many excerpts advise to use it for weekly entries rather than opening and closing positions on the same trading day. It also can be used to enter the markets today and close the trade the next day, it all depends on the trader’s preferences and strategy rules. It is generally advised to stick to your strategy’s rules to ensure consistency in trading. Combining weekly signals with daily sentiment analysis and checks refines swing trading entries and exits using fear and greed index.
Breakout strategies using fear and greed index
Breakout strategies are popular among traders. A breakout sentiment approach combines price patterns with emotion which is powerful for identifying a consolidation, then waiting for a close above resistance (or below support) on higher volume when index reading is below 25 or above 40. Traders can use 1-hour charts to confirm the move. New highs for longs and new lows for short selling. A price breakout supported by a fear and greed index reading can be a powerful signal for profitable trading as well. Traders should check the index when a major zone gets violated by the price for enhanced accuracy.
In 2021, the S&P 500 broke above a multi-week range as the index rebounded from extreme fear (below 20) to neutral readings (around 50), signaling the bull trend shift. No matter the win rate and promises of the strategy, traders should always place protective stops below price swings to cut losses, otherwise all strategies will lose money.
Best timeframes and markets for fear and greed index
Many traders are probably asking which is the best timeframe and assets for fear and greed index indicator. It is generally believed that the index excels for 2-10 day swing trades, while weekly timeframes suit longer-term and algorithmic systems. Intraday traders can use the sentiment on 1-hour and 4-hour charts as an additional confirmation tool for increasing their accuracy. By overlaying the index on these timeframes, traders can time breakouts precisely.
The index was originally developed for U.S. equity markets, but crypto traders now increasingly use the indicator in their trading time entries and analyze the overall market sentiment and investor confidence. Since cryptos are very volatile and sensitive to investor sentiment, this move to using fear and greed index is justified. Some traders even went as far as to use 8-hour charts in their trading and use 8-hour cycles for crypto trading using the index. Commodity traders use the index for safe-haven asset trading and FX traders also employ the index in their analysis.
limitations of the Fear & Greed Index
The index comes with its limitations together with many benefits it brings. The index aggregates broader-market data which makes it a powerful tool. However, it lacks sector or individual-security granularity, which limits its accuracy in niche trades. The index is a reactive and lagging indicator. With daily updates, the index often confirms moves after they occur, which is not something you want when trying to catch the main moves. However, it is still useful in trading and can provide early signs of reversals. Never trade on it alone, combine it with technical analysis and fundamental indicators combined with strict risk management strategies to avoid false breakouts and extended trend traps.
While it can't be used in short-term trading, the index could be used as an overall indicator for major investor sentiment and confidence for establishing a bias for the trading day. If it shows greed, then trailers might look to buy entries for the trading day, and when it shows fear, they might seek short selling opportunities.
Key Takeaways
Investor emotions often have more power over the markets than objective analysis and measuring fear and greed helps anticipate major reversals and breakouts.
The fear and greed index uses seven sentiment metrics into one daily measure: 0–24 = Extreme Fear, 25–49 = Fear, 50–74 = Greed, and 75–100 = Extreme Greed.
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Seven composite components
The index's seven components are momentum, price strength, breadth, VIX, put/call ratios, junk-bond spreads, and safe-haven flows.
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Proven effectiveness since 2012
Retroactive data from 2009 captured the 2008 crisis, and the index has a history of showing major panic and greed moments in markets.
But when others are fearful (< 25), sell when they’re greedy (> 75).” Mid-range readings between 40 and 60 often indicate indecision.
Check the index daily and use it as an additional confirmation. User alerts at 25/75 thresholds and use other indicators such as moving averages and support and resistance to confirm trends.
Weekly entries tend to outperform same-day trades by avoiding intraday noise in the markets. However, crypto and other asset participants use the index as an additional confirmation before entries.
Pair the index with price breakouts on daily and 1-hour charts for high accuracy setups.
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Best timeframes and markets
Swing traders should use the index to take 2-10 days trades. Can be overlaid on 1 and 4-hour charts for intraday precisions. Best markets for the index are U.S. equities but FX and crypto traders can also use it.
The index only indicates a broad market picture and is not industry-specific. Daily updates lag rapid moves. Crypto traders should always use it in conjunction with other tools and robust risk management.