The Fear & Greed Index, explained

What goes into the number

The publisher combines several inputs — among them recent price volatility, market momentum and volume, social media activity, and Bitcoin’s share of total market capitalisation — and weights them into a single score. The exact weights are the publisher’s, and they can change; we do not restate them here, because a weight we cannot verify today is a number we should not be printing.

Two consequences follow from how it is built. First, every input is backward-looking: the index can only describe what has happened. Second, price volatility is one of the inputs, so a sharp fall mechanically pushes the reading toward fear. The index is, in large part, a restatement of recent price action in a different unit.

What a reading of 20 or 80 means

It means the inputs, weighted as the publisher weights them, currently sit near one end of their recent range. That is the whole claim.

The popular reading — buy fear, sell greed — is an inversion rule borrowed from a well-known piece of investing advice, not something the index itself establishes. Extreme fear has preceded recoveries. It has also preceded further falls, sometimes for months. An indicator that describes the present cannot distinguish between those two futures, and no amount of confidence in the rule changes that.

How to use it honestly

• As context, not as a trigger. It can tell you that conditions are unusual. It cannot tell you what to do about that, and a number is not an entry.
• As a check on yourself. If the reading is extreme and you find yourself wanting to abandon your own rules, the index has told you something useful — about you. Why discipline fails covers what to do with that.
• Never as a sizing input. Position size comes from account equity, risk percentage and stop distance — not from sentiment. Sizing up because the crowd is fearful is a decision to take more risk while telling yourself you are being clever.