How to Manage the Bitcoin Fear and Greed index

How to Manage the Bitcoin Fear and Greed index

The Bitcoin “Fear and Greed” index prepared by alternative.me shows the sentiment of the crypto market, aggregating a series of indices to achieve a sensible approximation.

One of the fundamental pillars in trading is: Buy when the majority is afraid and sell when the majority is excited. However, when is the perfect time?

 We never know when is the perfect time when we hit the buy button. For that reason, we must keep in mind several criteria:

  1.  The index reaches a sufficiently low value. For example, below 10 points.
  2. The index after falling, regains a new high or at least slightly changes the trend. This avoids catching the falling knife. At least, the effect of the vertical fall is cushioned.
  3. Average only if the index is low enough.

All of them have an associated opportunity cost: if I buy trying to guess if this is the low in full decline, my risk is determined by the ability of the price to discover new lows, while if I buy when it seems that a bottom has formed, my risk is that there is a new low.

 In any case, the probability of finding the floor has a key psychological component associated with it. What is my strategy? What do I want to achieve? And based on the answers, act.

An example would be: I have 90 USD to invest. And I want to design a strategy based on extreme panic buying. I would divide it into 3 tranches:

A.        Tranche 1 of 30 USD to buy if it reaches 10 or less, buy the market, immediately.

B.        Tranche 2 of 30 USD in 5-6, depending on the level of BTC drop.

C.       When it has exited 10 point zone, enter with tranche 3, looking to buy on a floor that looks more consolidated.

This way an average purchase price is formed. And the criteria are diverse, it is possible to consolidate an average price that mixes different decision criteria.

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