Picture this: you walk into a party — the music is pumping and people are laughing, chatting, and even dancing on the tables. It’s pretty easy to tell that this is a party many people would want to attend, right? Conversely, if you walk in and people are shoving past you to leave — muttering about how boring the hosts are, you might well be tempted to leave too and take your party platter home with you.

What you’re doing in this situation is ‘reading the room’ — you are taking into account a number of factors to make an informed prediction about the prevailing sentiment, or ‘vibe’. This could always turn out to be wrong, of course, but it gives you something to base your decision on.

The Fear and Greed Index

This is essentially what the financial market tool known as the Fear and Greed Index is all about. This tool aggregates a variety of market indicators to come up with a number between 0 and 100 and a corresponding classification which ranges from Extreme Fear through Fear, Neutral, and Greed to Extreme Greed. The idea is that bringing together several indicative trends into one sentiment indicator gives investors a sense of which way the market is heading.

Unlike the party analogy though, it’s generally agreed that when overall sentiment is positive — and people are greedy — this is a better time to exit the market (sell), or at least to hold off buying. Likewise, when sentiment is showing that the market is fearful, this can be the best time to enter a trading position. It’s akin to choosing the quiet party so you get the best shot at the snacks table. TradFi guru Warren Buffet famously noted that it’s strategic for investors “to be fearful when others are greedy and to be greedy only when others are fearful” and the Fear and Greed Index is a well-known tool in stock market investing…….

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