Human beings have a dual nature, having both logical and emotional aspects to their cognitive functionality. Every day, we make decisions based on factors that underline our logical and emotional viewpoints. We make emotional decisions for people or situations that have a special bond with us and make logical decisions when the situation demands it of us. despite always trying to draw a distinct line between the two, we are prone to always blurring such line, mixing the two into our decision-making. This often leads to less efficient results and more problems to overcome.

The reason we think and act like this is because of our psychology. Our psychology is simply our present state of mind; how we think and react to stimulations and scenarios. When making a decision, your psychology at the time of decision-making plays a significant part in determining the direction you would follow. Case in point, when we want to buy something, the normal individual will logically determine if they have the purchasing power to buy the item; the same is not true when we see a sale for items. During a sale where prices are slashed, we would throw reasoning out the window most times, especially when we see an item we want. Our emotions cloud our reasoning and our psychology at that point is not in the normal state.

This problem surfaces whenever a decision involving money is to be made. Money affects each of us differently depending on our financial situations and background. How we act, think and decide is influenced by the roles money plays for us every day. Sometimes, we are so fearful of losing the money we already have that we end up sitting on our hands and doing nothing with our lives. Other times, our greed blinds us from facing reality; able only to see a delusion in which we are invincible and cannot lose.

It's this dynamic that has led trading industry experts to create the Fear and Greed index. They wanted to measure human sentiment in different market seasons and the reactions of people to market volatility, market turnover and other behavioural patterns.

The Fear and Greed Index is an aggregation of market sentiments from several sources all combined into one number. This number indicates the general view shared by market participants. People often tend to become greedy, especially in the crypto market; always looking for the next memecoin to throw their money in or another degen paly. The truth is most people get into crypto because of greed, greed born from the desire to also 'make it'. This greed leads them to FOMO, and most times, they get wrecked.

The other side of the coin is fear, and this fear plays out when the crypto market experiences a correction and there is 'blood' everywhere. The fear induces panic, which results in them selling their assets at a lower price than the price they bought at. They end up Buying Hihj and Selling Low, a surefire method to lose all your money.

The 2 market conditions that you need to pay close attention to when monitoring this index are extreme fear and extreme greed.

Extreme fear is denoted in the red zone (between 0 and 25) and indicates that investors are fearful and worried. During this period, crypto assets can be bought at a discount price, making extreme fear the optimal buying opportunity.

In the case of extreme greed (76 - 100), the roles are reversed. There is too much confidence in the market and everyone is trying to make more money. The level of greed rises exponentially and this period is a time to sell off positions you have as the market is due for a correction.

The aggregated sources of the index are:

1. Volatility - measuring the current volatility of Bitcoin. Volatility makes up 25% of the aggregate.

2. Volume - The amount of liquidity flowing in the market. Just like volatility, volume makes up 25% of the aggregate.

3. Social Media - what are people talking about? Market sentiment can be measured by gathering a general feel from posts and hashtags used on social platforms. It makes up 15% of the index.

4. Surveys - making up 15%, different pools and sites are live where people can answer questions and give their take on what they perceive is happening in the market.

Dominance and Trends both make up the remaining 20%

The Fear and Greed index is a useful tool to have when analysing the state of the market. It shouldn't be your only tool, but should serve as a guidepost to an informed trading decision.