Tools to Track Market Psychology

All people are prone to inadvertent and occasionally illogical actions. And it’s not necessarily a terrible thing. When you buy a delicious treat on the spur of the moment, you may experience a dopamine spike. When you consume it, you receive twice as much dopamine for the same amount of money! But issues can occur when such unintentional activity becomes routine. With the exception of trading and investing, perfection in action is reached when what was formerly a struggle becomes automatic and effortless.

Traders have been observing unusual price changes for ages. Munehisa Honma, the richest person in 18th-century Japan, created the candlestick chart pattern in an attempt to find a means of detecting such irregularities. It is a very useful tool for monitoring the price of rice futures as well as for determining the attitude of market players. Along with Adam Smith’s writings, Honma authored the first book on market psychology, The Fountain of Gold – The Three Monkey Record of Money, which went on to form the basis of behavioral economics.

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The selling and buying activities of all players, including businesses, funds, and individual investors, combine to form market sentiment, which is not a singular occurrence. Each uses a unique set of ideas, information, and methods to accomplish their objectives. Whether you use technical or fundamental research, there are a number of similar tactics to keep up with market sentiment..

Candlestick chart as an indicator of emotional conditions
By tracking prices, Honma realized that it is essential to consider not only external factors like weather, which could cause a rice shortage or surplus, but also traders’ state of mind when buying or selling.

As you can see, each candlestick consists of a full “body” and thin “shadows,” also known as “wicks.” Even today, many Japanese chartists consider these wicks irrelevant, focusing instead on the “body,” which depicts the true price of an asset. Steve Nison, who introduced the Western world to candlestick charts in the 1990s, also advises ignoring these “shadows” (price extremes) when identifying candlestick chart patterns or drawing trend lines.

The Fear & Greed Index: emotions quantified
Warren Buffett, one of the most successful investors of all time, said in the 1980s that he’s attempting “to be fearful when others are greedy and to be greedy only when others are fearful.”

For those who use fundamental analysis, the Fear & Greed Index (FGI) is a helpful tool. Various FGIs exist, some designed for the stock market and others for crypto. Each calculates a score ranging from 0 (extreme fear) to 100 (extreme greed), with 50 being neutral.

The original Fear & Greed Index, introduced by CNN Business in 2012 for the stock market, uses seven indicators (both technical and fundamental), each contributing equally to the final score.

The crypto community has also developed Fear & Greed Indexes tailored specifically to the crypto market. Like their stock market counterparts, these indexes incorporate different metrics, such as social media activity, including posts and mentions, into their calculations.

Over the past decade, the Fear & Greed Index has proven to be a reliable indicator of market sentiment, helping traders assess the community’s current mood, identify potential price deviations, and anticipate possible trend reversals.

Historical insights from the Fear & Greed Index
The price of Ethereum peaked at $4,700 in November 2021. One of the crypto FGIs continuously showed “extreme greed” in October 2021, with scores as high as 84. Following a significant decline, ETH was trading at about $1,000 by June 2022, and the same FGI ranged between 6 and 17 – its lowest-ever values.

The highest FGI score ever recorded was 95, which was noted in December 2020 and June 2019. The FGI reached 93 in November 2024, two weeks before Bitcoin reached $100,000. The Index has been continuously declining ever since. It is currently hanging just around 70, still in the “extreme greed” zone.

While an individual’s mental state can be unpredictable, the overall market outlook seems to be calculable, at least to some extent. When it comes to trading and investing decisions, emotions frequently result in failures and, very infrequently, in significant gains. You should never rely solely on one tool for trading or investing decisions because no single source of information is completely reliable. You should always follow your trading strategy and double-check data. Learn More