Can "greed" be traded?

This morning, the editor saw a piece of breaking news:

According to data from Alternative.me, the cryptocurrency Fear and Greed Index rose to 66 today (up from 65 yesterday), indicating that the market is still in a "greed state."

Every time I see this kind of content, I can't help but ponder a few words in my heart—how is the market's "greed" quantified?

The so-called "Greed Index" is actually a composite emotional indicator. It references multiple dimensions such as volatility, trading volume, Google trends, social media popularity, and Bitcoin dominance, ultimately deriving a value between 0 and 100. The higher the value, the more exuberant and greedy the market; conversely, the more panic it indicates. I wonder if anyone has thought about this like I have:

Is it possible for this indicator to be "put to use"? Moreover, can it be developed into a quantitative strategy?

Real-world problem: cannot obtain in real-time, and not easy to model.

The editor often uses AiCoin to check the market, and the news will promptly push updates on the greed index changes, for example, today 66, yesterday 65. Here is a news link for everyone to quickly understand current events:

Returning to the greed index, if you really want to use it to model and create strategies, you will encounter two problems:

Unable to call the data stream in real time, which limits the real-time capabilities of the strategy and the backtesting ability.

The index itself is a "black box model", and we cannot precisely know the weight of each part, making it difficult to tune parameters and optimize.

So, the editor tries to think from a different perspective: instead of using the greed index, it is better to directly use price action indicators that can reflect emotions.

This leads us to the real protagonist we want to discuss today: the BRAR indicator.

BRAR: Visible Market Sentiment

BRAR is a very old-school but noteworthy indicator that has been around in A-share technical analysis for a long time, but its underlying logic is equally applicable in the crypto market. It is divided into two parts:

AR (Popularity Indicator): Measures whether market sentiment is active. It calculates the ratio of the high opening amplitude to the low opening amplitude over a period of time, indirectly reflecting the willingness of bulls to participate.

BR (Buying and Selling Strength): A measure of the strength of the market's buying vs. selling, calculated as the relative ratio between high-close and close-low.

In simple terms, this indicator is used to "reverse engineer" the emotional state of the market based on price action.

How to choose parameters? Pay attention to the period and M.

The default parameters for BRAR are usually (26, 1), which corresponds to an observation period of 26 K lines, with BR using the previous closing price as a reference. However, this setting may not be suitable for the cryptocurrency market. The specific settings, I'll just give the conclusion directly! If you really want to apply it in practice, everyone still needs to adjust based on the currency type and other conditions.

How to choose the cycle N?

Daily level: It is recommended to keep 26 or adjust slightly to 20, 30;

Hourly or shorter periods: It is recommended to use 14 to 18, which is more in line with the rhythm of the cryptocurrency market.

Ultra-short line strategy: you can try 7 to 9, but the signals are easily interfered with.

The settings of M should avoid overlap between BR and AR.

Because the cryptocurrency market operates continuously, there are often situations where "opening price ≈ yesterday's closing price", leading to similar results in BR and AR calculations, which lose their reference significance. Suggestion:

Hourly Strategy: Set M to 2 or 3;

Daily or high time frame: M = 1 can still be used.

This allows for a more effective distinction between popularity (AR) and buying strength (BR), and is also more conducive to identifying changes in sentiment.

Practical Logic: Build an "Emotional Trend" Strategy with BRAR

With the custom indicator feature of AiCoin, I also tried to apply BRAR to long and short strategies in trending markets. This logic mainly revolves around the two core indicators AR and BR, judging the strength of market sentiment through their relative relationship, and thus assisting in opening and closing positions.

In terms of going long:

First, we will observe the position of AR.

If the AR is above 100, it indicates that market sentiment is relatively strong and optimistic, with a certain basis for upward movement. If the BR crosses above the AR at this time, it represents that buying pressure is starting to lead market sentiment, which often means that active funds are entering the market. At this point, it is possible to consider trying to go long.

As for closing positions, the author will observe the trend changes of BR—if a trend reversal occurs (for example, if it starts to flatten or decline after a continuous rise), it indicates that the bullish momentum may begin to weaken, and partial exit or profit-taking will be considered.

In terms of short selling, the judgment logic will be slightly different.

The editor will first observe the structure of BR. If it starts to turn down after experiencing a period of rise (for example, BR[1] > BR, and previously showed an upward trend), that is a signal of weakening sentiment, indicating that buying is beginning to wane. At this time, it may be worth considering a short position.

After that, if AR is simultaneously below 100, or if BR continues to fall below AR, it can further confirm that the market is in a cooling or even weakening phase, which is a more suitable environment for short positions. Wait until BR stabilizes and AR recovers to a relatively high level before considering exiting short positions.

Overall, the core of this strategy is a combination of price structure and sentiment changes: AR is more focused on reflecting the "heat" of the market, while BR represents real buying momentum. The combination of the two helps us identify the emotional drivers behind the trend, so that we can grasp the more reasonable entry and exit opportunities in complex markets. Of course, if you can superimpose some trend filtering tools, maybe the signal identification of the strategy will be more accurate! This is up for everyone to try!

Summary

The Greed Index of Alternative provides us with an intuitive overview of sentiment, while BRAR allows you to see sentiment on the chart and apply it in strategies. It is not a universal indicator, but its advantages are:

Logical transparency;

Data structure is stable;

Participate in strategy optimization and execution in real time.

Greed and fear are always a part of the driving forces in the market. We cannot eliminate emotions, but we can understand them, measure them, and even - leverage them.