The Fear and Greed Indicator : a new Weapon in my Arsenal ?

As it's probably not the most exciting week of the year in terms of trading, it may be the time to write a post about some TA (stands for Technical Analysis and not Tits and Ass as suggested Batman in our weekly discussions, anyway it's always time for the latter isn't it?). If you're crazy enough or have some too much time to waste to follow my blog (and if you do, thanks again!), you know how the ATR or Average True Range is important in my trading. The True Range is merely the difference between the high and the low, corrected with the opening gaps (if any, for instance for FX pairs, it's just high-low) and the ATR is the moving average of the True Range on the given period.

True Range = max(high, previous close)-min (low, previous close)

Basically I use the ATR to calibrate my stop losses, for instance I generally consider any move below 2 ATRs as noise and what I don't want is to be stopped by the noise. It's the worst thing : be right but stopped and lose money before this bloody price goes in your direction. More importantly, I like to trade so called "Volatility breaks", meaning I like to wait for a move of x ATRs in a direction before I put on a position in that very same direction. My intuition is market prices follow some laws of Physics (quite ironically because when I was a student I really hated Physics...) and their moves have some inertia particularly when they have some strength. It takes time to reverse a strong move. I look for such a strength in candlesticks analysis and technical indicators (RSI notably) but I've been looking for some measures of the inertia. A fellow trader of mine, further to our discussions about these concepts sent me a memo about an indicator developed by Bloomberg, "the Fear and Greed indicator" (nice name), that seems to fit the bill (the paper is enclosed below). The FG indicator works in a similar way as the MACD, it's the spread between 2 ATRs (a fast one and a slower one) calculated in a way that it oscillates on a zero base line. As a kind of prime derivative of the MACD, the FG could be considered to some extent as a measure of acceleration of the price. It could be the measure I've looking for and could be a new weapon in my arsenal. I let you here, I've to investigate further and do some test, at least it will kill the current boredom...

Here's the "user's guide" of Bloomberg's FG indicator :
To understand the Fear and Greed indicator, we must first understand the concept of True Range and Average True Range. True Range looks at the relationship between the current bars high and low, and compares it to yesterdays close to identify the largest range. For example, if the current high is $12 and the low is $10 dollars, the range would be is $2. If yesterdays close is $9 then today’s true range is $3.

True Range is important because after the market closes and prior to the open there is a significant amount of macro and micro events that can shift the level of supply and demand for a security. These events determine where the price of the security will open that morning. True range is therefore adjusting for gaps between the close of the prior day and the current days open to determine what the “True Range” is. Average True Range is a simple or exponential moving average of the True Range values historically. The ATR study on can be found in your G and Launchpad charts and represent this concept.

The Fear and Greed indicator is the spread of two weighted moving averages of the True Range. It is calculated in a way that it oscillates on a zero base line. The indicator provides signals in three ways.

1. A buy signal is generated when Fear (red) turns to Greed (green) and a sell signal is generated when Greed (green) turns to Fear (red)
2. Divergence - when price trends lower and fear reaches higher lows or when price trends higher and greed is at a lower high. These are signs of an exhausted trend.
3. When fear or greed spikes to extreme levels it is signaling the start of a top or bottom

The small “A” on the indicator is an alert level. In the settings of the indicator you have the ability to be alerted when the fear or greed exceeds a certain value. In the above, each A appears when it turns above or below the zero line.
The legend for the indicator displays “FG(5.00)” which represents the sensitivity factor. Depending on ones investment style, increasing or decreasing the value of this will speed up or slow down the rate of change of the Fear and Greed value. - Paul Ciana, CMT

---------------------------------------------------------------------
Comment this post
Tweet
FYI As this post is published: SPX 1088 // SX5E 2722 // NKY 9362 // DAX : 6168 // EURUSD 1.2877 // USDJPY 85.26 // XAUUSD : 1233