Understanding Greed As a Trader

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Welcome to our article on the Forex Grid trading strategy. This short guide will provide you with a detailed explanation of what the Forex Grid trading strategy is, how to implement the grid system, and some examples of scenarios that may occur as a result.

The Forex grid system has become quite popular among traders because it’s easy to visualise. However, it is important to know that there’s no guarantee. If you want to succeed with the grid system, you must know how to execute the system correctly. To use strategies related to the Forex grid system, you have to understand:

  • The way the market works
  • Fundamentals
  • Current market dynamics

The good news is, you can set up an automatic Forex grid trading system which can remove the pain of manually placing trades. The great thing about a grid trading system is that it helps you get a return on your investment even in volatile market conditions. This way, it eliminates the need to predict the market’s direction, making the choice quite simple.

The trader just has to know that the market is going to make a move, and the strategy will take care of the rest. It is important to use a broker with no trading commissions. These conditions will limit the maximum levels of the Forex grid trading system. Another great thing about the grid strategy for Forex is that it works in trending markets as well. However, the downside is that the trader always has to keep the available margin in mind – especially, in trending markets.

Defining the Forex Grid Trading Strategy

The Forex grid trading strategy is a technique that seeks to make profit on the natural movement of the market by positioning buy stop orders and sell stop orders. This is performed on a predefined market distance (referred as to a leg), with a preset size of take-profit and no stop-loss. This kind of trading removes the variable of knowing the direction of the price move. However, this also means very complicated money management conditions. Moreover, it increases the margin of error, because you will have to manage multiple trades at the same time.

Implementing the Forex Grid System

First of all, decide on a starting point. For example, take a look at the current price of 1.11860 as featured in the chart below:

Source: Admiral Markets Forex Demo Account – EURUSD 4-hour chart – Data range: 16 Oct, 2020 – 04 Nov, 2020 – Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.

Next, choose the number of grid Forex strategy levels – in this example, there are three levels. Now, place three buy stop orders above the current price starting at 1.1186, and three sell stop orders below it, starting at 1.1126. Note that there are other ways to plot the grid’s leg – pivot points, chart formation, support and resistances, etc. Furthermore, the number of levels is not restricted. You can change both the number of trades and the size. However, use caution when making changes, as the possible size of the loss can increase with each one.

How to become a Forex trader

While Forex is an exciting and lucrative financial market, many traders face difficulties when trying to make steady profits and grow their trading account. In fact, most beginners on the market blow their first trading account in a few weeks because they lack the understanding of basic trading concepts and don’t pay too much attention to risk management.

That’s why we’ve compiled a list of steps to guide you through your trading journey. Follow these steps and you’ll be well ahead of other novice traders who fail to understand the importance of education, risk management, trading strategies, and journals, to name a few points from the list.

What does it take to become a Forex trader?

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You don’t become a Forex trader overnight. It takes a lot of dedication and discipline to become a successful trader, but many traders have achieved that goal. Trading is just like any other business. In the beginning, you haven’t the slightest clue what pips, Fibonacci levels, or Elliott Waves are, but with time you’ll get to know these concepts and move on to other trading topics. That’s why education is the single most important part of becoming a Forex trader.

Steps to becoming a successful trader

The following steps could act as a map of what you need to focus on to trade Forex from home. These are, in my opinion, the most important points that beginners on the market need to understand to get a solid foundation in Forex trading.

  • Educate yourself

As we’ve already mentioned, education is the most important point on our list. Start with the basic terminology of Forex trading and move on to more difficult concepts. There should never be a pause in your learning process, but it takes some time to put the theory into practice. Once you grasp one concept, learn another one to get a feeling for the differences among various trading concepts. Once you have an understanding of the various ways the market can be traded, you can choose the one that best suits your needs.

  • Don’t overtrade on a demo account

Demo accounts are a great way to get your feet wet on the market and to familiarise yourself with your trading platform. However, many beginners make the mistake of spending too much time demo trading. Demo accounts can’t replicate the real emotions involved in trading, such as greed and fear. A losing trade on a demo account will not have the same emotional impact as a losing trade on a real account. That’s why you shouldn’t spend too much time on a demo account. As soon as you grasp the basics, invest a small amount in a real account and trade with small position sizes until you gain more experience.

  • Only invest what you can afford to lose

Trading carries a significant risk of losing your investment, especially if you’re a beginner. That’s why you should only invest money that you can afford to lose. Don’t put your entire life savings into your trading account.

  • Risk management is crucial

Risk management is probably the single most important tool that separates successful traders from unsuccessful ones. Take two professional traders side by side, and take risk management away from one of them. Chances are that the trader without risk management, even as a professional, will end up blowing their trading account.

Learn the basic rules of risk management while you’re on a demo account, and develop your skills further once you switch to a real account.

  • Control your emotions

Just like risk management, controlling your emotions is vitally important to becoming a Forex trader. Emotions can interfere with your decision-making process, and fear and greed can easily lead to costly trading mistakes. Risk management is one of the ways you can practice controlling your emotions, while having a comprehensive trading strategy is another way which will be covered in the following point.

  • Build a trading strategy

A well-round and detailed trading strategy should be a part of a larger trading plan, and given the importance of it, you should start developing your own trading strategy as soon as possible. A trading strategy should include the rules of entering into a position, your entry and exit points, market analysis, and other points that you feel are important. By having a written strategy, you can avoid trading based on emotions as you’ll have a complete set of rules for entering and exiting the market.

  • Keep a trading journal

Besides a trading strategy, you should also keep a trading journal if you’re serious about becoming a Forex trader. A trading journal consists of journal entries, in which you describe each trade as soon as you make it. For example, an entry could include the reasons you entered into a trade, the currency pair, the entry price, and the stop loss and take profit levels.

It’s also important to update the journal entry once the trade is closed. Was the trade a winner or loser? If it was a loser, what went wrong? Regular journal retrospectives will help you in identifying patterns which led to losing trades.

  • Don’t neglect fundamentals

Our final point on how to become a Forex trader is fundamentals. Never neglect the importance of fundamentals on the Forex market. The truth is that beginners tend to focus on technical analysis at first, and while there is nothing wrong with this, fundamentals should get an equal amount of attention. Fundamental factors create trends and reverse them in the first place, so make sure to learn as much about fundamentals as you can.

Final words – how to become a Forex trader?

In this article, we covered the most important points on how to be a Forex trader. Education comes first and foremost, and with good reason; you should never stop learning new trading concepts. With time, you’ll start to combine various concepts which will make your trading life easier. Risk management, control over your emotions, trading strategies, journals, and other points are important as well, so make sure to refer back to this article whenever you feel that your trading performance needs a boost.

The Grid Strategy in Forex

Find out how Grid Strategy minimizes the risks and maximizes the profits, how grid works and what money management rules you follow while trading grid.

There is a popular delusion that Forex is a place to have a quick raise if you are lucky enough. That is why trading Forex is associated with high risks and losses. Traders, who come for an instant profit, usually leave with nothing – they lack patience, education, ability to analyze, the right approach overall.

Luckily, there are still enough people, who know that they can trade better day by day, gaining knowledge and experience, learning from wins and failures. This article is for diligent traders, ready for a controlled risk with a perspective of larger profits. Actually, the strategy we are going to tell you about – if executed correctly – minimizes risks and maximizes profits. The current article centers around the grid trading strategy in Forex.

Main article sections

The Forex grid trading strategy

Good news: this trading system is easily automated. That means you do not have to be glued to your computer’s screen all day long. Another good news is that grid trading makes profits even when the market is volatile. So no matter where the price moves, the grid is able to pick up the profits from any direction of the price move, in case you have tuned your system correctly, of course. The bad news is that the grid trading system is a rather complicated strategy which requires some trading experience and knowledge. If you haven’t traded grid successfully yet, it is high time for us to bring this strategy into the focus of your attention.

Grid trading is a system of trading, mainly popular on Forex. This strategy makes profits from both sideways and trending market. Grid trading helps to maximize the profits while the in-built hedging system minimizes the risks. It assumes placing several buy stop and sell stops orders at certain intervals from the base price simultaneously, in both directions. These buy stop and sell stop orders, placed with several pip intervals build up a trading grid.

How the grid is formed

The design of the Forex trading grid depends on the trader’s strategy and risk tolerance. Nevertheless, most grids generally look quite similar.

All of them have a common structure – a visual grid in the chart, where the moving price rate comes through the levels and “picks up” the result of preset parameters.

Actually, the grid is formed by the buy stop and sell stop orders placed at a determined distance above and below the entry point. 10-20 pips is a common interval size in a grid. So, the number of pips in a grid, which is usually made up of about 5-15 orders, is about 50 to 300. The number of orders to buy or sell is usually equal in both directions. Traders use a take profit order for executing the trade automatically, it closes the trade and fixes the profit.

For example:
The chosen interval is 10 pips
The current price is 1.3550
Buy orders are at 1.3560, 1.3570, 1.3580, 1.3590
Sell orders are at 1.3540, 1.3530, 1.3520, 1.3510

As soon as the price rises to the first buy order at 1.3560, the trade opens. If the price rises by 10 more pips, there are 10 pips of profit.

Simultaneously, the second trade is open as the buy order is activated at 1.3570. If the price keeps increasing, the process will go on.

Money management

No strategy will work instead of you. Especially when we speak of risky strategies, promising many profits. But when automated properly, it works for profit-making sometimes even better than manual trading. However, proper automating requires a total understanding of market sentiment and trend tendencies.

Grid trading is no exception. There is a pattern in a grid, a so-called “dangling trade” which occurs when one of the orders is activated but price reverses before reaching the take profit. The further the price moves from your entry, the bigger will be the loss.

How to limit the losses in this grid trading? Place stop-losses. The stop-loss order closes the trade at a preset level.

Stop loss and take profit

Take-profit (TP) and stop-loss (SL) are the two critical things fixing your profits and limiting the losses. They should be set up beforehand.

In fact, a TP level should be 2-4 times higher from the entry point than the stop loss. This way you minimize the risks and maximize the chances of getting profit. If the TP is executed, the profit will cover the possible losses.

For example:
If the SL is set at 10 pips below the entry point, the TP should be set at 30 pips.

Some experienced traders with large accounts don’t use stop loss, relying upon the price reverse before the loss turns too big.

One more thing you should remember is that the trading risk shouldn’t exceed 1-2% of the trading capital per single trade. Once a trader opens a sell stop or buy stop order, the first thing you should do is to place the stop-loss, and only after that plan a take-profit level.

What assets to choose

First, choose what instrument you are going to trade. Avoid using more than one instrument in one grid, as keeping multiple instruments in one grid is extremely risky.

Another important thing to keep in mind is the typical spread of the currency you choose. The interval size in your grid will depend on the spread volume.

Grid strategy traders often prefer low-spread currencies with high volatility, like the USD/JPY, EUR/USD, or EUR/JPY. They usually choose pairs which price behaviour is familiar to them.

The size of the grid

After the instrument is chosen, determine your grid size. This means you have to decide how many orders you are going to open. As we have mentioned before, you will need several orders opened simultaneously, and most traders do not recommend grids with more than 10-15 orders since the trade becomes too complicated and risky in this case.

Grid-intervals

The common patterns say: the bigger the spread, the larger should be the intervals.

Usually, a standard interval is 10-20 pips. So if we multiply each interval size to the number of orders discussed above (5-15), you will see that your grid size can be from 50 to 300 pips. There are short-term grids and long-term ones. The grid size varies depending on the strategy operation time.

If you feel confident enough to try the grid strategy completely risk-free, it might be the right time for you to open a demo account.

Remember, while building the grid system and placing multiple orders, keep your profit low to reduce unexpected losses. Do not hesitate to implement backtesting and make sure you feel comfortable executing grid strategy. Take your time before trading on a live account.

Stay tuned! Follow the updates in our Education section.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Understanding Greed As a Trader

CNN has a “Fear and Greed” index for the market. They use some indicators to attempt to sense how fearful or greedy investors are at the time. They then display their results on a 0-100 scale, 0 being the most fearful and 100 being the most greedy. If investors are greedy stock prices should rise and if they are fearful stock prices should fall. So, if someone traded based off of this index for three years, how would they do?

I extracted data from CNN’s site using a plot digitizer (pretty cool). My algorithm is pretty simple. It buys/holds when the index is above 50, and sells/holds when the index is below 50, though that number and the security it trades can easily be modified.

Play around with it by cloning it below and let me know what you think.

Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

I’ll definitely play around with this. Does the data go back any farther than 3 years? Did you code the digitizer or download it?

I couldn’t find data going farther back than three years. You can see the image on the bottom of that page (http://money.cnn.com/data/fear-and-greed/) only stores three years worth of data. The digitizer I used is actually online, it’s here: http://arohatgi.info/WebPlotDigitizer/.

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

Here’s another source of data:

I read the book awhile back. the author claims some level of predictability of the market (although on a time scale perhaps not of interest to active trader types). The data and claims on the website might be another source of inspiration for you.

I cloned your algorithm and used it with monthly consumer confidence data since 2001 (http://www.econstats.com/r/usind__m5.htm)

Instead of just buy/sell if index is above/below 50, what I did was weight the confidence and allow for short sales. So for instance, if the confidence is 51, then long 1/50th of your bet size. Alternatively, if the index is 30, then short 20/50th of the bet size.

The bet size is static so sometimes its more or less that the total capital you have access to. Also, confidence interval spikes above 100 about 25% of the time with a highest value of 117.9 in mid 2001. Therefore, the algorithm uses a bit of leverage at times.

I think most of these confidence intervals are at best a lagging indicator and at worse just noise. It seems like consumer confidence never really recovered after the 2008 crash and has been flat (around 50-60) since then. Therefore, the index really missed out on the market rally since then.

Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month

Thanks Grant, that looks like it has some good ideas. I will check it out.

Branko, yeah, I agree that it’s just a lagging indicator. It is interesting that the consumer confidence data and the CNN index don’t correlate too well. Although the CNN one uses a mathematical formula based on a few different things. I think you are also right in using a weighted bet rather than just betting the same amount every time in an indicator like this where seeing confidence is possible. I guess the theory is that, for example, if there is a 50.5% chance a security’s price will rise, then it’s probably not worth it to bet much.

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

The result looks good only because this index is calculated from stock index, e.g., http://money.cnn.com/investing/about-fear-greed-tool/index.html, so they should be highly correlated.

You’re right Raullen, the index’s value is dependent on the market’s current state. But this shows that the Fear and Greed index is not a better than average indicator and is purely a reflection of the current (or realistically, past, due to delay) state and not the future state in any way.

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

Hello. Thank you so much for this. I am a total quant layman, but a long time conservative investor (not trader). I did wonder though if the CNN index was a good indicator if you buy when the index falls to 25 or below and sell at 85 or above, and just hold in between. I tried to plot the index against the S+P but couldn’t even figure that out. If someone can and can compare that to the price of the S+P, I wonder if it would show greater returns than simply dollar cost averaging in every month. Thanks for all your great work.

Thanks for the nice reply Jeff. So on my backtest charts above, the S&P is the benchmark in the top graph (the red line) and the Fear and Greed index is the purple line in the lower graph. You can compare them from there if you’d like, or if you are interested in modifying my algorithm, you can clone it and change whatever you like. Let me know if you need any help with that.

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

Hello everyone – Great place and Great people.Good work Gus.

Gus: Please post the URL for the site containing the data for the Indicator. Thanks.
Al

Hey Alan,
The site is in my code (click “Source Code” above the graph): http://money.cnn.com/data/fear-and-greed/

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

Jeff,
Did you get an answer to your question? I have had the same one only I look at 80 greed and 20 fear as triggers since that mark is hit more frequently than your limits.

I like the basic idea here. I modified it to weight the buys and sells, including short sales.

Why not take it one step further? It seems to me that when people are fearful, they not only sell securities, but they also shift that money into bonds and gold. So I am considering both positions — Greedy = sell AGG + GLD and buy SPY (or DIA, or similar), Fearful = sell SPY and buy AGG + GLD

[I plan on extending this a little further by comparing IBS of ETFs]

I have a question: is there a way to do this with current F&G index data? (I notice this would be very easy to grab from the websites source code — it is simply a number in an li tag, so a simple script to hit the website and parse/search for that section of HTML would do the trick)

I have another question (which I admittedly haven’t researched yet in the documentation): is it possible to set timings of these transactions, such as what to do On-Close or On-Open of markets? [PS. I’m a total noob. Not to coding, but to quants and financial in general]

Here is a previous thread that shows how to send orders on market open and market close events. This code should be helpful for your strategy. If its not what you’re looking for, let me know.

With the current F&G data, you should be able to implement your greedy/fearful strategy if you modify the logic in the ordering function. You can add the ETFs for gold and bonds in the initialize method.

If you discover another interesting strategy or find a fun phenomenon, feel free to start a new thread!

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

Thanks for the response. I have not yet implemented the complete strategy, as it was a little too complex for my first foray into this system. however, I did modify this F&G strategy by adding the additional ETFs (plus extras, to test multiple ones) and then using a reverse-strategy for those hedges (gold and bonds); ie. when fearful, sell all equities and buy gold/bonds.

Although this results in lower overall performance, I believe it would also be much less volatile in the long run (hard to tell from this backtest because it only covers a 3 year time span in which the general market was up-up-up for the most part. and also because gold was in an inflated bubble which burst a bit in 2020/2020, so that also has an impact)

It’s a very naive, basic strategy that simple works on the fundamentals. but, it does seem to work.

Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month

Another thought. it seems to me, that there is still a flaw in weighting based on fear/greed (or consumer confidence, for that matter), because those are lagging indicators (in other words: they tell recent history, they don’t necessarily predict anything)

I’m going to test something else: what happens if you sell when it is a mildly fearful index (ie. things are just starting to hit the fan, but there’s still room to fall), and buy when it is mildly greedy. but do the contrarian moves when it hits an extreme threshold of fear or greed (aka. a “peak” or a “bottom” — for example, when everybody was saying “Buy real estate!” in 2005, I knew for certain that it was NOT a good time to buy real estate. Confidence/greed would have been way in the green, but the correct move would have been sell or short when it comes to RE)

In other words — I’m going to test following my algorithm (combined with a multi-ETF IBS strategy), but throw in some contrarian moves; in other words, there would be 3 actual thresholds: for example, 50 = neutral, 80 = strong buy; 20 = strong sell; > 80 = sell;

Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month

Does anyone have or can anyone put the daily CNN fear index into an excel worksheet?

I haven’t tried it, but since the code is calling a fetch to a “CSV” (“comma separated values”) page, you should be able to download that at https://gist.github.com/gusgordon/7615f5b91f3cba1e7ff5/raw/261a3213b20f7cc7d2ee52be2cdc81c49f69a4de/gistfile1.txt and then load it directly into Excel.

Thank you so much, this is great!

Hi Gus, Thanks for the great info and analysis! the WebPlotDigitzer is really cool.

I actually tried using it to create a CSV file but the data came out with duplicate dates and did not exactly account for weekdays only (market trading hours). You must have prepped the data in Excel to the best of your ability.

If so you alter the data did you do so in Excel?

Dear Gus, I do appreciate your link above and I was considering to put CNN index on my market monitoring model but lack of raw data. Just wonder could you fill the data from 2020 July to 2020 Feb. I am grateful to your help and would like to thank you in advance :)

Does this source code still work? It has multiple errors when trying to “Build Algo”

CParserError: Passed header=0 but only 0 lines in file
File test_algorithm_sycheck.py:13, in initialize
File algoproxy.py:1391, in fetch_csv
File requests_csv.py:364, in init
File requests_csv.py:247, in load_df
File requests_csv.py:370, in fetch_data
File parsers.py:400, in parser_f
File parsers.py:198, in read
File parsers.py:479, in __init
_
File parsers.py:586, in make_engine
File parsers.py:957, in __init
_
File parser.pyx:477, in pandas.parser.TextReader.__cinit__ (pandas/parser.c:4434)
File parser.pyx:599, in pandas.parser.TextReader._get_header (pandas/parser.c:5831)

I am a long time algo developer but first time Quantopian user. Thanks!

Out of curiosity I saved the data with a .CSV extension.

Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month

I was referring to the original backtest with SPY only, not the GLD/TLT. I was able to use the source code from the last posted backtest to access the Fear & Greed index. I note the Sharpe/Sortino is lower then the original strategy posted. Even still, I’m surprised it was this high, unfortunately no down market data in the last 3 years.

Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month

Am I crazy or are the values in Risk Metrics changing? The Sharpe and Sortino ratio are higher today (1.04 & 1.63) then the first time I posted the backtest?

I played your setting with CSV import, the F_G curve it not right. It can be easy to spot by comparing FG curve in previous message and the first message. Please check.

Then fgindex seems okay.

I built a trend following trade system based ob CNN fear and greedy index,

  • when fgindex drop 13.5 from top, then sell
  • when fgindex increase 13.5 from bottom, then buy.

The result is not bad.

Returns 1 Month 3 Month 6 Month 12 Month
Alpha 1 Month 3 Month 6 Month 12 Month
Beta 1 Month 3 Month 6 Month 12 Month
Sharpe 1 Month 3 Month 6 Month 12 Month
Sortino 1 Month 3 Month 6 Month 12 Month
Volatility 1 Month 3 Month 6 Month 12 Month
Max Drawdown 1 Month 3 Month 6 Month 12 Month

Cool, and by the way, the code can be much simpler now since order_target_percent has been added: https://www.quantopian.com/help#ide-ordering

Instead of counting how many shares we own, we can simply just check if the indicator is above or below the threshold, then call

if we want to go long, and
order_target_percent(context.security, -1) if we want to go short.

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

Hi all. Thank you again for trying to explain how to use the FG index vs. SPY. Honestly, I am way out of my league as far as the technical aspect goes. I’m pretty seasoned as far as investing. I do still wonder what would happen if you sold at 80 and bought at 20 only. If you buy at 20 and the fg index goes to 70, for example, you don’t buy. Yes the fg index is lagging, or current, but it seems like it may help people buy low and sell high. If anyone with a technical bent wants to let me know how that strategy would have done vs. buying the first of every month, that would be great. I hope that using the fg index in this way provides some kind of advantage. Thanks.

Interesting post. I’ve thought about programmatically using the fear and greed index to set allocations on betterment.com. A few things to remember with the benchmark are:

1.) Dividends: When you sell your positions you are no longer earning them – I don’t think this benchmark is including dividends which are currently 1.86% annually with SPY
2.) Taxable events: When you sell, you will have to pay capital gains, in most cases short term. Deferring taxes usually works to your advantage in the long run
3.) Commissions: Although this can be mitigated with an commission free ETF broker.

Instead of selling completely, I wonder what the returns would be like if you basically set tactical allocations instead:

During times of greed switch to 90% bonds, 10% stocks: F&G index over 80
During times of fear switch to 10% bond, 90% stocks: F&G index below 20
For everything else, keep it 50/50 and re-balance quarterly

I suspect this will fail to beat the market, due to the large bond holding. However your volatility will be greatly reduced. Reducing volatility drag is one way to beat the market (if you can do it).

Perhaps a mix if 70% stock, 30% bonds during the times the F&G index is between 20 and 80.

There are tons of books out there that espouse the virtues of passive investing so I won’t go into that, but thanks to Gus for doing this test. Fascinating.

Thank you for posting this Gus. It is obviously an older thread but have been looking at the Fear Greed index lately. But what I found the most fascinating was the plotting site you posted http://arohatgi.info/WebPlotDigitizer/ as I regularly come across charts where I would LOVE to extract data.

My question is what method did you use to extract the Fear Greed index. I have uploaded the picture, made the axis’s, and then have tried a few ways to pull the data but each time I get as much bad data as good.

If you still use this tool I would LOVE some guidance as to what you do.

I’m new to Quantopian and curious, is there any way I can have it fetch Real time data from the CNN index or is it just more of a reacting algorithm itself?

If it can be done though, what ways would I have to change the Algo and CSV? I’m not necessarily asking for a new written code, but maybe a point in the right direction.

Thanks Dave! That tool is definitely very cool. It is a little tricky to get data, but it can all be done with Python or even Excel. I remember first running the digitizer to get the raw data. Then you have to normalize the x and y values to your scale and dimensions – for example, on the x-axis, we want dates in this case. I set up some sort of thing to convert the value on the x-axis to a date based on the fraction of the way through it was the date range I wanted, if that makes sense. The resolution was really high, so some days had multiple data points. Since I only wanted the first value (or the average value) for each day, I removed the excess points. That’s what I remember, hope that makes sense.

Not sure about getting bad data – I didn’t have a problem with that. Try playing with the digitizer settings, maybe. Let me know if you have any luck!

Alec, the F&G index, from what I gather, is a reacting value that is supposed to show the sentiment of investors. If it were very accurate, then it would explain how investors were feeling, and the stock market would follow that signal. It seems like an OK signal to me – though this data is over 2 years old now. The best way to get data in a live algo would be to get the signal from CNN’s page, and put that into a CSV for your algorithm to use. This could be done either automatically or by hand each day. The CSV would have to be updates around 2 AM EST or earlier, because that’s around when Quantopian will grab the CSVs for the day. See the docs on fetcher and the notes on live trading for more info.

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

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