What is the Investor’s Intelligence Index: Does it Work for Crypto?

The Investor’s Intelligence Index is a widely accepted mechanism for detecting power stability between bull and bear sentiments in markets; its primary purpose is to help investors understand market sentiments in hopes of predicting future market conditions.

When we think of bull and bear markets, we think of the key stages of any stock market cycle. Bull markets see prices rise, while bear markets see prices fall. However, bull markets prefer sellers, who can sell their assets at higher prices, while bear markets prefer buyers, where buyers can buy assets at lower costs.

There are several methods to investor intelligence index. Rather than a single predictive oracle spewing out binary “bull or bear” sentiment, an investor’s intelligence index is an amalgam of sentiments across different forms of media.

Most indices rank several indicators in a pool of sentiments. For example, one may strongly favor established media presence and newsletters from licensed financial advisors, while some indices may give more weight to an aggregated sentiment disseminated via social media.

Since cryptocurrency is such a new asset class, the best approaches for measuring investor intelligence are still being worked out. For example, in the ICO craze of 2017-2018, social media was a very popular means of gauging which projects could emerge as home runs. This was all for better or for worse, as many pump-and-dump schemes started using bot accounts or otherwise manipulating sentiment for speculative purposes.

How do you measure investor sentiment?

When people talk about investment or market sentiment, they are referring to the overall attitude of the investment community. It is often used by short-term traders or technical analysts whose primary goal is to profit from short-term movements in stock prices.

Investor sentiment is essentially a snapshot of the stock market’s perspective at a glance. Many quantitative methods have been developed to help investors understand market sentiment.

chart craftIntroduced by Abe Cohen in 1965, it was intended to provide a technical approach to understanding the underlying mechanics of stock and commodities trading. The approach is actually contrarian in nature, with the intent to identify reliable signals that support countering general market sentiment.

For example, instead of determining that one should BUY during a bull market, these sentiments would dictate to SELL while prices are rising, in anticipation of future prices falling.

When bulls dominate the market, Chartcraft uses a negative rating system, from -1 to -10.

When bears dominate, the rankings are between +1 and +10.

If the sentiment is that bulls are 51% or more in the market, -1 is assigned to indicate the market sentiment, and when it is above 60%, -10. When the bulls drop to 45% or below, a +1 rank is awarded, while +10 is awarded when the bulls drop to 36% or below.

The ranking system actually only reaches a maximum of -20, and the ranking remains active for almost three months. If the bears are over 55%, an additional +10 will be added to the ranking for the next six months.

The highest level of bullishness to date was on December 24, 1994.

Final Thoughts: Is Relying on the Investors Intelligence Index Intelligent?

It’s incredibly difficult (theoretically impossible) for anyone to predict the granular swings of a market with perfect accuracy, so it’s important not to put too much faith in the variety of attempts at doing so. However, approaches such as the investor intelligence index can at least provide a framework for analyzing whether or not your model has predictive power.

The investor intelligence index is one of the most popular techniques for this. The index was introduced in the 1950s and has been repeated ever since. Its application and relevance to cryptocurrency are yet to be determined. The investor’s intelligence sentiment index measures response to critical events and market milestones.

By observing the changes in sentiment, investors aim to decide whether the market position is too bullish, too bearish or somewhat neutral. Investors could use the accurate measurement of market sentiment to their advantage. When the ranking indicates extreme bullishness in the market, an investor could interpret this information as the market would soon undergo a correction before returning to normal sentimental condition.

The usefulness of the investor intelligence index varies for short- and long-term traders.

The investment strategy success rate may depend on your potential to balance information from different sources and use the knowledge in accordance with your personal goals and needs.

The post What is the Investor’s Intelligence Index: Does it Work for Crypto? appeared first on CoinCentral.

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