Trying to interpret market sentiment is tedious. How people are feeling about the markets, their finances and job situation, inflation and other economic components is difficult to measure. Our feelings about these things are dynamic, changing from week to week or even day to day. How often have you felt positive about the economy one week and completely negative the next week?

Tedious as it might be, it’s important to understand market sentiment, as it can help us make money and save us from losing it.

Here’s how to interpret market sentiment

Fear/Greed Index

Every human is on the fear/greed spectrum. We fear losing money and are greedy about making money. The Fear/Greed Index measures where the majority of us fall on that spectrum at any given time.

When markets are going down, most investors/traders become fearful and express that fear with action. What is that action?

They hit the sell button, of course!

“Who wants to stick around for lower prices,” they think. “I’ll just sell and wait for a new entry point.” This one of the four fears of trading: fear of loss.

Meanwhile, when the stock market is going up we want to be on board at all costs, even if it seems too late. This is the classic fear of missing out.

As I said above, the index will tell you where sentiment is sitting – are traders fearful or greedy?

Volatility Index

The volatility index, or VIX, is my favorite gauge of fear. When the VIX rises, fear is on the rise. Most people are selling or considering it.

As a contrarian trader, I use this as a signal to take a position, because this indicator (like so many sentiment indicators) tells me when the crowd is leaning too heavily in one direction. If everyone is one side of the boat, it’ll tip over.

When the VIX is dropping, it means people are feeling complacent. They are buying – or at least, they are not selling.

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