The Fear and Greed Index is a composite sentiment indicator that synthesises several market-based signals into a single 0–100 score. Readings near 0 indicate extreme fear; readings near 100 indicate extreme greed. CNN developed the most widely-cited version, drawing on inputs including stock price momentum, safe-haven demand, put/call ratios, market breadth, and volatility.
The index is used primarily as a contrarian signal: extreme fear has historically coincided with undervalued markets and periods where forward returns have been above average; extreme greed has historically appeared near overheated peaks where near-term returns have been below average. Neither extreme is a precise entry or exit trigger, and the index can move sharply over short periods.
The value of a composite gauge like this is that it averages across several sentiment proxies, reducing the noise any single input would generate. Its limitation is that it is backward-looking about sentiment, and sentiment itself is a lagging reflection of price action — markets often move before the fear-and-greed reading catches up. Best used as a background risk filter, not a trading rule.