Crypto Academy / Season 3 / Week 2 - Homework Post for [@asaj] // MARKET AND TRADING PSYCHOLOGY

Hello crypto prof @asaj !

This is my submission for this week's crypto academic homework challenge; in truth, your lecture was excellent, and I must say that reading it and conducting research for the homework job helped me better understand some concepts.

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Part A (Case Study)

The case study given is an example of what type of psychology? Explain the reason for your answer.

The case study given by professor @asaj can be confirmed as a market psychology , Jane invested in the coin because everyone else in the group were talking good about the coin , initially when the price was at $9 she didn’t invest but the influence in the group compelled her to invest when the price shot up to $10.
Looking at the scenario she didn’t enter the market base on her own technical analysis but what she heard about the market trend, later on she decided to buy more coin because she was told the coin is going to the moon and , looking at how she confidently decided to invest more this tells us that those who bought the coin before her made more profit so she also anticipating to make more profit until things turned round and she didn’t have the maximum patience and she had to go through this disappointment.
After Jane’s was disappointed by the position she took a position blindly in the market , she decided to quit cryptocurrency trading but later on she got to realise she was lucky to quit the market early because the price dropped more than her closing position, this was as a results of the market psychology which is the mentality of so many individuals in the market , after the coin started the downtrend all those who invested where going short , so this kept the price Deeping , Janes decision to buy more coin when the deep started was a trading psychology used and she quitting the market was a personal decision made due to fear , this is also a trading psychology effect .

Using the case study above, list and explain at least 5 biases that influenced Jane's trading behaviour with examples of how it affected her behaviour

Base on my understanding of this case study, I have found out the following Biases are those that affected Jane’s decisions.

• Herd Mentality Bias: This Bias usually refer to the psychological state that allow an individual to follow a crowd views to make a decision, in crypto trading individual sell or buy coin blindly because people are saying it is booming or they are infighting fear that I will reverse to lead you to sell your coins, looking at what happen to jane she bought the coin because everyone in the group was buying it and making profit.

• Emotional Bias : in the case study Jane felt she was losing everything she felt sad and she decided to quit the market at a losing position , this was due to a mental state at that moment , so she was controlled by her feelings hence she made the decision to quit the market blindly.

• Confirmation Bias : One thing about the human brain is that anytime you make a decision your mind always look for reasons to justify your decisions to be correct , this the psychological state that causes that. When Jane sold her coin at a lower price she was very disappointed in crypto she even decided to quit, she later on had a smile on her face because she saw the price surging more down than where she sold them, this made Jane to feel that she was right, until the price began to rise again.

• Disposition Bias : Jane was averaging down when the price of the coin was going down thinking that it will rise and put her in profit until she got disappointed, this Bias affect her because she refused to admit the mistakes on the investment she made so blindly with little knowledge . She tried to HODLe and bought more of the coin with the mind that if she sells what she has will cost her a lost.

• Bounded Rationality Bias : This Bias causes individual to choose or decide on the fastest way to solve their problems than they having much time to analyse their situations and come out with excellent solutions, in the case study Jane decided to quit the market because the only thing that comes to your mind as a beginner trader in crypto when the coin you are investing in drops to maybe half of what you invested is to sell your position quickly because you will be scared to lose everything, Jane’s decision was affected by this Bias .

List and explain how each bias you have mentioned can be avoided?

1.) One should not follow hear/Say, in trading and investment you need to build your skills of analysing the market before entering any trade to avoid Herd Mentality Bias.

2.) In crypto you need to understand that the market is very volatile, so always have exercise patience, don’t rush to quit the market when you enter a trade minimize your expectations and have in mind that you are risking your money, so as a trader as the market swing any time at all so your mood will be but always invest what you can afford to lose to avoid emotional Bias.

3.) Personally I avoid Confirmation Bias by sharing my technical understanding of a particular coin with my friends who also have experience in trading , they criticize it and I debate them on that just to make sure my mind opens up to new ideas or suggestions to avoid my mind having a fixed suggestion.

4.) One need to avoid over confidence , when you make a decision to trade a particular asset , research for positive comment or critics about the assets on social media , get others view and make sure you take the good ones into consideration , avoid believing that you are always right and this will help you do away with Disposition Bias.

5.) Don’t always make decision when you are in panic , Jane was panic and she sold all her coins at a lower price , so sometimes while trading avoid the quick decision making , try to follow fundamental analysis, technical analysis and also what the public is saying about the market . when you are able hasty decision making you can do away with Bounded Rationality Bias.

Part B (Research & Analysis)

What type of analysis can be used to monitor market psychology and trading psychology, and why? Identify the differences between trading psychology and market psychology.

• The market psychology can best be measured using the Technical analysis, analysing the market of a particular coin with some technical indicators such as RSI, MA, MACD can tell us the collective mental state of all other investors who have entered the same market, in the case of RSI it tells you either the coin in the market is overbought or over sold by other traders, in that case you can determine the mind-set of all the traders who invested , if traders over buy a coin it means there is a good sign of profit there , immediately they start to over sell you will determine again that the coin has reached it pick and it is a profit taking time.

• Trading Psychology can also best be monitored using Technical analysis , to determine that we look at trends in the market , as prof @asaj state this type of psychology deals with an individual and before a market goes into a particular trend it needs a group of individual to push that trend , so let say if the price of a particular coin is going bearish it means each trader has the mental state of being a bear or to go short.

DIFFERENCE BETWEEN MARKET &TRADING PSYCHOLOGY

Trading Psychology	Market Psychology
Trading Psychology is the individual mental actions or behaviour to trade a particular cryptocurrency	Market Psychology refers to the collective decision made on the market by several traders
In trading Psychology decision made are quick and affected by Confirmation Bais, Bounded Rationality Bias	Here the decision impacted on the market take gradually , if all traders decide to go bearish it will take some times to do correction in the bullish market

How can you measure market psychology using a crypto chart? Select 5 trading biases and explain with screenshots of any cryptocurrency chart how the biases can cause a coin to be oversold and overbought

In this part I will be using the UNI/USDT coin pair to measure market psychology, below is a screenshot of the chart where I applied the Supertrend Indicator.

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Analysis

• Looking at the chart above the price started rising from point A and broke a previous resistance which turn support now.

• The price went up to a particular resistance and couldn’t break through so it has to fall back to the new support (yellow) line , then it started bouncing back again .

Measuring Market Psychology

• The price was in a bullish trend (going up) because so many traders were buying, the Supertrend indicator was green from point A to the resistance, and this tells us the mind-set of traders at that moment hence we measure that the decision was influence by the buy actions taking by several traders.

• The drop of the market from the resistance back to the support was as results of the bears pulling back the market , this can be attributed to the fact that traders go to a particular level where they are all deciding to take profit because they made so many pips from the point A to the resistance , so the market psychology here is that all traders are going short , so we will say traders are going bearish

BIASES THAT AFFECTED THE UNI/UST

• Herd Mentality Bias : this is psychological bias that affect individuals who follows crowd , for the chart above any new beginner or someone who listen to people most a time will follow the bullish trend , they will decide to buy more since the price is rising and most investors are trading it as well

• Emotional Bias such as greed will let most traders lose the maximum take profit because they will be expecting the bulls to pull up more but the bears at the resistance will not allow them.

• Confirmation Bias : just like using the technical indicators above let say the Supertrend is still showing green which means buy more and if other traders using different analysis begin to go short, but because of self-confidence and complacency people will still hold on unto their trades till they begin to lose it all.

• Self-Attribution Bias: in the chart above all those who relied only on what they know but not having a look at what other traders are saying might end up losing bigtime either when the price hit the resistance or when they were advice to buy at the lowest price.

• Disposition Bias : this will affect all those who refuse to take profit when every trader was doing at the resistance but waited for more profit at the end of the day they will be panic and they have to make a quick decision when the price was dropping down to the support.

In your own words, define the term efficient market hypothesis (emh). List and explain the advantages and disadvantages of efficient market hypothesis (emh)

This theory states that the price of cryptocurrencies always react quickly to new information entering the market.
This indicate to us that the cryptocurrency market is very efficient and this justify the reason why the price of a coin tells the true value of the stock and it says again that the fundamental analysis and technical analysis cannot give a trader a return very huge as he expect but then one can earn more profit by taking higher risks.

ADVANTAGES

• This can prevent money lost because it clearly tells investors not to believe that they can make money with only analysis so they have to be careful when investing, and they can try new coin with money they can afford to lose.

• They maximize profit making since it tells us the kind of investment that has higher returns.

• It reduces disappointment caused by expect who gives recommendations to traders to buy this or that , once traders are aware of the efficiency of the market.

DISADVANTAGES

• It involves people in high risk investments

• It gives false information about technical and fundamental analysis, they work also depending on what you use them for

in conclusion let me thank the entire steemit for bringing us marvelous lesson each weeks and i will use this oportunity to say kudos to all professors for their marvelous work.

THANK YOU