Steemit Crypto Academy – Season 3 - Week 2 - Post for @asaj

Question 1 - The case study given is an example of what type of psychology? Explain the reason for your answer

In my opinion based on the case study, the psychology clearly shows that of trading psychology. Trading psychology has to do with emotions, it is basically the emotions and behaviors which influences the trading decisions of a trader, which in turn influences the success or failure from the investment. From the meaning of trading psychology, we can see that it relates to the story of Jane whose trading decisions was heavily influenced by her emotions and behavior in the market. This emotions and behavior influenced her actions that saw her make a decision not to hold on to her make a loss even after being in profit some days ago. Above all, Jane showed the concept of trading psychology because her decisions and actions was influenced by her emotions.

Question 2 - 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?

If we look at the case study of jane, we can clearly say that there biases which influenced her trading behavior. Some of the biases are;

Herd Mentality Bias

In my opinion, this is one of the biases that can be seen from the case study showcasing Jane’s behavior on her trade. From the story of Jane, we saw that she jumped into a trade based on what was posted on the group. It was posted on the group that members should by the cryptocurrency and Jane decided to follow others to buy as well. This is what is called the Herd Mentality, simply because Jane bought the coin because it was posted on the group and other members of the group was buying as well. Jane didn’t do her fundamental analysis and technical analysis before picking a coin to buy, but decided to buy because some posted it in the group and other members was buying. This can be very risky and can lead to heavy losses. If she carried out her proper fundamental analysis and technical analysis by herself, maybe she would have made profit from the trade or she would have avoided the trade and invested in another coin that would have made her even more profit.

Confirmation Bias

For me, this is also another bias that can be seen from the case study showcasing Jane’s behavior on her trade. When we talk of the confirmation bias, it basically means when traders justifies their actions or decisions by seeking or cherry-picking things that confirms actions or decisions to feel better. In the case of Jane, she was feeling sad that she didn’t buy the coin when it was posted because she would have made more profit. Instead of her to sell and enjoy the profit she made already, she was a bit greedy and wished she bought at a lower price. When the price of the coin started falling, it was a confirmation for Jane to buy more at lower price as she wished. She neglected all the bearish signs and neglected her technical analysis, instead she assumed that the price would rise back up and held on to the belief that after the price falls, it will rise back to its previous high prices. Jane kept on buying at lower prices as the price kept falling, which eventually saw her lose money.

Self-Attribution Bias

This is also another bias that can be seen from the case study showcasing Jane’s behavior on her trade. This type of bias is basically when a trader claims all the success and attributes the success to herself alone without accepting blame for the failure and tries to shift the blame to other things. In the case of Jane, instead of her to accept her mistake and learn or accept that she made the wrong decisions in the market by letting her emotions and other biases to influence her trading decisions, she began to blame it on the stoploss and blame the creators of the stoploss concept by saying stoploss is a dump concept because the stoploss triggered after the price fell to that point which made her lose money. Instead of Jane to accept that she made the wrong decision and accept the loss, she showed her Self-Attribution Bias by blaming her loss on the stoploss.

Emotional Bias

In my opinion, this is also another bias that can be seen from the case study showcasing Jane’s behavior on her trade. This type of bias is basically when a trader allows the emotions or feelings to control the trading decision. In the case of Jane, she allowed her emotions take the better of her in making her decisions which proved to be the wrong decision that made her lose money from the investment. If she didn’t let her emotions take control or influence her decisions, she would have probably sold the coin much earlier when she was in profit and taken profit, instead her feelings wished she bought earlier at a lower price and feeling of wanting more profit led her to begin to buy at lower prices. Or, she would have just held the coin much longer without setting stop loss. If she didn’t allow her emotions and feeling of fear to lead her to set stop loss, she would have probably made even more profit when the price increased.

Bounded Rationality Bias

This is also another bias that can be seen from the case study showcasing Jane’s behavior on her trade. This type of bias is basically when a trader makes certain decision that he/she sees as good enough or decisions that satisfy a certain rationality, instead of making decisions that are optimal, making the best decision possible, rather the trader makes decisions to satisfy his/her rationality. In the case of Jane, she allowed the bounded rationality bias to affect her trading decisions. Her rationality is always to dollar cost average down so that when the price goes higher, she will be in big profit or break-even. While this can be a good decision is many situations, it is not always the right decision because if Jane sold her coins earlier when she her asset value was high, she would have been in profit. Also, when the price was continuing to fall, she would have just taken very little profit or very little loss and moved on. Instead she always believed in the idea of keep buying low if the price keeps falling that was what led her to be a loss.

Question 3 - List and explain how each bias you have mentioned can be avoided?

• To avoid the “Herd Mentality Bias”, the trader should not enter a trade because every other person is entering that trade. Simply put, a trader should not buy a coin because other persons are also buying the coin. The trader should do their due diligence to research about any coin before buying. Proper fundamental and technical analysis is very important. If Jane did proper fundamental analysis and technical analysis, maybe she would have seen some reasons not to buy the coin and would have bought another better coin that would have made her more profit.

• To avoid the “Confirmation Bias”, the trader should focus heavily on fundamental and technical analysis before making any trading decisions. If Jane has done proper fundamental analysis and technical analysis, she would have seen some signals on the chart that mean that the market would go in a downtrend and she would have sold much earlier.

• To avoid “Self-Attribution Bias”, the trader should always take the blame the failures. In cryptocurrency trading, there are always losses, but good traders learn from their mistakes and move on. If Jane didn’t have the Self-Attribution Bias, she would have learnt a long time ago and it would have probably not repeated again because she would have learnt. But because of her Self-Attribution Bias, she keeps making the same mistakes and blaming it on other things.

• To avoid “Emotional Bias”, the trader should not let her feelings take control of her actions and trading decisions. Sometimes fear makes a trader make wrong decisions. If Jane didn’t let her Emotional Bias influence her decision and action, she would have made profit.

• To avoid “Bounded Rationality Bias” the trader should always think logically through the use of proper technical analysis. If Jane didn’t satisfy her bounded rationality which was to always buy the dip and aim to make more profit, instead, make use of proper technical analysis to find out signals on when to exit the trade, she would have made more profit or at least greatly reduced her losses.

Question 4 - 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.

In my opinion, “Technical Analysis” can be used to monitor psychology and trading psychology. This is because the market most time move in a predictable pattern and comprises of different phases. With the use of proper technical analysis, a trader can identify the market trends or predict the direction the market would move since market psychology is basically the combination of all the trading psychology of all the individual traders and investors in the market. Since the market moves in a predictable pattern, a trader can study and monitor the price charts during careful technical analysis to spot certain patterns that can signal whether to enter a trade or exit a trade. Also, with the help of certain indicators on a price chart during technical analysis, a trader can determine the direction the market is going.

Differences between market psychology and trading psychology

In market psychology, it comprises of all the actions and behaviors of all traders and investors in the market based on their individual trading psychology. While in trading psychology, it is only the actions and behavior of one individual trader in the market.

In Market Psychology, the trend in the market or direction the market is moving is as a result of the actions and behaviors by different market participants. While in trading psychology, the profit or loss incurred by the trader is as a result of the behaviors, actions and decisions by the trader alone.

Question 5 - 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

When it comes to measuring market psychology, it can be done by understanding the different phases in the market which are the accumulation phase, uptrend phase, distribution phase and downtrend phase. All the phases in the market proves the idea of the different trading psychology that make up the market psychology. I will be using the AAVE/USDT to demonstrate the various phases in the market

AAVE/USDT pair

Accumulation

In the accumulation phase, the large investors starts buying the coin strategically to accumulate a large portion before the smaller investors enter the market. The large investors are buying is carefully so as not to cause the price to increase drastically. On the chart, we can see the phase is associated with a sideways or horizontal movement.

Uptrend

As the large investors are buying, some other smaller investors who are sharp and caught the phase early begin to buy as well. The joint forces of the large investors and other smaller investors who caught the phase early begin to push the price of the coin upwards. The buying pressure suppresses the selling pressure and begins to cause the price to increase, this will alert other traders and investors to buy so as not to miss out. “Fear of missing out” sets in, the price continues to move in an uptrend.

Distribution

At this point, the large investors and other smaller investors who caught the market early are in serious profit. At this point, the large investors and the smaller investors who bought early are satisfied with the profits made and begin to carefully sell and take profit. As the large investors and some other smaller investors are selling, the price is slowly falling but not significant enough to cause panic.

Downtrend

As the selling pressure increases, the selling pressure begins to slowly suppress the buying force. The price of the coin begins to fall at a much faster rate. This will alert other traders and investors who bought at a higher price. Panic will set in, FUD in the market and people who bought high will begin to sell as a result of fear of losing all their investment. The selling pressure continues to increase until it suppresses the buying force. The market enters a downtrend phase where the price continues to fall at a faster rate like we can see on the chart.

How the biases can cause a coin to be oversold and overbought

Herd Mentality Bias

This type of bias is basically when a trader buys a coin because others are buying as well. The traders and investors are buying because other are buying and the price keeps increasing due to the buying force. This can lead to loss. We can see from the STORJ chart showing where people where buying STORJ because other were buying due to the Coinbase listing tweet. Those who bought high lost money after the price dumped back down.

Disposition Bias

This type of bias is basically when a trader decides to hold on to their position and ignore the signs in the market. The signs are point that the market is bearish but the trader is still holding their position due to their own beliefs. The traders keep holding even though there are already signs that the asset would continue falling. Because of this, the price would fall to unbearable ranges and the traders could eventually sell off at a bigger loss. The selling force by the traders can cause the market to enter an oversold.

Confirmation Bias

This type of bias basically means when traders justifies their actions or decisions by seeking or cherry-picking things that confirms actions or decisions to feel better. This can cause the market to go into an overbought position because if a lot of traders are buying the dip and the buying force becomes greater, the price of the coin would enter into overbought.

Emotional Bias

This type of bias is basically when a trader allows the emotions or feelings to control the trading decision. When the traders in the market allow their emotions and feelings control their decisions and actions due to fear, the market can enter into an oversold because of many traders and investors selling out of fear of losing all their money.

Trend chasing bias

This type of bias is basically when a trader decides to buy a coin because of the past trends of the coin. This bias causes traders to chase trends due to past records. When traders identify a trend, the want to take advantage of the new trend. We see that a lot in the cryptocurrency world which could lead to losses especially if the traders enter the market late. Because of the buying force to take advantage of a newly discovered trend, the market can enter into overbought.

Question 6 - In your own words, define the term efficient market hypothesis (emh). List and explain the advantages and disadvantages of efficient market hypothesis (emh)

Efficient Market Hypothesis

Efficient market hypothesis is basically is a very popular theory when it comes to investing and trading. It is a theory that states that the price of an asset corresponds and reflects with the sentiments, news and information surrounding the asset in the market. This has become very popular in the crypto space as social media activities most especially on twitter greatly affects the price of cryptocurrency assets in the market. In efficient market hypothesis, old information, sentiments, news have already reflected in the price of the asset, hence only new sentiments, news, information can affect the price. This makes price of a cryptocurrency asset very difficult to forecast or predict because new information, news, and sentiments in the market are random and can happen at any time. We see this a lot in the crypto market. When there is a negative news about a particular cryptocurrency, the price of the asset would most likely reflect the negative news which would see the price go into the negative zone.

Advantages of Efficient Market Hypothesis

• One of the advantages of EMH is that it brings down the over-confidence self-made experts who rely on their technical analysis skills.

• Another advantage of EMH is that it saves t

• Another advantage of EMH is that it can stop new investors and amateur investors from losing money due to their reliance of signals from technical analysts.

Disadvantages of Efficient Market Hypothesis

• One of the disadvantages of EMH is that markets are irrational

• Another disadvantage of EMH is that it can sometimes make the market look like gambling due to the speculative nature of the market.

• Another disadvantage of EMH is that fundamental analysis can still ignore the EMH. This means that fundamental analysis still works in many situations.

• Also, Another disadvantage of EMH is that technical still works in a lot of cases which clearly ingnores the EMH theory.

Conclusion

When it comes to trading and investing, market psychology and trading psychology are key elements. Trading psychology has to do with emotions, it is basically the emotions and behaviors which influences the trading decisions of a trader, which in turn influences the success or failure from the investment. When it comes to market psychology, there are different phases in the market which influences the price and direction of the market. All the phases in the market proves the idea of the different trading psychology that make up the market psychology.

@asaj