Crypto Academy Season 3 Week 2 - Homework Post for @asaj || Intermediate Course: Market Psychology & Trading Psychology || by @daiky69

Today we have entered the second week at the crypto academy, the crypto classes have been updated, as well as the homework. And on this occasion I would like to take a class from professor @asaj on "Market Psychology & Trading Psychology". I am interested in taking his class because the theory explained by professor @asaj is very good and easy for us to understand, thanks to him.

Market psychology & trading psychology almost have the same meaning, there is only a slight difference between the two discussions, so we must carefully read and understand them. There are two parts of the questions given by professor @asaj in his class, the tasks are as follows:

Part A (Case Study)

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

• 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?

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

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.

• 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. (Add watermark of your username)

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

I will try to answer the questions one by one, if later I am wrong please correct me.

PART A

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

After reading all the case studies written by professor asaj, I conclude that these case studies are a sign of trading psychology. Not only Jane who has made mistakes and has problems with trading psychology, I personally have also experienced it. Why did Jane invest her money in the coin when the coin was in a bearish trend, of course the main reason Jane did this was to anticipate price increases and also look for big profits.

However, along the way, Jane couldn't control her emotions and panic ensued, so Jane sold all her coins in anticipation of a bigger loss, or commonly known as panic selling.

The price movement of a token either up or down is caused by market psychology, and what Jane experienced is called trading psychology because Jane acts individually without paying attention to market conditions first. Jane began to lose her mind and could not control her emotions well so Jane made decisions in a hurry without doing any analysis or asking other people before making a decision.

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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?

It is quite difficult for me to determine the 5 biases that occur in Jane's case, but I decided to choose the following 5 biases:

1. Emotional Bias
2. Confirmation Bias
3. Self-Attribution Bias
4. Herd Mentality Bias
5. Bounded Rationality Bias

Emotional Bias:- Jane made an investment based on her feelings and wrong calculations due to high hopes and also greed, then when the token price didn't go up, Jane became scared and sold it, but when the price started to creep up Jane began to regret her decision that was too hasty.

Confirmation Bias:- is our tendency to seek evidence to justify our decisions and beliefs and ignore facts and evidence to the contrary. Let's make an illustration, Jane makes a decision by continuing to buy tokens when the price is falling and in a bearish trend, then when the token price doesn't go up, Jane sells all the tokens to prevent more losses.

Then Jane opened the telegram group and got information that the token price continued to fall and Jane seemed happy because her decision was right and also got justification for her decision in the telegram group. However, Jane ignores the fact that almost all tokens will experience a bearish trend but then a bullish trend will appear after that although sometimes it takes a long time.

Self-Attribution Bias:- is the tendency of individuals to attribute success to their skills without the intervention of others and to attribute failure to factors beyond their control. In Jane's case, if Jane were able to control her emotions by holding the token longer and then selling it at a big profit, Jane would puff out her chest because she has managed to get a big profit thanks to her prowess in investing. But in fact Jane failed with her investment, then Jane looked for an excuse to blame her failure, in Jane's case, she blamed the market and she even blamed the stop loss that had been set by herself.

Herd Mentality Bias:- also known as the bandwagon effect, is the psychological state of a person in performing an action and also justifying an action because everyone else is doing it. Forms of herd mentality bias such as panic selling or buying. In Jane's case she followed the instructions from the telegram group to buy some tokens even though she lacked understanding and sensitivity to the tokens, then Jane continued to buy tokens at a decreasing price, then she became impatient and started selling them again.

Bounded Rationality Bias:- is a decision-making process where we only try to find the good enough instead of optimizing (the best possible decision), for example as in Jane's case study. Jane made a good decision to sell her tokens so she's no longer stressed and her emotions are more stable, but not the best decision because the price has strengthened again and Jane can even make a profit from it.

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

Jane be able to avoid emotional bias by:- Using good analysis and strategy, Jane must also be able to control her emotions in trading. Jane should be able to make a profit as long as she can maximize her self-control and emotions with the initial strategy she carried, thus Jane should be able to carry out her strategy in an unhurried and structured manner. No matter how good we are, no matter how smart we are, we will still lose with bad emotional control.

Jane be able to avoid confirmation bias by:- Jane shouldn't need to justify the tokens she's selling, but Jane shouldn't ignore the fact that the tokens are buying when the price is down. Jane should be able to refrain from being overbought against the token and waiting for the support level of the token.

Jane be able to avoid self-attribution bias by:- Jane could have avoided a loss in investing had she not been too trusting and made her own decisions without understanding the intricacies of the token. Jane doesn't have to blame the market or the token, but Jane should be more able to control her emotions and ask other people's opinions first or read articles about the prediction of the token.

Jane be able to avoid herd mentality bias by:- Jane can also avoid losses if she doesn't join in investing in tokens that she doesn't really understand, Jane should make a strategy and try to run it without getting involved. There are times when we have to follow others and there are times when we have to decide for ourselves.

Jane be able to avoid bounded rationality bias by:- Doing analysis and trying to find the best decision is not only good. Jane should follow the development of the token and not rush into making decisions, then after getting enough information by doing technical or fundamental analysis then make the best decision, not just to satisfy herself.

PART B

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.

To identify market psychology we can use technical analysis. Technical analysis provides greater insight into market movements than fundamental analysis. With technical analysis we can use several indicators in predicting crypto prices and markets, including the relative strength index (RSI), moving average (MA), moving average convergence divergence (MACD), stochastic RSI (StochRSI), and lastly there are bollinger bands. (BB).

Similar to trading psychology, we can also find out the state of trading psychology by using technical analysis. There are some people who sell tokens or buy tokens when the tokens are in a bearish trend, we can see how many buyers are with sellers and if there are more sellers than buyers it means the people who are selling or oversold are in trading psychology and can't control their emotions so well that they make decisions in a hurry, and vice versa.

How to identify the difference between market psychology and trading psychology, most of us will probably ask this question. As professor @asaj explained, we can identify with market and individual actions.

Trading psychology is the individual behavior of a trader in taking action without seeing the movement of market conditions first, also taking hasty decisions, and will not affect the market.

While market psychology occurs due to the behavior of all individual traders, token prices can change at any time based on the general emotions of traders, if general behavior continues to sell tokens or buy them it will lead to market instability.

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. (Add watermark of your username)

We can indicate the psychology of the market by looking at the crypto charts, and to me that is very clear. Look at the picture above, we can see the market moves from steady then creeps up slowly and reaches a peak before falling back to the bottom price or the relevant price.

1. Sideways
Market conditions do not experience sharp movements or price movements only occur a small difference, this indicates that between buyers and sellers are very stable and buyers or sellers are not influenced by hasty decisions or other things.

2. Uptrend
The token gains value because it is influenced by market psychology, traders hope that the price will continue to rise and they will not miss the opportunity to buy the token and resell it when they get it.

3. Bullish
The condition where the token buyer is more dominant than the seller so that the price becomes higher thanks to the increasing market demand, here we can see that market psychology really wants to have the token to be re-sold at a higher price or other reasons.

4. Bearish
Where the condition of sellers is more dominant than buyers, causing prices to fall, on the other hand people start to panic and think prices will not return to their original levels and choose to sell them in order to reduce further losses.

Then there are 5 biases that can cause a coin to be oversold and overbought, including:

1. Emotional Bias
High hopes and also greed can cause people to overbought when the token price is in a downward trend, then when the token enters a bearish trend people start to panic and oversold.

2. Confirmation Bias
Excessive decisions and beliefs by ignoring facts to the contrary can cause people to be overbought or oversold.

3. Self-Attribution Bias
Excessive self-confidence in investing can lead to failure, people with self-attribution bias usually rely heavily on self-skill and self-confidence before investing. They can also be overbought and oversold when the market does not match its predictions.

4. Herd Mentality Bias
Joining in on investing can make people overbought or oversold because they follow what other people are doing in the market without having a clear plan and strategy.

5. Bounded Rationality Bias
People can act overbought or oversold when influenced by bounded rationality bias, because most people will do what is good for their investment instead of doing their best to make them overbought or oversold.

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