Part A (Case Study)

(1)

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

Since trading psychology refers to the way an individual may react or feel towards a coin then the case study of Jane is an example of trading psychology. The sole reason is because the case study was focused upon Jane's trading life and how she reacts to the market trend and this is the major concern of trading psychology.

(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?

P

(1) Emotional Bias

p
One of the dangerous bias which Jane brought to the crypto world was emotional bias
Firstly she brought in regrets after having both the coin she started feeling like she had missed out on a better offer of buying the coin at $9. This first Factor brought about the next factor.

The next factor was greed when the coin was at $20 value she had already made up to $5 gain upon her investments and because of greed she decided to hold on to her position.
Also hope played in at that moment because she had held her coin only with hope that it will exceed its all-time high of $20.

Another factor that comes to plays is the fear Factor. she was afraid and suspected that the coin was going to crash but because of her hopes, she decided to hold on to it but then her real fear which is to hold the coin at less than $5 came in and that was why she had set a stop loss to help her not to lose all her investments.

(2) Disposition Bias

Another bias that came into play was the disposition bias. Jane decided to average down her position as she saw that the price of the coin which she had invested in was going down and in this way she started to acquire more of the coin while the market psychology was negative.

(3) Availability Bias

p
This kind of bias plays out when an investor takes the easy way or shortcut by following what a company or individual has said about a coin without making their own complete and thorough research.Jane showed these bias firstly by getting tips from a group or source on which coin to buy.

(4) loss Avertion Bias

p
In this type of bias, a trader holds on to his coin and refuses to sell his coin because of the decrease in value but the trader will continue holding on until at some points which he can't hold it anymore then decides to sell but by this time at a greater loss. In real sense, the trader was trying to avert loss but rather incured loss. Jane followed this same path by refusing to sell her coin and when it seemed as though she was going to make a total loss, she sold them but at a loss price.

(5) Recency Bias

p
This bias type plays out when a trader only analyses a coin from its most recent events without considering the pieces of information hidden in the coins older event or history. Jane had judged the coin with its recent trend without checking other factors that influenced the coin in previous events.

(3)

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

p

How to avoid loss Avertion bias

An easy avoidance method of the loss aversion bias is to set rules that will go with your experience and temperaments. You could also set out your win/loss ratio, take profit targets and also at what point you will exit the trade.

How to avoid emotion bias

A way of avoiding emotion bias is to keep your emotions in check. if you feel too excited that too much profit is there for the taking, also remember that profits do not become so huge as you might think and in facts, the profit which you get is a function of your investment rates/value. This means that the profit which you get is in accordance with the money which you have invested. Also, you could choose to take some break hence you are losing your trading streak so as not to stir up anger or revenge trading which will come with greed.

How to avoid Availability Bias

To avoid availability bias, you must think thoroughly that if making money through the tips which was given were easy, then everyone will be into it. That is to say that nothing is ever sure and so you must try to make a thorough research on the coin which you wants to invest in before investing so that you can have some level of confidence even when the coins trend is in the bearish trend.

How to avoid Recency Bias

To avoid recency bias, always analyse and investigate thoroughly the coin which you want to invest in. Do not use partial information to judge for all time trend.

Part B (Research & Analysis)

(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.

p
Trading psychology can be identified majorly by technical analysis. Since it involves an individual, we can use the chart to observe how collection of different persons are behaving towards a coin. When you observe the order book, then you can see clearly what different individuals are expecting from a coin. That is, what price they want to buy or sell.

p
Market psychology can be identified with both technical and fundamental analysis. Since it is the collection of different peoples behavior towards a coin, we can use the price chart to know how people view the coin. If the coin increases, then you will know that more people has demanded the coin and vice versa. Also fundamental analysis can aid to detect peoples behavior at large toward a coin. When you analyse the top 20 ranking coins on the crypto list, you can be sure that there will be more investors in those top 20 coins than. Also, details such as trading volume, circulating supply maximum supply will show how people demand a coin and then you can access there overall behavior toward the coin.

Difference Between Market Psychology and Trading Psychology

The major difference between the two psychology is that trading psychology is refers to the individual behavior or feelings with which a person could react to a coin while market psychology is the totality or collection of various individual behavior or feelings toward a coin.

(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. (Add watermark of your username)

Overbought

(image source: Binance app)

When the price of an asset moves significantly in an upward and temporarily consistent trend in a given time frame, then we can say that the asset is overbought. This implies that the buy order at this particular time is ever increasing.
The over bought region is the region that ranges from 70% or more using the RSI strategy.

Oversold

(Image source: Binance app)

This is the time in the market of an asset where price moves significantly in a downward and temporarily consistent trend.
This implies that there are more sell orders without corresponding buyer in this time frame and it will lead to a decline in price.
The oversold region ranges from 30% and below using the RSI strategy.

Emotion bias

Like in the case of Jane(case study) her fear brought her setting a stop loss which ended up selling her asset. If the likes of Jane at about same interval, sell off their coins to avoid total loss, then market psychology for the asset will become oversold.

Availability Bias

This is one of the biases that influence the price very well. Many people invest into a coin because they hear that it has potential or because it's a trending investment. When people invest in uniformly in an asset because of the availability bias, then it will surely cause the asset to be Overbought.

(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 (EHM)

p
Efficient market hypothesis in simple terms is a thirty which states that the market is generally efficient. This theory states that
there is no safer way to approach the market to make profit because all the determining factors of a coin lies in it's price. This implies that your digital asset cannot be bought overvalued or undervalued.

EMH implies that investors can only gain higher returns when they invest on digital assets through pure speculation that poses a huge risk. According to EMH, digital assets at all time trade at their best prices on an exchange and so it is not possible that a coin is over bought or over sold. EHM implies that the use of all kind of analysis (technical and fundamental) fore investment cannot bring higher returns but investments done on pure market speculation.

Advantages of EHM

Dismisses the influence of self made experts

One good which this theory does is that when you understand that the current price of a coin reflects it's true value, then you cannot get into the web of self made crypto analyst who pose to know how to manipulate the crypto market better and dish out advices in when to and when not to purchase a crypto asset.

Saves Time

Since an investor knows that the crypto market is efficient, then, he doesn't have to spend much time in deciding which coin to invest in or starts looking for reasons to back up the need to invest in the coin. With mere gut feeling, an investor will quickly decide on which coin to invest.

Disadvantages of EMH

Markets are Volatile

The first con of EMH is that in contrary to the theory states, the crypto market is a very volatile place. At some time for some reason, there could be panic in the crypto market and so people will sell off massively there coins and so other investors would then purchase these coins at a low price and would make greater returns when the coins value increases. So, the disregard of market timing of EMH has been proved to be faulty.

Technical and Fundamental Analysis Works

While fundamental analysis will help you know the crucial information about the development, length of existence and reason for development of a coin, technical analysis uses the price chart to determine the next price trend. These two analysis together build up a good analysis before potential coin investment. EMH has stated that the use of these analysis will not bring about huge investment returns which is not totally correct. Factually, the crypto market trends by market history tends to repeats itself and so there are many people who earn already from the use of these analysis in different digital asset trading.

Crypto Market is not Gambling

The proposition of EMH that the crypto market investments should be by pure speculation cannot be obtained. This is so because no body will want to invest in anything that he doesn't have an assurance of. The reason so many investors invest in crypto market today is because they have done their part in analysing the coin which they want to invest in and so have gotten the least conviction and not by there gut feeling.

Conclusion

• Market psychology is the totallity of the average sentiment and prevailing behaviors of individuals in the crypto market. It is the sum of the trading psychology and its effect can be seen on the crypto market price.

• In general, to avoid the various biases, first understand your self and your risk tolerance level, never invest more than you can afford to lose and lastly, always ensure to make thorough check and analysis any coin which you want to invest in. Do not invest by mere speculations as there is more risk to encounter in the crypto market

Regards to professor @asaj