Crypto Academy Season 3 |[Assignment post for professor @allbert –week 5] Psychology and Market Cycle
In this week's lecture we discussed the Market Psychology and how it affects our trades.
In this assignment I'll be discussing FOMO, FUD, investing in a crypto asset, market cycles and much more.
Here we go;
1-Explain in your own words what FOMO is, wherein the cycle it occurs, and why. (crypto chart screenshot explanations needed)
You wake up from your cell phone ringing constantly. It's your cousin calling you over and over again. You attend the call and here an excited voice of your cousin says that the price of Ethereum is rising and he tells you to invest in it . You dont pay much heed to it. You get to your office as a routine. While having a talk with your colleague, the topic of crypto comes up and he says that the price of ETH is on a rise and you should definitely invest in it.
After he leaves in curiosity you open up your binance account and notice that Ethereum price is actually on a rise. You start getting thoughts and you tell yourself that you'll invest in it some time later if it keeps on rising.
A couple of days pass. You open up your Binance account and see that price of ETH/USDT has sky-rocketed from $2500 to $4100. A sudden tension surrounds you. You feel like a fool on not investing earlier. You start thinking of your cousin and your colleague who would be buying cars from the profits they made from this Crypto asset. You get a feeling of missing out on those profits. You curse yourself for not investing at that time. But you think that even if not now then you will miss out on the opportunity of making profit. You get a Fear of Missing Out. At that moment, you make an impulsive decision and you invest $1000 in Ethereum when its price is on the top, hoping it would go even higher.
You have a feeling of contentment. You feel satisfied that you'll finally be getting your dream house and that dream car that you've been wishing for, through the profit you'll make. Little did you know that your FOMO would lead you to further anxiety.
The price of the asset faces slight retracements at the start of a bearish trend. The whales which had invested at the start, withdraw their profits. With them other traders start to withdraw with profits as well. This results in the fall of the price. You start getting anxiety but you still hold on to your asset in hopes of its price rising up again. But it does not happen. As traders keep on withdrawing, the price keeps on falling,.
Finally, the price hits a low where the feelings that dominate are anger and depression.
So what did we learn? What is FOMO?
FOMO is the fear of missing out on something that others are making profits with. FOMO will lead you into buying an asset at the tip of a bull trend(as we saw in the example above) only to lose all their investment, as at the top prices usually take a downward turn. It is an impulsive decision that you take due to FOMO which leads you to a bigger loss.
2-Explain in your own words what FUD is, wherein the cycle it occurs, and why. (crypto chart screenshot explanations needed)
You check your whatsapp Crypto group where there's speculations about an asset called LUNA Your trading actions depend merely on the forecasts posted in that group. You place your buy trade at $15 and it is executed.
Over few days the value of your asset rose to $20 but you're still not satisfied as you think that if you had invested in this coin a bit early when it was trading at $10 you could have had more profits. So you don't sell your coin but you decide to hold it waiting for its price to go even further up.
Over a course of few days, the value of the asset goes downhill. You don't panic and invest more in this coin, hoping that you would get more profits when it's price will increase.
But, the price doesn't recover. It continues in a bearish trend. You start getting anxious over it. You keep on checking the market, affecting your life.
The price still follows the bearish trend. A feeling of Fear, uncertainty and Doubt overcomes you. You don't know what to do. You decide to take suggestions from your whatsapp group where traders are suggesting you should sell it.
You wait for another day, praying to God to increase the price of your asset. But had trading world being working on prayers, a lot of things would have been going differently. In a state of FUD you muster up your courage and sell your all assets at $8
After you've sold your assets you notice the market going down even further. You get a feeling of satisfaction as you think that had you not sold your asset at $8 you'd have been facing a bigger loss.
A few weeks pass and the Market experience a Market Correction, ie, a change in the movement of the price of an asset opposite to the market trend.
The price breaks the resistance and overcomes the $10 point. You feel like a fool. You start thinking that you shouldn't have sold your asset. Due to your panic selling due to the FUD you sat there like a loser cursing the crypto market and all the traders.
So what did we learn? What is FUD?
FUD or Fear, Uncertainty and Doubt that is often spread theough social media can cause people to take foolish and impulsive decisions usually in a bear market, which results in further loss of the trader. Due to the fear, you sell your assets at the bottom of a bear market, a place where you should buy and hold, you sell and run.
3- Choose two crypto-asset and through screenshots explain in which emotional phase of the cycle it is and why. Must be different phases
a) LUNA/USDT
after a thorough understanding of the market psychology and the emotions which drive a market, conveyed by you professor @allbert I believe the market is rallying through a HOPE PHASE
Lets analyse why. Just like we all know that the market has different phases. Just as we observe in the example above. It started with hope and an accumulation phase where the whales started investing. This took the market in an upward direction,ie, a start of the bullish market. More traders invested in the trending market dragging it further in the uptrend phase
Now when we reach the thrill or Euphoric phase of the market. If you had invested at the start of this trend that its well and good for you as you could withdraw with your profits. But if you entered the market at the euphoria phase due to FOMO, then straighten up my friend as you're about to get anxious.
Now we see above in the example that the market is in a bearish trend. I have marked different phases on it. If you look at the phase after the disbelief phase we can observe the hope phase as I believe that there will be market correction and the market will move in the upward direction. I will be trading at this point due to this and even if the market doesn't go in my desirable direction, and moves in a downtrend, I will not sell and run instead I will buy and hold.
b) IOST/USDT
After a good analysis, I've observed that the IOST is in the Euphoric phase which is rallying towards a complacency.
This setup started after a market correction from the previous bearish trend. We observed the price rising which gave us a bit hope.
From there we observed the bull run of the market as the price entered the Optism and Belief phases progressively. This is where people invest. As quoted by the professor:
This is where people mortgage the house, sell the car, the dog, the mother-in-law, all in order to obtain more capital to invest. In turn, they spread the word with friends and neighbors about this wonderful cryptocurrency that is going to change the world.
This leads the market to the Euphoric Phase as more and more traders have started investing in it. At this point some traders who have succumbed to FOMO invest heftily in the asset only to face a trend reversal. From this point market rallies towards the Complacency and starts the bearish trend.
Now according to my analysis the best time to enter the market is at the end of the bear trend as we all know market correction occurs in the Cryptomarket. Or if you've missed the chance of investing at that point, then you can enter at the optism phase when the market is moving in a bull trend.
The best time to exit the market, for me is the Euphoria Phase where you can sell off your assets for good profits and then wait for another setup, a bear trend, and then repeat your trade by entering at end of the bear market.
Sometimes, the trend does not go in our favours. Sometimes you would've hoped that the market would take an upward shift after a bear trend, but it does not happen, instead the market further moves downwards. At that point you do not have to give in to FUD and instead hold your assets.
4- Based on the analysis done in question 3, and the principles learned in class, make the purchase of 1 cryptocurrency in the correct market cycle. The minimum amount of 5USD (mandatory), add screenshots of the operation and the validated account.
For this question I'll be investing in LUNA as I have also discussed about this asset in the previous question.
First of all a verification picture of my Binance account
a) I clicked on the Buy Luna option as shown in the screenshot below.
I got 1.3 LUNA from $10.54 at the rate of $8.109
A picture from my wallet for verification of the trade
Invested in the correct market cycle as the trend will move towards a optism phase,ie, a bullish trend.
I thoroughly enjoyed making this assignment and I hope you have a good read as well professor @allbert
In this lecture we learned about the psychology and how it affects the market. We learned about the different phases in the market and how traders' emotions and psychology have an immense affect on the market. How hope follows the disbelief and how traders succumbs to FOMO in the Euphoric Phase. I discussed everything thoroughly. We learned about how Traders are affected by FUD and they sell of their profits in a bear market in loss.
Furthermore I demonstrated the different market phases on two different crypto assets and then Executed a trade on one of them, ie, LUNA, in a correct market phase.
This is it from my side. Hope you have a good read.
Thank you
Ps: all screenshots are from my verified Binance account and taken from a Laptop so that they are properly alligned
Regards
@huzaifanaveed1
