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Hello fellow steemians my name is James Joseph and this is my Assignment post for Professor @asaj on Trading Psychology

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TASK

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 behavior with examples of how it affected her behavior?

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 the efficient market hypothesis (emh).

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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 where an analogy was made with our subject of study i.e Jane was a typical example of Trading Psychology because from the definition we can see that trading psychology has to do with the mindset, sentiment, and mental state of an individual in particular. The Case study gave us a picture of Jane's mental state and focused on decisions Jane as an individual was making decisions that were affecting her well being both sleep-wise and emotionally so it's accurate to say that the type of psychology displayed here was Trading psychology mainly because the case of study was about an individual in particular not a group or lots of people

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?

In the case of study, I observed from studying and further research that the following Biases affected Jane's trading behavior.

• Emotional bias
• Disposition bias
• Herd Mentality Bias
• Bounded rationality bias
• Confirmation bias
• EMOTIONAL BIAS(1)

This was the first bias Jane started to experience specifically the greed bias Jane's assets went up by practically 33.3% and to any trader that is a good profit and she could have closed after the profit but the greed bias made her feel she could get even more if she held on a bit longer but it didn't, if the Greed (Emotional) Bias wasn't there she would probably take profit and closed her order as soon as she noticed the bearish trend starting and wouldn't have gone through her emotional and mental trauma

• DISPOSITION BIAS (2)

The disposition bias was also a bias that influenced her trading behavior, she saw the market in a bearish trend and felt it was an opportunity to get rid of the regret bias she had earlier of not buying the asset when it was cheaper than when she did, so she kept buying even when she saw the market was still in a downtrend this behavior called "averaging down position" is a typical example of the Dispositional Bias and it affected her ability to think clearly and gave her lots of sleeplessness

• HERD-MENTALITY BIAS (3)

If Jane had done her own research and knew where to source for and make proper analysis rather than rely on signals she probably would have gotten a heads up on the market trend and closed her order, Following other peoples signals or financial decisions in trading is what I term to as Herd-mentality, she could have done her research and gotten a heads up on the downtrend and avoided the emotional and physical trauma she had to go through

• BOUNDED RATIONALITY BIAS (4)

This bias is seen when an individual doesn't take his /her time to consider alternatives options before making decisions and in our case study, we could see a literal example where Jane didn't stop to consider before deciding whether to close other or not she spontaneously felt it was time to get more of the assets now that it price has fallen way below where she bought it.

• CONFIRMATION BIAS(5)

Jane exhibited this bias when she decided to lean solely on the information she got from her group in form of a signal to ascertain her decision to purchase the asset, Confirmation Bias is seen when an individual gets information to back up his bad decision which in this case was the signal, she believed since the signal was from a trustworthy source it was definitely going to go in her favor eventually which in the end was actually a bad decision

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

• Emotional Bias

Content would have saved her all the trouble the went through at first the market was going in favor of jane if she had simply been content with the profit she had made of an additional 5$ she would have closed her order and made a profit hence avoiding the trauma she had to go through

• DISPOSITIONAL BIAS

Avoid "averaging down positions" If a market continues in a downtrend avoid the mentality of buying more while it's cheap as it is very possible the market can continue in a bearish trend until the stop-loss limit you set is triggered and you end up losing all your capital or investment

• HERD-MENTALITY BIAS

Proper technical and fundamental analysis and research by an individual will keep you away from falling into this bias, if you do your research properly you will most likely not follow every signal or the mass in doing or purchasing whatever assets they are rushing to buy

• BOUNDED MENTALITY BIAS

In the world of trading, I believe the more time you invest the better your chances of succeeding, if Jane had spent a little more time confirming her signal or studying the asset she was about to buy it would have save her a lot of energy and sleep

• CONFIRMATION BIAS

Get a lot more information if you want to avoid this bias contemplate on the Source of your information, read diversely on what you are about to invest in, that way you get different perspectives and angles instead of just justifying your decisions with a single perspective or information

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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.

In trading, world analysis helps us predict the outcome of the market and price trend, as the professor explained Trading psychology is more like a collection of Trading psychology simply put. If there is an uptrend it indicates positive psychology among the traders and hence everyone one is happy and excited which leads to individual acquiring more assets and leads to the market being overbought, now with the help of a technical indicator like the Japanese candlestick chart alongside the Bolinger band one can easily keep track of market psychology as these charts will quickly indicate if a market is overbought or oversold which is equivalent to positive psychology or negative psychology.
The Bollinger band indicates and tracks volatility in the market SMA while the Japanese Candlestick Chart focuses on opening and closes and indicates visually whether a market is overbought or oversold and all this information about market psychology can be absorbed by merely just glancing at this chart and indicator combo. Visual simplicity is a reason I would pick this form of analyses
BOLLINGER BAND AND CANDLESTICK CHART

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Identify the differences between trading psychology and market psychology.

The most obvious and notable difference between the two psychology is in their explanation, the Trading psychology is about the mindset of an individual specifically when making stock or crypto decisions while Market psychology is about sentiment or mindset of overall traders in general when making stock or crypto decisions.

Tabular difference between market psychology and trading psychology

TRADING P	MARKET P
Focuses on an individual trade	Focuses on an entire network of traders
Cant cause trend in market price	Can cause Bullish or Bearish trend
Cant be analyzed by an indicator or chart	Charts and indicators can be used to analyse this type of psychology

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How can you measure market psychology using a crypto chart?

Simply by looking closely at your indicator or chart if the market is in a bullish trend that indicates or to some extent is a measure of Traders psychology indicating positivity it means people are happy and are buying more of the assets which ends up most times with a market being overbought

But if you look at the chart or indicator and you see a downtrend it means the market is losing value psychology is on a decline and traders are hurrying off to sell their share of the asset to avoid loss

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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

• Bounded rationality bias
• Trend chasing
• Disposition bias
• Herd-mentality bias
• Emotional bias

Bounded rationality bias

The Bounded rationality bias tends to affect the market in both ways too and can lead to oversold or overbought market were because individuals exhibiting this type of bias don't really have time to research or make an analysis of the asset they are about to buy they just tend to make a spontaneous decision and if a market is already in a bullish trend they tend to push it to be overbought and vice versa

Trend chasing

For those exhibiting the trend-chasing bias that always looking for a market that is already in a bullish motion to buy or invest in they always tend to make market overbought cause by buying more when the market is already in a bullish trend or in a bearish trend and they end up making the asset of that specific time period to be overbought or oversold, this type of bias usually favors both a market uptrend and downtrend

Disposition bias

This type of bias most favors downtrend as it a bias that tends to give traders a psychological edge that market trend will turn in their favor so they end up buying more and in the end they end up losing more than they initially invested

Herd-mentality bias

so does herd mentality bias, they buy because everyone is buying or sell when everyone is selling without proper research of their own which ends up making a market overbought if it was already in a bullish trend or oversold if it was in a bearish trend

Emotional bias
Emotional bias affects the market both ways too, due to the Fear of missing out bias an individual will follow the crowd and buy a crypto asset that has finished making its uptrend and about to start a downtrend or a dip and end up losing a good percentage of his capital or assets

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

Efficiency market simply put means how well news and data affect the market trends or prices, but the efficiency market hypothesis or theory in the financial sector which states that market prices reflect all current and available data which makes it practically impossible to beat the market price invariably, In a nutshell, the EMH states that it is impossible for a trader to purchase undervalued stock cause the current market price reflect current information available, which means the only way to make a profit according to the theory is to take risks or by getting lucky.
We have three types of EMH

• Strong market hypothesis
• Semi-strong market hypothesis
• Weak market hypothesis

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List and explain the advantages and disadvantages of the efficient market hypothesis (EMH)
ADVANTAGES OF EMH

• Outperformance

The EMH makes it very difficult for individuals to beat the market price consistently cause u cant see ahead or accurately predict what new information is about to be made public or in what way it will affect the market prices

• Proper Value

Assets cant be inflated or undervalued by anyone cause it's the information or data made available that determines an asset's worth hence no individual can raise his own share of the stock prices up

DISADVANTAGES

• Complexity

The EMH is a bit bulky and a beginner to the crypto world most likely dosen't know a theory like EMH even exists and even if they know they might not fully understand how to work around it or how it influences trends

• Risk

Because the EMH is impossible to outperform or anticipate it means the most prominent way to make money is to take your chances and raise the stakes high by taking manageable risks

Conclusion
Knowledge is power and in the crypto market I believe knowledge equals profit the more information a trader gets about an investment the lesser his chances of losing money is, understanding how Trading psychology, Market psychology and EMH can affect the market trends give a trader an edge on the maximizing profits