Crypto Academy/Season 3/Week 2- Homework post for @asaj by @kelechisamuel

The lesson today, gives a flood of light on market and trading psychology , clearly explaining all wrongs of individuals that bring about losses in the market and how to correct them on the other hand

I am @kelechisamuel and this is my homework post for @asaj

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QUESTION 1: The case study given is an example of what type of psychology? Explain the reason for your answer.

The case study in the passage was given based on the Trading pyschology because, like we see in the passage, the trading pyschology depicts individual thinkings and relative actions unlike the market pyschology which gives a collective understanding ie everyone's behavior and thoughts in the market.

From this we can draw a conclusion of trading pyschology being singular and market pyschology being collective

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?

Considering the case study above ,there were several biases affecting her behaviour including;

• Emotional bias ;
  We see emotional bias to be trade decisions made on momentary feelings ie basically could not be what's is supposed to be done but maybe the fear of missing out on trades could cause it .Like we see in the example, she tried averaging down her position because of the fear of missing out totally on the trade and finally allowed anxiety to let her sell off her coins that prospectively rose again.

• Disposition Bias :
  This kind of bias shows a kind of system where the trader utmostly tries to escape losses without thoughts of profit being coined out through the situation . The disposition Bias entails the trader holding even when the crypto stock is gets depreciating in value .
  Just like Jane in the case study who kept on holding on a falling market instead of selling ,to buy back later just like she finally did in the averaging down situation she was just bent on avoiding more loss in the situation and not even maximising the situation to grasp profits

• Confirmation Bias ;
  A confirmation is a bias that goes for the trader looking for belief or information that suits his or her current decision and in the other vein ignores the actual news that contains the decision supposed to be taken .
  Just like Jane in the case study she immediately begun to buy more at the falling market and sold off at the market low ,maybe because of a mind advise or friend advise which wasn't the main idea , since everyone knows that the bulls return after the Bears

• Representative Bias ;
  This particular system is understood as treatment of issues in accordance to previous events happened ie here traders take decisions based on what happened formerly .
  For example in the case study Jane saw a falling market and felt that like it was falling, it was going to completely fall and so she decided to sell which brought her later regrets.

• Self attribution bias ;
  This kind of bias could be seen as a way of claiming prowess and denying weaknesses ie traders tend to receive the praise for good market movements and then leave the bad movements anonymous like in the case study she tried to shift the blame of the falling market by selling off ,and in the same vein ,creating a heavy loss .

QUESTION 3: List and explain how each bias you have mentioned can be avoided?

All the mistakes made could be avoided ,one way or the other.including the following ways ;

• Firstly the emotional bias could be avoided by thinking and studying before making trades decisions and also not just following the fear, sadness we feel before we make trades as anyone could benefit from a market no matter it's state

• Disposition Bias could be avoided by having major focus on both making profits and avoiding losses because leaving one for the other could bring drastic losses .

• When traders seek perfect news and information and not just something to sooth their beliefs and opinions ,they make good decisions and it helps in avoiding of the confirmation bias

• The representative Bias can be eluded by understanding that the market is a trend ,ie it can take any turn at any time and so not just taking old events to refer to the present market ,it will help in a better trade .

• Self attribution bias can be avoided by every trader ,taking full responsibility and account his trade movements ,for example in the case study Jane decided to sell once she found out that the market prices were down and she had bought other stocks too .
  Assuming she decided to hold down till the end with the perception of the fact that the market would rise again ,she would have made profits

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.

The technical analysis is better used in the monitoring of market behaviour and trade psychology since general price and market cap could be seen as being a result of variations in emotions such as fear and greed .

More so this technical analysis tends to ascertain price directions by proper study of historical data ,mostly price level and market cap level .
There are also differences between trading psychology and market psychology including;

• The trading psychology refers to a one man or singular incentive on trade movements in the market while the market psychology refers to a general/collective understanding

• A trading psychology could affect just one's trading mind and action but a market psychology would affect a market cap and price controls in the market

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. (Add watermark of your username)

We can deduce market psychology from crypto charts by technically analysing the trading volume ,candle stick movements and check the market highs and lows in the market .
We could see different bias in the charts below ;

• Emotional Bias ;

Considering this chart of XRP below ,we see the bullish trends of the Cryptocurrency and let's imagine John ,who didn't want to miss out on the big returns (FOMO),bought at 2050 without proper analysis now we can see the returns in less time of how the market got blown half way.

• Disposition Bias :

Here we see traders trying to evade losses at the cost of overlooking prospective profit situations like we see a chart below of Bitcoin with a shaky market response from January and we imagine Flora who kept on having stop losses and finally sold off to avoid further losses .
Now we see a 150% rise in the next two months in the crypto value of Bitcoin just after she's sold off.

• Confirmation Bias ;
  

We understand such bias to be a a situation of people seeking news favourable to their wrong trade actions for example like the chart we see here of Ripple's low value at the period of their lawsuit and rumours that they were soon going into extinction and Job ,a cleric officer sells off since there is no major progress throughout November till December he bought so he sells at January and at March up the year we see a whole recoveries of profits over a trade he gave up on.

• Representative Bias :

This one explains treatment of situations in trade as former events that took place for example in the Ethereum Chart ,we see it's steady rise up to about ,4.500,000 and Joe, a trader who assumes the market to continue being bullish since it's been up since ,but finally it gets to be over bearish instead and loses a whole lot of funds

• Trend chasing bias :
  
  
  this could be seen as the wanting to buy assets based on the high returns they have had in the past for exmsleydue to the passive hypes on Bitcoin ,everyone wants to buy Bitcoin and we see a case of Lemar who takes a loan to buy Bitcoin at 59 million naira expecting more bullish returns but in less than a week the asset worth is down to 50 million and even lesser.

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 could be defined as a phenomenon stating the responsiveness of price levels of crypto assets to news in the market .
We understand this to be a kind of speculative move in the market that affects the value of assets soo immensely .For example the price of Bitcoin that got a raised head once Elon Musk declared his acceptance of Bitcoins to the Tesla company .

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There are also merits and demerits of this Efficient Market Hypothesis including ;

Advantages include ;

• It helps new investors or traders to reduce losses ie it gives them proper knowledge and guards against the failures of the technical and fundamental analysts .It clearly explains the speculative nature of the market also to them and makes them desist from seeking huge profits maybe by selling over value stock and buying under value stock and in the end incurring huge losses

• There is less stress and time incurred in this process unlike going about to getting fundamental and technical analysis and getting thoughts twisted in the process
  *It defeats the aim of people who claim to own the market in other words gives everyone a chance to manipulate trade decisions and profit makings at the same time

Disadvantages ;

• This system creates way for irrational markets ; this is a very considerable factor , as the easy influence on the market, under values and over values stock leading to inflation if not controlled .
• It gives the fundamental and technical Analysis a dumped idea ; The EMH makes fundamental and technical analysis look unimportant since they are seen to be wastage of time but in the actual sense they are major sources of analysis
• It gives the crypto market a hazy view and nature ; Now when assets are pursued by speculations , they seem like they're been gambled on and alters the purpose of study , leaving real experienced traders at loss and just changing the course of trading

CONCLUSION

It was a bit stressful but I was able to understand clearly from the lesson the concept of market and trading psychology and reasons people get biased on their trade actions , how to avoid them inclusively .
We equally see how to analyse pyschology including drawing efficiently market Hypothesis it's advantages and disadvantages inclusive.
Thank you all for going through my homework post

Cc
@asaj