Crypto Academy Season3 | Intermediate Course: Market Psychology and Trading Psychology

Greetings Steem family. Thanks @asaj professor for the notes on trading and market Psychology. My entry is below;

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

ii)Using the case study, list and explain atleast 5 biases that influenced Jane’s trading behavior with examples of how it affected her behavior.

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

B)What type of analysis can be used to monitor market Psychology and trading Psychology and why? Identify the differences between trading and market psychology.

II)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 a watermark of your username)

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

A) what type of psychology is given in the case study and explain why.

In the case study, it is trading psychology that is given. Trading psychology deals with the mindset of and individual during decision making in the stock or crypto market. It focuses on the trading behavior if one a single individual.

Reason for pointing out trading psychology
In the case study, we are given a single individual, Jane, who gets to know about a coin through her telegram group and makes a decision to purchase this coin. She holds her coin and in the due process when price levels are low she decides to stock more of the coin in hope of selling it off very soon when the price levels are high so as to make profit but things don’t go on as she expects.Every thing in the case study looks at the trading behavior of Jane.

Using the case study, list and explain 5 biases that influenced Jane’s trading behavior with examples of how it affected her behavior.

• Emotional Bias
This is when a trader decides to make trading decisions basing on his or her feelings. In the case of the case study, Jane makes a bad investment decision.
In fear to lose out on the current trading coin, she purchases the coin and holds it. Due to greed, she decides to stock more of the coin when it’s prices were low, hoping to sell the coin off at a time when the market prices are stable and high. This does not work out as Jane had expected because the market prices had dunked fir a long time and she lost patience and sold off at this time. After some time, the prices started stabilizing which made Jane realize she had made a loss and starts regretting why she sold of her coin that early.

• Mental accounting bias
Jane receives information in her telegram group about the coin and she makes her own market analysis on the profits she hopes to get. Her analysis is disrupted by the market trends that keep declining time to time. She gets emotionally stressed because she checks her wallet more often to see what is going on with the coin price and starts regretting why she invested her finances in the coin.

• Loss aversion bias
This bias occurs at a time when Jane refuses to admit her bad investment mistake and tries to hold her coin asset even at a time wen its value had declined. She chooses to hold her position at all costs to hold her coin and even purchase more when the prices were low which was not a right decision because there was a very high risk in investing much in a coin that had a very low price. She doesn’t mind about making profit anymore and focuses on managing her loss.

• Trend chasing bias
This is the strongest bias to avoid in many investors like Jane. Jane believes that she can predict the price patterns and they turn out to be valid. Little does she know that the patterns are already priced. She trusts her instincts and purchases a coin and with time she gets happy seeing its prices decline and purchases more thinking that she will gain much in future when she sells the coin at a high price but unfortunately the price keeps sinking and she sells of her coin on disbelief at a loss.

• Anchoring bias
This happens when a trader becomes Less flexible and is fixed on the existing information they find. Jane in this case gets information from her telegram group and she doesn’t think twice but becomes fixed on the information she gets and goes further to make her decision to purchase the coin that was posted. She loses hope of reaching the price she thinks she wants to sell the coin at with time due to the sinking price levels. She was blind to recognize trading opportunities and focused on the information she gets in the group.

List and explain how each of the biases you have mentioned can be avoided

• Emotional bias
Emotional bias can be avoided by making proper research about the investment one wants to make and acquire right information so as to be able to make the right decisions that are not based on feelings but rather prior research.

• Mental accounting bias
This bias can be avoided by a trader making a technical analysis of the crypto assets that he or she is holding. For example, If the technical analysis conducted says that there will be a loss in holding on stellar(xlm) and a profit on steem. This means that the trader should sell of the stellar coin earlier to avoid further losses arising from holding on to it.

• Loss aversion bias
This can be avoided by focusing on making profits rather than managing losses. The fundamental analysis is required to study the price patterns well so as to be in position to make proper decisions. The trader must admit to his bad investment decisions and focus on making profit out of an opportunity instead of managing the losses made.

• Trend chasing bias
Trend chasing bias can be avoided by understanding that when a trend is identified, the market already knows about it and has exploited it even before you. So the trader doesn’t have to risk buying coins at times when they predict profits. In this case there is need to create an objective and an unbiased strategy and stick to it no matter what.

• Anchoring bias
We can avoid Anchoring bias by having more knowledge through making research, improving our reasoning skills and consulting experts to help out when making decisions. This reduces the impact of Anchoring bias in trading.

What type of analysis can be used to monitor market psychology and trading psychology, and why? Identify the difference later between trading psychology and market psychology.

There are two types of analysis that can be used to monitor market psychology and trading psychology which are as follows.
Fundamental analysis
This is the analysis of financial statements such as prices in the market. Using the fundamental analysis, you can measure the value of something. It mainly looks at factors that determine price levels in the trade market.

Technical analysis
This is the way of predicting price movements in the financial market by using the past prices, charts and market statistics. It enables a trader look at previous prices and evaluate the price patterns and form accurate predictions of future prices.

differences
Trading psychology deals with personal emotions while market psychology deals with the behavior of many people.

Trading psychology deals with a personal transaction while market psychology deals with trading volumes.

Trading psychology leads to making hasty decisions while market psychology leads to market instabilities due to the many views from different people.

How can you measure market psychology using a crypto chart? Select five trading biases and explain with screenshots of any cryptocurrency chart how the biases can cause a coin to be oversold and overbought.

You can measure market psychology using a crypto chart by finding out the trends which include;

Accumulation trend
At this time, the prices are very low because coins are being bought and sold in small bits. Most of the traders here prefer holding on their coins.

source

Upward trends
At this time on the market, there is over buying which leads to an instant rise in prices as a result of the bullish trend. Traders her buy at a high rate because they hope to sell of at good prices afterwards.

source

Downward trend
This happens at a time when selling is at a higher rate in the market. It makes prices sink and brings about emotional stress to traders.

source

ii)Biases that can cause a coin to be oversold or overbought
• Emotional bias
Due to fear emotions, traders can choose to sell their coins which leads to a situation of oversold and due to hope and greed they decide to purchase making the coins become overbought.

• Disposition bias
This mainly looks at the decision making of a trader. A poor investment decision can lead to situations of overbought and oversold coins.

• Mental Accounting bias
When prices of coins are affected in any way, it may result into poor investment decisions hence making coins be oversold or overbought.

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

Efficient market hypothesis, also known as efficient market study consists of both fundamental and technical analysis of the coin to analyze and determine market trends that are to be experienced in the market. It assesses risks that are in the market trends.

Advantages of EMH
It helps in conducting the risk assessment of different investment opportunities.

Maximization of profits of the coins

Helps new investors know that the market is speculative and learn to invest after prior research rather than buying on their feelings.

Disadvantages
It brings about losses because it is involved in high risks.

It works with technical and fundamental analysis only hence eliminating ordinary traders

Conclusion
In conclusion, I have been able to explain about the trading psychology and market psychology as based on the notes given by @asaj professor and the research I made.