Crypto Academy Season 3 | Intermediate Course: Market Psychology & Trading Psychology

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Trading either stock or crypto can be very lucrative as well as very stressful and an important factor an investor/trader needs to master is trading psychology aside from the technical analysis if a trader can control his emotions in trading such as greed and fear they can perform incredibly good in handling market behavior such as manipulation from high influential investors a typical example of market manipulate that easily affect small traders include FUD crackdown on crypto regulation #Elon musk and influential crypto investor in his tweet made an announcement disclosing tesla would no longer accept Bitcoin this single tweet affected crypto investors physiologically causing the price of BTC to fall over -21%

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With such tweets, small investors started selling out holding, and traders' open positions got liquidated.

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

The case study analyzed in part A from Jane trading experience shows a good example of trading psychology

In which Jane opened a trading position base on the market analysis given from a telegram trading group without wasting much time Jane entered at a specific price which initially the market was moving in her favor due to some market speculation the price correlation start occurring making the price of Jane bought token to start dumping in price this price change made Jane very uncomfortable since she investment a lot in buying the invested token.

As a trader market correlation or price reversal can affect anyone Just the way it happened in Jane case since all human beings can psychologically get attached to what they have invested their time and effort on in most cases small investors can even get obsessed with checking their bought portfolios every time just to observe if there is a change in market price.

Frequent checking getting obsessed with the market sudden correlation is a clear example of trading psychology that Jane experienced when she bought her new investment coin are reason showing Jane had undergone trading psychologically from market movement.

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?

• Emotional Bias

greed form basis that affected Jane trading psychologically because making an additional increase in $5 would have been an appropriate time for Jane to close her trading order or increase take profit stop loss.

hope Jane was very optimistic hoping the price of her bought token will pump higher which turns out quite unfortunate for her.

regret Jane was happy initially, but when the price of her bought coin started going down which allowed her to buy more from the price dump it turns out that the price went down more dip making Jane regretted buying from the dip.

• Confirmation Bias

Here, Jane decision to trade base on using signals from the telegram channel bought coins which later began to dump from a price correlation since jane had more cash or spare coin she decided to buy more from the dip but unfortunately the price of the coin continues to dip which now gave jane a feeling without a proper stop loss her asset might get liquidated. when her stop loss hit jane felt a bit awkward but when she checked on the telegram channel she observed that the token price has dump even further down making jane a bit happy her stop-loss help prevented her asset from getting liquidated.

• Bounded Rationality Bias

Here, jane thought she made the best decision when she initiated a stop loss that later got triggered saving the stress of losing more money.

Unfortunately, it turns out she regretted her decision when the price of her triggered stop-loss token began to rise.

• Herd Mentality Bias

Here, improper research before buying any coin made jane followed a telegram group blindly making her buy more dip without proper understanding of the coin she's buying.

In this type of bias, traders follow the crowd blindly without knowing why they are buying a particular coin since everyone who is buying them would also be buying.

• Self-Attribution Bias

In this type of bias, traders tend to take credit for being successful in any trade and tend to blame either market manipulation for their loss.

Here, jane decides to blame stop-loss triggering that made her asset traded position get close without making a profit.

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

• Emotional bias can be avoided let's take trading greed as an example this type of emotional bias can be avoided if a traded choose to define a good trading strategy that includes sticking to a set-out rule in the case of jane making an additional $5 profit would have been a good position to close her trading position but instead she decided to let the trade open which is a typical sign of greed to avoid greed in trade a trader most stick to their trading rules and regulations.

• Confirmation Bias
  In other to avoid confirmation bias first a trader need to have an in-depth understanding of the market this means a trader would have known where the support and resistance will be to understand or know where to apply proper stop loss.
  To apply proper stop loss and avoid confirmation bias will need to understand market technical analysis.

• Bounded Rationality Bias

Before setting a stop loss in other to avoid getting it triggered improperly support and resistance to prior knowledge should be known.

Jane would have avoided placing stop-loss blindly if she had understood the market very well.

• Herd Mentality Bias

Here, jane buys crypto tokens blindly without making proper research of what the coin she's investing on is all about.

To avoid such a pitfall before buying or investing in any token a trader needs to make fundamental and technical analysis on any coin before buying or making any investment.

• Self-Attribution Bias

To avoid self-attribution a trader doesn't need to solely depend on his sentiment but should combine all necessary skills such as fundamental and technical analysis to avoid self attributes.

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. part B

Multiple technical analyses can be used by traders to monitor market trading psychology which includes the Relative strength index (RSI) it can be used by traders to monitor market trends RSI has a percentage of 100 which means if the market RSI is above 50 it means buyers are dominating the market while a range below 50 means sellers are in charge of the market. Bolinger band is another technical indicator that helps traders Identify support and resistance with market trends in traded tokens.

Other interesting technical indicators include moving average pivot point and Elliot waves all these indicators help traders to make calculated risks or decisions before making trade entry, using these tools will reduce the chance of traders entering the market blindly just the way Jane reacted to the market.

Difference between trading psychology and market psychology

Trading psychology is a behavioral character exhibited by a trader or an investor towards trading securities. these emotions include fear, greed, sentiments, regrets, and hope towards trading.

These emotions if well balanced can help increase a trader's success toward achieving successful traders on the other hand it can increase failure if not properly controlled.

Market psychology these describe market overall behavior which includes market movement in price action.

This price movement from the market can be triggered by investors either affecting the market positively by buying more assets in the market or negatively by selling off their investment which can lead to a bear market.

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)

An easy or convenient way an investor or trader will measure market psychology using a chart is by conducting technical analysis of a particular chart or trading pair below is an example.

The chart above represents a BNB/USTD pair

• box A represents the market accumulation in this phase investors seem to be neutral about market movement making it possible for them to buy in more BNB so the market can go further up or sell off their holding for the market to fall.

• box B after the accumulation period cools down investors decided to buy in more BNB which made the market price of BNB move up indication of a bull market.

• box C distribution phase market uptrend cools off and investors began to take profit.

• box D this phase indicates a bear market it can be seen there is a drop in the price of BNB and traders are selling off their holdings.

It's can be seen from the above chart and boxes A to D various market psychology can be identified.

For box, A confirmation bias can be identified since it's an accumulation phase traders will be busy buying or holding at this phase to wait for confirmation where the market will be heading.

For box, B self-attribution bias can and confirmation bias can be identified also emotional bias can also be identified since it's a bull market greed and hope will creep in.

Box D is similar to box B except for box D it's a bear market here fear an emotional bias creep in making traders panic and sell their assets.

• In emotional bias; fear, greed, hope, and regret are basic emotions that can be found in traders' fear in particular in-box D can cause traders to sell off their assets which can lead to a bear market.

• confirmation bias; for box, A traders can hold more tokens by buying in more which will make the market ready for a bull or bear rally.

• self-attribution; box C seems to be neutral and for day trading traders can be able to make a quick profit from a market movement that is not volatile.

• Trend-Chasing Bias; in-box A traders are uncertain where exactly the market will be heading and in this phase there can be overselling and buying of assets.

• Bounded Rationality Bias; box D shows a wide drop in price without placing a proper stop loss traders bought position will be triggered which will still lead to price overselling.

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

Efficient market hypothesis it's a market theory that states all prices of shares in the market reflect all information.
For investors to take proper advantage of the market such as making an appropriate entry buying a particular stock share or catch a new crypto project at an early stage will depend on how informed such an investor is.

In essence, this theory tries to highlight the importance of early investment if an investor will invest or buy a stock share at a very low price there is a high chance of such an investor to make a profit from an investment.

Advantages

• Here an investor that made an early investment in stock or a new crypto project can stand a high chance of making a high return.

• Risk of losing funds is very low compared to those that buy when the price is high.

Disadvantages

• Buying new stock with little backing from big investors can lead to crashing in the price of such stock and in turn an investor can lose all his investment.

• it can be somewhat risky to invest in new stock that doesn't have financial backing.

Conclusion

It is worth noting that as an investor/trader market psychological emotions are part of human nature best part is it can be controlled or work on, in other to minimize psychologically factors while trading a trader will not solely depend on sentiment but will need technical support tools from trading indicators such as Relative strength index, moving average and so on.