Steemit Crypto Academy Season 3: Homework Task for @asaj// Submitted by @meymeyshops//9/07/2021

Part A (Case Study)

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

It is a case of trading psychology.

Reason

Jane was possibly called into the telegram group where prospects are encouraged to invest in a certain platform that promises to pay high within a short period of time. In that kind of chat group, information regarding the said venture(s) are not always relayed adequately. Prospects are told to grab an opportunity immediately and then learn more later, testimonies of those who have 'made it' are bombarded in the group every hour. No formal training on the nitty gritties of what it takes to succeed. Those testimonies sometimes heighten the emotions of members, making them to jump into an investment without accurate knowledge. It is on this kind of emotions - to make it within a short time - that Jane placed her buy order.

She lacked the discipline needed in trading psychology together with knowing her risk aversion which would have enabled her to develop a waiting attitude required in crypto trading. She may not have an alternative means of income hence she has a make money syndrome which made her to invest her whole being - both mental and emotional.

No wonder Trading Psychology has the ingredients of individual's character and behaviour that makes the person react the way he or she does in cryptocurrency trading. It is because of trading psychology that made Jane who wants to maximize profits but end up doing the opposite.

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?

Jane's trading behaviour was influenced by the following 5 biases:
1). Confirmation Bias: This kind of bias makes people to only look at issues from their own point of view, overlooking information that do not suit their belief. This mostly comes to light when a person tenaciously hold to an expectation, he or she may unintentionally neglect other feasible information that may disprove his or her belief. Like I earlier mentioned, since Jane was possibly networked into a telegram group that usually bombarded members with too many testimonies, she may not have had the time to critically examine those information logically so as to arrive at a reasonable conclusion. She only confirms what she already believes irrespective of whether she is right or not. That is confirmation bias.

source

The effect of this confirmation bias on Jane is seen in her sole reliance on the group updates without any effort to cross-check those updates from other sources. Another effect it has on Jane is that since she holds to her belief to make more profits, she did not look at the red signals when the price of her asset moves downward from $20 instead she places more buy orders, telling herself that the downtrend is an uptrend in disguise.

2). Self-Attribution Bias:

Source

People who exhibit this kind of bias do attribute whatever success they have made to themselves, they say they are wise and strong. But when failures arise, they rationalize their failures to some external forces, seeing themselves as victims of circumstance. They try to look inward to see their limitations or weaknesses so as to amend or adjust where necessary. We the effect of this bias on Jane when she saw that the StopLoss has stopped her trade, she initially happy but as soon as the market reverses uptrend to recover, she immediately began blaming the instrument of StopLoss and the inventor. Had it not stop her trade, she would have begun making profit. To Jane, success is her making while failure is by others making.

3). Herd Mentality Bias

Source

Look at the image above, what do you see? A crowd of herd moving towards same direction. A herd mentality bias simply means following after a crowd to one end whether good or bad. In cryptocurrency it is refers to as a market volatility, whereby a crowd of people may choose to buy, sell or exit the market at the same time, causing assets to be either oversold or overbought.

It is not that they may not be adequate information about a certain investment, but the problem is that no one may want to verify such information, no one would decide to study the company profile - the whitepaper and so on, rather relying that since everyone in the group is investing then me too should do the same.

The effect on Jane is that she simply bought because everyone else in the telegram group is buying. She swallowed hook, line and sinker what the group told her. No thorough investigation.

4). Trend-Chasing Bias
A person with this mentality always base his trade decision on past history reasoning that if a certain asset performed well last week with good returns, therefore, surely it will continue to be yielding maximum returns. But this is not always the case because nothing in life is constant except the word 'change'. Those who propagate this bias often trade based on latest news and trends instead of digging deeper to find more sources of data as per an asset of consideration.

We see the effect trend-chasing bias exerted on Jane when her asset returns with extra $5, she was overjoyed and said to herself that if she had bought more earlier she would be on money now. So when the downward trend ensues with low price, she followed the trend and bought more. She was simply following a trend.

5). Bounded Rationality Bias
People with this bias tends to satisfy one criteria instead of looking at the whole issue at stake which could help someone to make the best decision. For example, most people from my side Aba in Nigeria loves buying cheap articles especially clothing materials, they may not want to care whether those materials have good quality or not but once it is cheap, they buy. So with this mindset, they end up satisfying one criteria - it is cheap and so within the shortest period of using those cheap cloths, the materials begins to suffer wear and tear. Are their decisions optimal? Not at all.

In making trading decisions some people would go for 'averaging down', buying when crypto price goes bearish. I have fallen into this currently though in the case of Steem, the higher you hold the better influence you've got. But in the real sense, the best optimal decision a trader should make is to cut loss as soon as possible instead of holding a long wait for bullish reversal which might accrue more losses. In the case of Jane, she had the time to cut her loss immediately the price began moving on a downward trend, instead she opted for averaging down position in order to satisfy her initial want of buying cheap 'article'. So sad that loses kept spiraling down deeper.

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

Avoiding Confirmation Bias: Since this bias tends to ignore contradictory evidences that do not suit him, therefore to avoid this bias, it's important to give attention to any contradictions with a view to find out why they exist. It is also imperative to ask questions from various sources before reaching a conclusion. Do not ask questions that will only confirm your mindset but those that could prove you wrong.

Avoiding Self-Attribution Bias: There is no limit to learning, in fact we learn throughout our life time. So sitting down to find out our weaknesses and strengths can never be overemphasized. Learn to acknowledge those areas of mistakes and learn how to correct them. It's also important to read well trusted trading journals to understand when to take a position either enter or to exit the market. Such journals will equip one to see faulty trading reasoning and more.

Avoiding Trend-Chasing Bias: It is optimal to have a clear cut objective and strategy set before embarking on a trade, then be determined to stick to them at all time no matter the pressure. This is called integrity. Following the trend rarely yield the best result, you can buy when others are selling and sell when others are buying, going against a common trend minimizes losses.

Herd Mentality Bias: It is best to stand tall among a crowd, do not follow the crowd to same direction. This means that a trader must have to stop and think things out, lay hand on varying technical analysis of a said crypt asset before investing. A trader shouldn't just invest based on what my people call "initial gragra", that is on first impression of an asset that is performing well in the market because first impression does not always matter.

Bounded Rationality Bias: Have the mindset of a beginner who does not know nothing, learn to empty your cup instead of holding tight to our premeditated belief. Be open to fundamental facts about solving problems instead of satisfying one desire, check the overall effects. Do not invest because it was recommended by a close associate instead look out for the company's profile to see the pros and cons of their packages. Fortunately, we have coinmarketcap website that over provide information on a particular crypto and exchanges, one should leverage on those information for accurate decision.

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.

From the lecture given, I understood market psychology to be an aggregated sentiments of all individuals in the market put together which sentiments motivate them to act the way they do and in turn affecting the movement of crypto assets.

Therefore to monitor market psychology, Technical Analysis has proven to be the best option since it provides traders with tools in form of graphics enabling them to make accurate observation of past price movement and the trading volume of an asset so as to make a sensible future prediction. It then behooves on the trader to appropriately understand this tool in order reach a proper conclusion.

Trading psychology

To refresh our minds on this psychology, it is an individual behavioural pattern and characteristics that affect the sense of reasoning of an investor. It has to do with the emotions, mindset or mentality of the investor.

Having said that, what analysis can help in monitoring this psychology? All surround with the trader. It is often said that 'attitude makes the difference', so in succeeding in crypto trading, the individual must develop a strong positive attitude. He must think out of the box, must change his mindset.

What kind of attitudes are we talking about and why are they helpful? Scroll down a bit.

1). Understanding that losing is part of trading but the trader must know his risk aversion. Yes how much risk are you willing to take so that the trader may not lose sleep having lose money.
2). Self Discipline is imperative for the trader. Why? It will enable the trader to be realistic with the current market trend and make him to be steadfast not being too joyous or too sad as a result changing trends.
3). The trader must be adept with following strict risk rules of engagement.

Identify the differences between trading psychology and market psychology.

m

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)

First measurement using past price

A market structure serves as a foot path to understanding how price movements works. The structure pictures past prices which a trader can base his next calculation for either a buy or a sell. So it is advisable to apply technical analysis to market for a timely action. The chart below indicates how prices can swing from one to another. Follow the indicators cautiously to avoid impulse trading.

Second measurement using news items

Another measurement that is useful is fundamental news involving different authorities such as the big whales or government agencies whose authorities can affect either positively or negatively the movement of price. See such news items below.

Source

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)

Herd Bias: The chart below depicts the effect of herd bias where many people were moving towards the same direction by buying an asset due a change in price, their behaviour caused oversold the said asset, Dogecoin.

Confirmation Bias: A closer look at the chart below also shows that some people came late to buy because their belief is that price will continue to move Bullish.

Trend chasing bias: From the same chart, we can see clearly that some people were chasing a trend, they said since the price went up in the past therefore it'll continue that way. At this juncture their buying into the market caused oversold.

Bounded Rationality Bias: When the price made a u-turn downward in bearish behaviour, some entered the market on recommendation of others. Their buying behaviour caused overbought. See the chart below:

Hope: In the chart below, one see a positive type of hope. Some bought their coins when price was averaging down in the hope that the price will definitely rise. The reactions caused oversold as the chart below shows.

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

The term Efficient Market Hypothesis (EMH) propagates that the cryptocurrency market is normal, that everything happening in the market good. There's nothing being rational in selecting a certain asset to trade on, that one can not make more profits by studying the fundamental and technical analysis of an before choosing than when one randomly select an asset. It goes on to state that when people behaves abnormally due to an abnormal information they receive, it is also normal. Therefore, the hypothesis favours taking high risk investment packages selected randomly than low risk one which was intelligently chosen.

There are three forms of EMH namely:

Weak Form

According to this form, a fundamental analysis of an asset will only give a trader a short-term benefit but in the long run will stop working, that even a technical analysis will not yield long rang advantage.

Semi-Strong Form

This proposes that there is no merit in pursuing historical data as well as a detailed information of an asset since there don't work but that there is an instantaneous pricing of securities.

Strong Form EMH

This form states that all information about an asset are already embedded in the price, so a trader should be aware that the market rules and so no one can take advantage of the market.

Advantages of Efficient Market Hypothesis

Protects the innocent investor: It is an obvious thing that before a newbie should enter the stock market, he/she should as a matter of urgency, get an advice from a technical analyst and a fundamental analyst who charges for a pay to give needed counsel. But EMH takes away these counselors out of the way because you don't need them, you just go ahead and randomly select a stock to trade.

Push away self acclaimed experts: The social media bombards us with these experts who claim to posses all-time guidance for stock markets. Most times when people joined their telegram group like Jane in the case study did, some end up throwing away their hard-earn income by investing at their recommendation. But EMH's theory tells the investor to go into the market and cut your pound of flesh randomly.

Saves time: Yes you don't need to spend time and effort analyzing charts using all those technicalities that does not work and neither will they make an investor generate abnormal profits that randomly selected stock can do.

Disadvantages

• The notion that neither fundamental analysis nor technical analysis work is very erroneous because you can not tell not tell me that a reckless driver will never at all times have accident while a very cautious driver who observes all traffic rules will have a higher chance of accidents. No it's not true.

• Markets are not efficient but irrational: The debate that attentive observance and timing of stocks does not work is wrong because instances abound where there happen to be giveaway prices and only those were watchful took advantage of it and made huge profits. So in this case an investor can buy low when prices crash and sell high, making abnormal profits.

Conclusion

From this study, I have learnt a lot from all the psychology that people exhibit in the market. While trading psychology is an individual bias, market psychology is an aggregation of all individual biases put together that make up a certain market. Exploration of different kinds of bias was made, like trend chasing bias, herd bias, bounded rationality bias, confirmation, self-attribution bias and lot more. Effort is made to explain in my own words what EMH is, disadvantages and advantages.

I thank you my Prof @asaj for preparing your lecture in a clear and understandable way worthy to be emulated by other Crypto Academy Professors including us students to always write in simple terms. Once again, I say thank you Sir.

I remain yours faithfully,
@meymeyshops.

Reference
Reference