Crypto Academy / Season 3 / Week 2 - Homework Post for @asaj // MARKET AND TRADING PSYCHOLOGY

Hello,
I salute all colleagues and professors in the Cryptoacademy.

Case study

Part A (Case Study)

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

Jane's actions and behavior from the beginning till the very last minute was purely incorporated into the Trading psychology.
Jane as a singular person answers it all.
Trading psychology is an individual behavior, mental state, mindset, thinking faculty which is involved in processing data and information that is used in making certain decision when it comes to trading.

The Cryptocurrency market is highly volatile, which means nothing is guaranteed, which often makes people to act rashly sometimes without considering the consequences of their action.
That short story presented Jane's actions and her personal behavior towards her decision making in dealing with her trading which is known as Trading psychology.

Trading psychology will later leads to Market psychology when individual trading behavior becomes that of a group of people, hence their decisions will reflect in the market and it becomes market psychology.

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?

1.) Herd mentality bias:
I can't agree less than to point that her Herd Mentality bias caused her to buy the coin. The coin was recommended earlier, but until when the price started going up, which means people are buying it steadily, that when when she went ahead to buy too. Following the majority without doing her own research.

2.) Emotional Bias:
I will point at her greediness here. Her greedy emotion made her to fail to sell her coin when she has made a little profit, but she wanted to maximize profit, and the price began to crash in her eyes which was the consequence of her greediness. She also joined the panic sell. How? She was the one who set the price for the stop limit at that rate because she don't want to be a complete loser (FOMO).

3.) Confirmation bias:
Jane always wanted to feel good about herself just like everyone else. She failed to admit any of her mistakes and this lead to more complicated issues.
She didn't begin the investment when she suppose, yet she's didn't admit she was wrong. She didn't sell when she ought to, yet she's didn't admit. She was justifying her decisions, when the stop loss sold her coins, she was still feeling ok about her decision, just worried she has lost from her initial investment. When she saw the price bearish form non stop, she was happy too. Feeling good about her decisions so far. But when bullish season started she began to realize she has taken wrong route.

4.) Disposition Bias:
Jane began using the averaging down strategy when the coin's price was falling, believing that the coin's price would moon and put her in profit. But, before that, she was supposed to figure out what went wrong and devise a new approach, but she was dissatisfied in the end. She refused to accept her mistakes until the very end.

5.) Self-Attribution Bias:
She thought she was doing well from the beginning, that she was making the right choices, and she was crediting herself, but when thing turned around and the bearish movement became serious, and her coin was sold by stop loss activation, she blamed the stop loss tool inventor.

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

1.) How to avoid Herd Mentality Bias:
By doing research. There are several means of doing research. We have the technical analysis, we have the fundamental analysis, we have sentimental analysis. All this method could help in making decisions instead of just following others opinions blindly

2.) How to avoid confirmation bias:
Everyone wants to be right. Making good decision gives us joy, but finding the balance between what we want, what is happening and what is missing in the equation will help us in making a clear judgement instead of having a sentimental judgement of justifying of decision. Sentimental judgement situation will always cloud our decisions

3.) How to avoid self-attribution bias:
The most recommended way to to avoid this is to accept our mistakes. Jane wasn't ready to accept her mistakes. Accepting our mistakes is the first step to learning from it. When we learn from our mistakes we become experience to design our actions more brilliantly in another time.

4.) How to avoid emotional bias:
Most times, emotions overcome the situations and controls our decisions.
The best way to go by this is to follow protocols when trading.
There are signals for entry and exist points. Also, if we want to invest, there are long time investment and short time investment. Understanding if we want the long time investment and short one will help of and get us away from worries. If we are investing for long time, we will not be worried about current price because our focus isn't now but the future. Overall, instead of our emotions, our analysis should lead the day to our next step of action. We can not do without emotions, that's true, but we can control it.

5.) Disposition Bias:
Cryptocurrency market is volatile in nature. Which means anything can happen at any time. Knowing this will help our believe. When things go wrong, we will be able to understand that it happens, and possibly, if our findings says it will make sense, then we will know what to do next. Holding onto crashing assets isn't a bailout at times, but finding out what is wrong, acknowledging our mistakes, restructuring our decisions can help out in this case. All that matters is making the right decisions.

Part B (Research & Analysis)

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.

Monitoring traders behavior is one major out of what the technical analysis takes care of.
One of the most important of the technical analysis ideas is that markets move according to trends, and that some certain things influence this movement, such as investor sentiment, information availability, and other factors like trader's behavior toward price. All these are graphically represented in technical analysis.

Technical analysis assumes that all elements that can influence the market, whether political, social, economic, or psychological, are already immediately reflected in the previous price, and that specific tools were developed to assess and predict future movements.
Technical analysis can be used to track trading and market psychology with the use of some indicators. At the same time technical analysis can be used to monitor any time frame.

Identify the differences between trading psychology and market psychology.

Trading psychology	Market psychology
Trading psychology is the personal mental state, mindset, thinking and behavior of individual towards trading	Market psychology is the behavioral reflection of the majority traders.
In trading psychology, once made decision of the trader will bring either positive or negative consequences	Market psychology will give room for individual to make decisions base on the reflected situation of the market
One person is affected in Trading psychology	In market psychology, everyone in the market is affected

5.) 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)

Using the RSI to complement the technical Chart to better understand how biases can affect the the price and cause overbought and oversold.

1.) Herd mentality bias:
When the price enter the bullish season, it was sudden and it entered overbought. Many took advantage of this and didn't do research but they followed the upward trend and buy doge. Traders invested their money because of the uptrend.

2.) Emotional Bias:
FOMO happen here. To avoid missing out, traders buy many of doge coin believing it will bring in profit. Without analysis they buy many of it. The sudden rise in the price indicated that investors buy plenty quality at a particular time to earn so much gain.
The oversold from the screenshot was as a result of panic and fear. The market was going down and they don't want to lose too much. Not know that the bull season is near. Analysis should have help here

3.) Self-Attribution Bias:
Traders who didn't do analysis was praising himself because he sold before the oversold and at the bullish season, he will find something to blame for his thoughtless decision.

4.) Disposition Bias:
I would say Disposition bias benefited some people here. During bearish season, they buy more and hold on to the losing asset. Fortunately it will bring profit if greediness didn't later influence them.

5.) Confirmation bias:
They bought doge in the bullish season and were expecting much profit, after that season the price came down. Realizing their believe isn't that reliable, they want to sell their asset because they are disappointed.

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

What is the efficient market hypothesis?
The Efficient Market Hypothesis (EMH) is a theory of economics and finance that aims to explain how financial markets work. It was created in the 1960s by economist Eugene Fama, who claimed that all security prices are totally fair and reflect an asset's inherent value at any given time.
When you talk about efficient markets, you're describing a situation in which all market participants' judgments are totally logical and take all available information into consideration. As a result, the EMH believes that the market price will always be totally accurate, because all new information will be valued immediately and without regard for the past.
According to the EMH, the only turbulent fluctuations occur following unexpected news, but the efficient market restarts after the information is absorbed.
The efficient market theory is divided into three categories: strong, semi-strong, and weak;

1.) The weak EMH
The EMH is an economic and investing theory that discusses how financial markets work.
The weak EMH's proponents argue that all fresh price changes are unrelated to historical data. According to the hypothesis, all future market changes cannot be predicted solely on prior price movements.

2.) Semi-strong EMH
Because all new information is instantaneously reflected in the market price, a semi-strong type of EMH means that neither fundamental nor technical analysis can provide useful information.

3.) The strong form of the EMH
The strong variant of the EMH requires that the price take into account all available data. As a result, while no investor can regularly outperform the market as a whole, some individuals can occasionally produce exceptional results.

Advantages of a market hypothesis that is efficient (emh).

1.) The argument advocates both passive and active trading and investing in a methodical manner.

2.) Hypothesis of an efficient market How can we improve market efficiency?

3.) It allows for logical reasoning rather than analysis since it considers the market to be a game of chance.

Disadvantages of the efficient market hypothesis

1.) EMH believes that taking excessive risks is the only way to profit more than the underlying market.

2.) The concept primarily targets technical and fundamental investors, who are interested in short-term trends and past pricing.

3.) It was unable to explain market abnormalities, bubbles, and collapses, which were primary reasons for investors' dissatisfaction.

4.) While it may appear to be a fantastic idea, it is not without flaws.

Conclusion

I advice that we go through the Case study here by prof @asaj.

A lot of lessons can be learnt from here, from different forms of biases which can affect our business life, and why it is necessary for everyone to do research before investing money in any recommended coin.
EMH is another aspect of market with another believe and viewing market from another perspective, but above all, what should be superior in our decision making is our own conclusion, and what we believe is good for us.