SteemitCryptoAcademy Season 3: Week 2 Homework (by @asaj) | Market Psychology & Trading Psychology

Hello Steemit Crypto Academy,

Professor @asaj handled the essential homework topics of this week. I will try to explain the questions in the homework. Thank you, Professor for working on this issue. I learned a lot of new information.

Source: Canva

Introduction

Before preparing this assignment, I have not known enough about the difference between market and trading psychology concepts. I realized how important these mood swings are in the crypto market. I learned many new things about herd psychology, fear, prejudices, what to watch out for in the analysis.
In this assignment, I first tried to understand Jane. Secondly, I tried to show the difference by making the definitions of market and trade psychology. Then I gave examples about prejudices through a graph. Finally, I tried to convey what I learned about the efficient market hypothesis (EMH).

A) Part A (Case Study)

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

In Case Study, I see Jane's experiences very close to mine. Almost everything that happened to her has happened to me too. We can include Jane's life in the definition of business psychology. Among the categories of trading psychology, hope and regret from Emotional Prejudices summarize Jane's feelings. Jane is undoubtedly not cowardly or greedy, and she's just hoping to increase her investment. She is waiting for the coin price getting low. She buys when the price falls.
However, as with any investment, there are risks. Jane is selling low to avoid any more risk and unfortunately, the price of the coin is rising. This brings regret. We can't call it greed because Jane did not invest large amounts. If we acted that way, we might think he was greedy.

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?

I will try to explain 5 of the emotions that Jane was affected by in her situation.

Trend-Chasing Bias

When I read Jane's story, I likened it to my own. When I first entered the coin market, I tried to turn to whatever the trends were. I went with my friend's recommendation. Jane did that too. He acted by following the advice given by the Telegram group. If a suggestion from the Telegram group is given, it's probably on-trend advice. Jane also invested in a coin that everyone bought and sold.

Emotional Bias

Emotions are important for someone who is first entering the crypto market. First, Jane went into joy mode with the expectation of gain. She waited as the price started to drop and when she got the price she wanted she bought it. This made her happy. However, she sold her coin in order not to risk it when it started to fall more. However, there is always risk in the market. When the coin price rose, she regretted selling her coin.

Herd Mentality Bias

Following the advice given by the Telegram group is already the most important indicator of this feeling. Jane believed that the coin she invested would earn by following the herd psychology. For example, when I saw Elon Musk’s tweet, I bought Doge right away, but I made a loss 😊 Jane also immediately sold out like everyone else when the price started to drop. Like most people, she did not want to take the risk. And in the end, like many, she regretted what he had done.

Bounded Rationality Bias

Jane could not entirely use her mind in this example. She could not win as she wanted because she acted with her emotions. If Jane had done enough technical analysis, this would not have happened. I can understand Jane very well because I can not work rationally because I can not do enough technical research.

Confirmation Bias

Since everyone gave investment advice for a currency that was on the agenda, Jane thought that the coin had a good return. Confirmation is an example of bias. For example, there is a belief that left-handed people are more intelligent. It may not actually be accurate, but it is accepted as true because the majority approves it. Jane was also hopeful because she thought the coin she had invested in was backed. She also believed that this was true because everyone was selling low, and she sold. It would have been a profitable investment had he not sold and waited.

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

In this section, I will evaluate the biases I mentioned above from my perspective.

Trend-Chasing Bias

Rather than looking at trending coins, I would examine the charts and decide for myself because the coin that everyone invests in is risky. Patience is required in the crypto market. Therefore, I would do long-term technical analysis and be more careful following the developments related to that coin.

Emotional Bias

Emotions are dangerous, and I learned this by experience. I made a lot of mistakes in the crypto market. Since I invested a small amount, I did not lose much, but I still lost. There were times when I won, but mostly I lost. And the biggest reason for this was to act with my emotions. I still have not learned to be patient and do technical analysis.

Herd Mentality Bias

Yes, unfortunately, I also followed herd psychology. That's why I lost it recently. One of the most famous examples, Elon Musk tweets, I was deceived and lost in the long run. Or I invested in a coin that was constantly mentioned on Twitter but generally lost. That's why technical analysis is so important.

Bounded Rationality Bias

I could not use my mind enough because my emotions were guiding me. I have a talent for technical analysis. However, I prefer the easy side of the job and choose the trendy one. I am always biased because I do not trust myself.

Confirmation Bias

If everyone says a lie is true, it is now considered true. The same is true in the crypto market. For example, if everyone says that the Doge will rise and invest, the Doge will rise, but this bubble. I forget this from time to time. And I lose most of the time. Due to the current market, I will wait. I will not make this mistake when the bull market starts again.

B) 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.

To analyze market psychology, it is necessary to check people's general sentiment, behavior, and emotions in the crypto market at a given time. Market psychology describes the feeling in the market that will make people buy and sell. Business psychology, on the other hand, is more individual. It is about what a person thinks or feels when investing. Person’s feelings or thoughts can analyze trading psychology.

Differences between Market Psychology and Trading Psychology

• Market psychology refers to the general, trade psychology refers to the individual.
• Market psychology is a combination of multiple trading behaviors.
• Trading psychology is characterized by greed and fear. However, along with greed and fear, anxiety and excitement are common in market psychology.
• While a change in market psychology affects everyone, trading psychology only binds the person.

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)

To answer this question, I want to share the chart of the first coin I invested. In this chart, we see the EOS/USDT change. Here we can look at bullish and bearish periods to measure market psychology. For example, if there is news that this coin is rising in the market, I buy where the green arrow starts. I think if everyone wins, I win too. But I do not give a sell order for the future, and I wait. Maybe I will sell towards the end of the red arrow.
This is how I acted most of the time. In fact, I did precisely that in my last sale. I waited; I did not sell, I thought it would go up, but I lost. The market has affected me negatively in this way.

Figure 1. EOS/USDT Graph

Source: Binance

I drew arrows in 5 different colors on this chart. Each indicator expresses another emotion. I will try to explain five various emotional changes through this graphic. The bias that I tell; Trend-Chasing Bias, Emotional Bias, Herd Mentality Bias, Bounded Rationality Bias, and Confirmation Bias.
I would be deceived by the herd psychology and buy from where the yellow arrow starts. Since I am not very patient, I act with my emotions. Towards the end of the yellow arrow, I could sell, thinking I had earned enough. I would then follow the graph from the beginning of the green arrow to the end. I would expect it to fall again anyway. I would not act rationally because I did not act on my emotions. Maybe I will make a final move and buy high. (I did it this way because 😊) After I buy, the red arrow starts to move, and I start to get upset. It is a very bad feeling.

I regret selling when my position low and buying when high. I would sell in the middle of the red arrow to avoid further losses. I would be happy when it hit bottom, just like Jane did. I would retake the risk, buy towards the end of the blue arrow and wait for it to rise. But I see on the chart that there is a decrease on the contrary. Every day when I opened the screen, I would follow the purple arrow and continue to be sad. So, in the end, I would have lost because I acted in the majority's mind. If I could do technical analysis instead, I would have performed more logically.

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

The Efficient Market Hypothesis (EMH) defends the view that financial assets reflect all the information at any moment in time. In the case of new information entry, this will immediately be reflected in the prices of financial assets.
EMH says that none of the price setters can individually influence prices. EBH also assumes that processors can access all information simultaneously, and transaction costs are extremely low.
According to the efficient market hypothesis (EMH), everyone has equal information about all stocks or coins. Also, the Efficient Market Hypothesis assumes that all stocks are traded at their fair value.

Advantages

• Since it does not require technical knowledge, it can be evaluated by anyone.
• The number of buyers and sellers in the market increases. This is a positive development for the economy.
• Since the risk is high, the profit rate will also be high.
• You will have more time because you will not waste time with technical analysis or research.

Disadavtages

• Discussions on EMH will continue for many years.
• Since it is risky, the loss rate will also be significant.
• It will cause the spread of speculative information.
• It can lead the market in a negative direction.

Conclusion

In the crypto market, bias and emotions affect the decision-making of many people. Although there are traders who do technical analysis, many people act with their prejudices. The losses experienced in cases where we move in this direction are very high. People act with herd psychology, emotional or direction. The most important lesson I learned from this assignment is to act without bias. While preparing this assignment, my own mistakes came to mind. In this context, I realized that I should not forget the concepts of both market and trade psychology. For this, I thank Professor @asaj for preparing this assignment.

CC:
@asaj