Crypto Academy Season 3 | Intermediate Course:Homework task for [@asaj] ; Market Psychology & Trading Psychology
I humbly welcome professor @asaj to my homework for s3w2 assigned task regarding MARKET PHYCOLOGY AND TRADING PHYCOLOGY, I have been priviledged to read and understand the professor lecture where by i gain knowledge on how to answer the given question and I also made research where they were needed to answer questions, I have been able to give back according to my understanding. I stand to be corrected in areas I come short.
The case study given is an example of what type of psychology? Explain the reason for your answer.
The type psychology in this case study after reading and understanding this lecture i conclude that it is a trading psychology.
Trading psychology as said by the professor can also be known as trading behavior. that Is, the individual behavior of trader in the market.
Psychology refers to the ability to think, refers to the state of mentality, and the general behavior of an individual regarding cryptocurrency trading.
Firstly Jane receives signal from a telegram group without carrying out necessary analysis on the given signal. okay, let's say jane knew nothing about trading analysis, Jane was supposed to be a holder therein she failed again. why, because of her emotional behavior, As an investor emotions are not to be used when it comes to investing or trading, the market wouldn't feel what you felt towards it after making the wrong decision.
Jane concur to her emotion, she started making mistakes upon mistakes, as a naive investor the first at 33% of profit acquired from a trade of $15 to 20$ is enough but because of her greed which is still under emotional bais, as she didn't sell she wanted more profit. however, as the coin dips she continue with another mistake, performing what we know as averaging down a position, acquire more coin as the market reverses in a downtrend, this behavior is a result of disposition bias, jane refuses to admit she hadn't made a mistake by not selling when she had a chance of gaining 33% profit, she stood to her position and even acquired more coin as the market reverse in a downtrend signal and lastly she regret when the news hit her that the supposed coin has found support and the market condition changes positively. Jane wasn't experienced as she should have made analysis and controlled her emotion and also she should have hold that coin and on the long run eventually, one day she will smile regarding her profit
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?
- * HERD MENTALLY BIAS
- * EMOTIONAL BIAS
- * DISPOSITION BIAS
- * CONFIRMATION BIAS
- * SELF ATTRIBUTION BIAS
* HERD MENTALLY BIAS
This bias involve following the majority regardless of whether its a right decision or not, information from various media on a certain coin also influence this bias, social medias like twitter, Facebook and internet news makes popular noise about a certain coin and then we buy as a result of packs buying the exact coin, this happened to Jane, she also bought the coin through a social media signal Group (telegram) this also influence Janes behavior.
* EMOTIONAL BIAS
Jane was influenced by an emotional bias also, firstly, Jane was greedy, the greediness in her made her lose it all and having a balance of $5 which was triggered by her stoploss. She could have had a 33% profit from the onset, at some point she feared as a result of the negative market reversal and then she hoped for an uptrend in the price movement of the token, but the price refuses to rise as a result of the overbought asset and then the dip continued as the price hit her stoploss and sold, she traded based on her feeling which made her incur loss.
* DISPOSITION BIAS
Using the the case study, the loss aversion which is also known as the dispositional bias is also a trading behavior that influenced Jane, when she ought to have taken profit from the onset, now the market reverses and Jane refused to admit her mistake, instead she did what is known as averaging down a position, buying more coin as the price of the asset decreases, Jane saw the downtrend as an opportunity to buy more asset even though she knows she is at loss, maintaining her trading position, placing more concentration on avoiding loss instead of making profit, infact she might have sold off other coin that gave her profit in attempt to compensate for her current Loss.
* CONFIRMATION BIAS
Finding evidence to back up your decision and action on something and then start looking for a reason to make your decision right Jane sold her coin in a downtrend, and later made check on whether the coin has risen on not, seeing that the coin hasn't rise, Jane was happy thinking that she had made the right decision, after a long time or a while the market reverses to an uptrend and Jane could only regret to the extent that she blamed a stop-loss set by her.
* SELF ATTRIBUTION BIAS
Self appraisal of yourself when making success without the helping hand of others or intervention of others and blaming things beyond you when you fail, like environmental factors, if Jane had hold her token more for a period of time and the market reverses to an upward price movement, Jane would have boasted about her skills and courage towards herself but this is not the case as Jane failed and Incur loss and started blaming the market and also she even had to blame the invention of stop-loss for her failure.
List and explain how each bias you have mentioned can be avoided?
To avoid HERD MENTALITY BIAS:-
Internet news, social media news are be avoided, it carries most of us away as we most believe in them, why not make our own analysis and gather enough information, set a plan. by doing this we have avoided the mentality of following the pack into an ambush and stop relying on what people say.
To avoid EMOTIONAL BIAS:-
To avoid this bias it involves knowing oneself, trading style. it may seem to be the hardest because it involves feelings but knowing what triggers our emotion should be avoided, our fears, greed, hope should be controlled and certain trading rules which will be of help to us, to be discipline is also a way to avoid emotional bias. Setting rules is one thing abiding by the rules is another thing, so one must comply to the rules set by him or herself with discipline.
To avoid DISPOSITION BIAS:-
To avoid this bias, firstly, there must be a fixed price you intend to invest, no matter the market conditions will you add more investment into your initial investment. averaging down your position may incur bigger loss to trading and also admitting ones actions despite how good or bad we may have analysed the market.
To avoid CONFIRMATION BIAS:-
Gathering information consciously is a way to avoid confirmation bias, dig deeper into your areas of reliable research, verify your information with good source. after all this has been done still don't jump into conclusion interact with peers that are competent, that sees a positivity in your research then you can make your conclusion.
To avoid SELF ATTRIBUTION BIAS:-
Jane could have avoided self attribution bias if she hadn't put too much trust in her decision she should have had a better understanding about the information of the token, hence having not done that, she should have sticked to the crypto like she was married to it.
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.
Trading psychology cannot move the market, that is an individual decision to buy or sell cannot change the trend of the market either positively or negatively where as, the collective or overall behaviour of individuals in the market will surely affect the market and the behaviour of all traders in the market is known as market psychology, both are intertwined, trading psychology complete the market psychology, why because the trading behaviour of a trader in the market creates the market psychology.
Analysis that should be used to monitor the market and the trading psychology is the technical analysis. Technical analysis Is used to study the price movement with the help of some technical tools or indicators, using indicators to analyse chart pattern, to know when to enter a trade or when to exit. Indicators can be used to predict future market trend or to show the current trend using past outcome of a chart to determine the present chart and this can be done with the help of indicators however, indicators are RSI, MACD, MA, fabronacci line, bollinga band(BB) and so on, indicators have their specific use and ways to determine the price movement in the market and they help in trading decision of an individual which will be of help to the market psychology hence, we can say indicator helps to indicate the behavioral pattern in the market and where it is heading to.
|MARKET PSYCHOLOGY||TRADING PSYCHOLOGY|
|The combination or overall of all individual behaviours in the market is referred to as the market psychology||The behaviour of a single trader is known as the trading psychology|
|Market psychology affect the entire market||Trading psychology affect only one person|
|The overall decision in a market will affect the market trend||Individual decision in the crypto market doesn't determine the market trend (only if the person in question is a whale trader)|
|Instability of price will occur in the general behaviour of traders in the market||Single decision of an individual cannot cause instability of price|
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)
The screenshots seen is a BTC/usdt chart, whereby BTC found support and rise to a level of overbought position, at this position traders are still buying this asset following the crowd which later pumped the asset a little bit untill the market reverse. The bias that could cause this is the herd mentality bais because even after the long uptrends, trader are still seen acquiring more of the asset which later run in a little bullish trend before market reverses.
When yours stoploss was triggered or you sold at a loss due to impatience or there hasn't been an upward trend for weeks or months, so you lost interest and you could not hold any longer because the market continues to dip, so to avoid more loss you sold and later you went to confirm if your decision to sell at loss was right and to see that the market is still in a downtrend, justifying your action as right even with a loss, incurring more loss to the market phychology as the trader sold making the trend in an oversold position in this case the baslis that was triggered here is the confirmation bias.
From the chart seen this represent the disposition bias where by a trader bought an asset at an overbought position and hold on to the asset untill the market reverses in the opposite direction and this trader continue to accumulate more of this asset as the asset is moving in a downtrend resulting into an oversold position
The screenshot shows that the bullish run of the asset ended already, but investor continue accumulate more of this asset in an overbought position with regards to FOMO, thereby causing the asset to be in an overbought position, sending wrong overbought signal..you can see the signal with the RSI tools pointing to the direction of higher low.
In your own words, define the term efficient market hypothesis (emh). List and explain the advantages and disadvantages of efficient market hypothesis (emh).
EFFICIENT MARKET HYPOTHESIS
Efficient market hypothesis(EMT) or Efficient market theory(EMT) are hypothesis or theory that affects crypto price due to news information that enters the market, this theory occur of recent when a whale investor invested in BTC, here the theory was positive as we experienced a massive increase in the price of BTC without an analysis and negatively when the crypto banned in China and Tesla withdrawal of acceptance of BTC as a means of payment hit the news it immediately affected the market negatively.
So having said this, EMH explains that, immediately when a news hit the market the asset prices get affected, analysis are not used in this theory as news information or tweet generate increased in price of an asset, it implies that the fundamental and technical analysis can't dictate the movements of the market and they also can't generate higher profit compared to the sudden outbreak news information that breaks into the market. In this theory I believe that the higher your chances of acquiring higher profit so is also the change of losing money because it is based on risk adjustment, so all in one, EMH opposes the act of using fundamental and technical analysis to dictate movement of the market, therefore investors should focus more on news information.
* FORM OF EFFICIENT MARKET HYPOTHESIS
The forms of efficient market hypothesis are as follows
- * WEAK EMH
- * SEMI-STRONG EMH
- * STRONG EMH
* WEAK EMH
In this form of efficient market hypothesis which is also known as random Walk theory states that the history information of past price movement including volume and data earnings cannot be used to predict the future price movement or direction of an asset.
* SEMI-STRONG EMH
Semi-strong ETH state that the use of technical and fundamental analysis are not needed or eliminated to adjust price movement whereas newly information quickly adjust price movement to earn high rewards, it dispproves the use of fundamental and technical analysis.
* STRONG EMH
In this form of EMH, investors, either private or public cannot earn beyond the average return of the assets, since all information reflect in price movement. No matter the inside information you have or researches you made or information an investor may have access to, investor cannot profit above or exceeding the normal return.
ADVANTAGES OF EFFICIENT MARKET HYPOTHESIS
it's safe time because analysing asset using fundamental and technical analysis will take time but since speculations and guts is what is used in this theory one can buy or sell according to his or her guts.
Positive speculation of an asset reward investors with abnormal return. that is, higher financial return or reward.
No investment pattern can be identified since the market cannot be predicted.
Expert advise are not needed since the idea is that the market are speculative, money spent for expert advises will not be needed.
DISADVANTAGES OF EFFICIENT MARKET HYPOTHESIS
There are difficulties in predicting the price movement
Investors are not dumb, as they don't invest blindly. researches are made before investing, so in this case technical analysis and fundamental analysis are still used.
Investment are very risky.
With the idea that market are speculative one can lose a lot, because speculative asset do not rise forever and they can go low beyond your buying position.
it has been a wonderful journey in this week lesson because I have learnt that market psychology is the overall behaviour of trading psychology which is the individual behaviour in the market, emotions are to be kept out of trading system but since we are human we are bound to feelings, traders just need to set some rules for their trading style and abide by them. efficient market hypothesis is a theory I think that is logical, buying assets regarding to news information is something I consider very risky as we have seen in most cases that the help of trading tools and fundamental analysis in the crypto market. it is such a beautiful blessing participating in this week assigned tasks.