Hello everyone. First of all, i would like to be thankful to the Professor @asaj for this wonderful lecture. This week lecture is about the Trade psychology and market psychology. After reading the lecture thoroughly, i am going to do my homework task.
The case study given is an example of what type of psychology? Explain the reason for your answer.
Before answering the question, i would first define the trading psychology. Trading psychology mean the behavior or mindset of a person while making the trading decisions. The trading psychology include those emotions of an individual which causes the success or failure in trading.
We know that crypto world is versatile. The prices of coins fell and rise every time. Sometime, there is bull season and sometime, market face the bearish season. So there always an entry and exit point for market. We should always buy the coins in bearish phase and sell the coins in bull period. The traders should definitively do the technical and fundamental analysis before entering in market. But the analysis alone are not enough. For successful trading, the good psychology also matter.
In the above case study, i can say that the person made the decisions my being emotional. He made the mistakes one after other because of his emotional attitude. HE made decisions in emotions. This emotional behavior resulted in lose.
In above case study, there was a bullish period. The price of coin was just 9$. It means that was good time to purchase the coin but jane didn't buy the coin at that price and did a mistake. After some time, the price of coin reached to the 15$. There was an increase in price of 66%.
JAne though that now it is good time to buy the coins. He bought the coins. After some days the price raised to the 20$. There was a further increment in price of 33%.
The total increment in price was more than 120% from the time when its price was 9%. But Jane didn't buy the coin at that time, so he just had 33% profit. So Jane faced a lose in a way. He could get the more profit if he bought the coin at starting. But he didnn't. Then he made an emotional decision when he sees that market goes up. He bough the coin at price 15$. It was his second mistake.
But he made another mistake here. As we know that after every bull season, a bearish period start. When the price goes up, we should exit the market by selling our coins. But Jane didn't do this. He kept waiting for more rise in price. But then price started felling down.
The bearish period started. The Jane made an emotional decision again. He again made a mistake by buying the coin when market goes down. He think that it is good time to buy coin at low price. He was thinking after this fall, the market will rise again. But market didn't rise.
The market fell to the 5$. Now the price was this much down. The Jane got made. He sold his coin at that price and did another mistake because of his emotional attitude. After some days, the market started rising because there is always a bull season after a bearish period. The Jane now started regretting for not holding the coins. He repent why he sold the coins at that low price. But Now it is useless to cry over spilt milk.
We should made such emotional decision while trading. We should be very careful about some points like:
We should always perform the technical and fundamental analysis before entering the market
We should have knowledge when to enter in market
We should have knowledge how much we should invest
We should have knowledge whether it's time to hold the coins or sell the coins.
We should have knowledge about market exit point.
We should have control on our emotions.
Using the case study above, list and explain at least 5 biases that influenced Jane's trading behaviour with examples of how it affected her behaviour?
Herd Mentality Bias
When we study the case, we come to know that the jane's behavior was herd mentality bias. Herd mentality bias mean that following the others without doing any research or analysis. When jane saw that more people are now investing the money in that coin, he follow the crowd without doing any research.
The jane became emotional while trading. He made investment by being emotional when he saw that market is rising. When market reached to the 20$, there was a clear profit of 33%. But jane acted according to the Emotional bias and didn't sell the join. Instead he kept waiting for further rise in price.
But price didn't raised. Then he sold the coins at the bearish period. When again market raised, he started regretting on his emotional attitude.
The Jane sold her coins at 5$. The market was felling at that time. After some time, the price fell even to 5$. The Jane was happy that he didn't made wrong decision. He sold the coins at right time otherwise he would have to faced a big lose. He forgot that after every bearish season, a bullish phase is started.
But when the market started rising, the Jane realized his mistake and he started blaming the things for his act.
When an investor look for some thing to blame for his mistake, it refer to the deposition bias. When the market was felling down, the jane made another mistake. He acted accordingly to the Deposition bias. He buy the coins at the low price thinking that the low price purchased would be beneficial for him.
He again faced lose because of his this act.
Self Attribution Bias
In this bias, the traders take the whole credit when things are hapoening in his favor and blame other when things start happening against him. The Jane sold her coins in market bearish period. When the market fell down more, he was happy that he made a right decision.
But when market started rise, he started blaming and accusing the other things. He became angry because of market moves. He instead of accepting his mistake, blamed the market for changing its moves. He started blaming the people who invested the stop lose. He just kept blaming others for his lose.
List and explain how each bias you have mentioned can be avoided?
1- Avoiding the Herd Mentality Bias;
To avoid the herd mentality bias, the traders should do the proper research. He should do the analysis before making an entry in market. He should not follow others. Instead we should make the decisions by our own by making the proper research.
2- Avoid Emotional Bias
While trading, we should make the decision by the mind not by being emotional. The jane bough the coins after getting emotional. He became emotional when he saw that the price going up. He bough the coins without making any research. Then when the price reached to the 20$, he again acted emotionally and didn't sell the coins and kept waiting for further increment. He sold the coins at 5$ and it was also an emotional decision.
We should not be emotional. We should invest money after the proper research and doing the analysis. We should sell our coins when we see that market is at the bull period and now it will start felling down. Instead of being emotional and keep waiting for further increment, we should sell our coins at that time.
When we see that the price is falling, we shouldn't act emotionally. Instead, we should keep calm. We should sell the coins. We should hold the coins because we know that after every bearish season, the bullish trend start.
3- Avoid confirmation Bias
To avoid he confirmation Bias, we should avoid making the lame excuses when something wrong done by us. We shouldn't seek for other things to make them base for your wrong acts. Just accept your mistake. It will help you much to safe from many other issues.
4- Avoid Deposition Bias
To avoid the deposition bias, we should be sensible enough to absorb the market moves. We should understand that the ups and down are part of crypto world. We should have guts enough to accept our mistakes instead of seeking for approval. Instead of blaming other for our wrong decisions and acts, we should take full responsibility whenever something bad done by us.
5- Avoid Self Attribution Bias
In the above case study, we see that jane blame the person who invest the stop loss, He didn't accept his mistake. She kept blaming other for her lose. We should own the responsibility for our lose. Our losses belong to our wrong moves and decisions. So more we realized and accept our mistakes, more we learn.
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.
In the crypto world, the good investors always do the analysis before making an investment. Some perform technical analysis, sometime fundamental analysis goes good and some do the sentimental analysis. Sometime combo of two is use for better result. The analysis predict the future of market and save you from lose. But the type of analysis used for trading psychology is Technical analysis.
The technical analysis is done by looking at chart and by analyzing it. Some analyst have a confirm believe that the pattern which we usually use to predict the future in technical analysis are actually all the result of crypto market psychology. That's why the technical analysis is best for trading psychology.
Whenever we want to do trading, we first open the chart of that coin and analyze that. Different tools are used in technical analysis which predict the future of market for us. We come to know about entry and exit spot. Thus we can perform the market psychology in more efficient way by performing first the technical analyses.
Many other indicators are also use in technical analyses which help in trading psychology. RSI, MA, MACD and Bollinger band are among those. All these indicator work with technical analyses and produce more efficient result.
|Trading Psychology||Market Psychology|
|As we studied above, the trading psychology is a sort of psychology which can be define in term of personal. The behavior of a single person on his trading. It means how the mindset and emotions of that individual contribute his success or failiur in trading||This is perform on the community level. It mean the investors on large scale perform the transaction in same direction. Mean they will sell the coins at bearish period and sell the coins at bullish period.|
|The trading psychology shows the behavior of single person toward the trading||The market psychology shows the general behavior of whole crypto community toward the trading|
|The behavior of an individual does not have effect on market(Except some special cases).||Market behavior effects.
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 following is the graph of bitcoin. The red candles shows that the investors are selling their coins. The green candles shows the investors are buying the coins
1- Emotional Bias
The above graph shows that there are some people who are acting emotional. The red candles showing that the investors are getting emotional and they sold their coins at the market bearish period. At this point the investors faced the lose. This will also result in when market will enter in over sold zone.
2- Herd Mentality Bias
Here we can see that some investors are acted according to mentality bias. They just follow the trend. They didn't perform any research or any analyses and invested the money when the market was at its uptrend. They bough the coins at high price. They didn't perform any analyses other wise they would get to know that market is going to downtrend. They buy the coins at high price thinking that the price will raise further but there mistake made them in lose.
Some investors are there who didn't sell their coins at market uptrend. They kept waiting for more increment in price. They ignore the fact that there is always a bearish period after a bull period. At the end of the day, they had to sell their coins at very low price when market was at its fall. This will enter the market in over sold state.
4- Confirmation Bias
In confirmation bias, there are some traders who kept waiting for market price more rise but when market downtrend placed, they had to sell there coins at very low price. The green candles are showing the selling of coins at bearish period. We should always do proper research and plan the strategy when to enter in market and when to exit the market. If some mistake are done by us, we should accept the responsibility instead of prentending that every thing is good and decision was fine even knowing that it wasn't fine at all. This caused the market to enter in oversold zone.
5- Trend chasing Bias
There were some traders we see in graph he kept holded their coins. They kept chasing the trend and didn't sell the coins at the uptrend. When the market fell down, they faced lose and they had to sell the coins at very low price. So we should buy the coins when the market us low and should sell the coins when the price is high. We should always follow trend.
In your own words, define the term efficient market hypothesis (emh). List and explain the advantages and disadvantages of efficient market hypothesis (emh).
The theory or hypothesis state that the any new information in crypto world is quickly reflected in the price of coin. At that time, the tools use for analyzing the market cannot help the investors to earn the good financial return. In simple word, the price of crypto currencies reflect all the information which enter in the market. This hypothesis state that a random preference is more beneficial for an investor instead of technical analysis or fundamental analysis.
This hypothesis state that the investors always choose those platform where the price of crypto coin is fair. They will not go to the platform for trading of crypto currency where the price of coin is greater than usual.
- Higher profit rate
- high market volume
- Greater financial return
- save time which is invested in performing the technical or fundamental analysis.
- High risk
- Higher price of coin as compare to the general price of coin.
- Overconfidence sometime may result in lose.
In this lecture, we learnt about the trading psychology. Then we learnt the biases which effects the trading psychology. This lecture was very informative and i get to learnt about the efficient market hypothesis. I am very thankful to the @asaj for such informative lecture.