According to me, the given example is a type of trading psychology because the decision she takes was her own. She bought cryptocurrency for $15 based on the telegram group’s recommendation which was only $9 earlier. She took her decision individually and this psychology is known as trading psychology, not market psychology where group of individuals are involved for making any conclusions.
Firstly she received a signal in a telegram to buy a coin for $ 9 dollars but she made the purchase when the price was up at $ 15.Undoubtedly It rises to $20 but was not that happy because she feels that she could have make more profit if she had bought crypto when it was $15.And if jane would have bought it for $9 her profit would have 122%, but she bought it for $15 and could make a profit of 33% only.
After some time price starts dropping and goes below the janes purchasing price and jane thought this is an opportunity to buy more cryptos, she keep buying cryptos and as we know market takes it's time to recover but jane was impatiently waiting for price to climb and her impatience later cost her a big loss and hurt her emotionally as well as mentally, and also took her out of trading.
She wasn't unfamiliar with market volatility but was carried away by her emotions.
Herd Mentality Bias
Doing whatever a group of people do, without researching right or wrong information. As she purchases a recommended currency from the telegram group which was based on peoples own experience, no trading tools were involved in it that's why she made and mistake and regret it later.
Emotional Bias
Emotional biases are decisions based on individual feelings when trading, which can be good as well as bad. jane could have sold the cryptocurrencies when the price was $20 but she makes a mistake by not selling them at right time and then faced an advised outcome later.
Also, she could have sold the cryptocurrencies when the price was falling but her greed and hope of earning more profit prevent her from selling at that point.
Confirmation Bias
Justification of our decisions and false beliefs by ignoring real facts and proof. Jane decides by continuing to buy coins when the price was falling and when the price doesn't go up, Jane sells all the assets to prevent further loss.
Self Attribution
The tendency of humans to attribute success to their capabilities and to attribute fault outside their control. If jane were able to control her emotions by holding the token longer and then selling it at a good profit when the price goes up, but she makes a mistake and sells the Tokens at low prices, then looked for an excuse to blame her failure, as she even blamed market and stop loss.
Disposition Bias
Jane tried to justify her position by not only holding the coins that she had purchased already but by purchasing more assets as prices were dropping consistently. She didn't admit that she was making mistake by holding cryptocurrency.
How these biases affected her behaviour?
I would say all the above-mentioned biases affect her differently and she ended up her trade in a great loss. The hope of earning more profit and fear of price drops, made the mood keep changing with different moves of the market. In the end, everything was normal as prices start rising that's why before taking any decision proper analysis is required.
Strategies to avoid biases
Don't let your emotions control you.
Do your research before making decisions.
Be unbiased towards the market.
Spent affordable fraction.
Emotional Bias:-This type of bias can be controlled by simply taking control over your emotions because the crypto market is so volatile and everything can be changed in seconds. we should keep in mind that neither a bullish nor bearish trend is permanent. so before making any decision without using proper analysis tools and market strategies.
Jane could have earned 33% profit within few days if she knew market psychology, instead of buying more cryptos she could have sold the already available assets at a good price, also she could have used a stop-loss properly.
Disposition Bias This bias can be avoided by being normal towards trading, you know that emotion cannot control markets but you do, so try to analyse your mistakes and work on them instead of making excuses and keep doing mistakes again and again.
Self Attribution Bias we should accept our mistakes and try to learn from them because you learn more from failure than from success.
Confirmation Bias It can be avoided by gaining knowledge from various sources before making any decisions. we should properly analyse the market and do plenty of research before making any conclusions.
Herd Mental Bias It could be avoided by gaining knowledge about the market fluctuations. So that you can make decisions by yourself without being dependent on others and waiting for their signals.
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.
Technical analysis is the best tool to identify and monitor trading psychology. The market is not determined by any particular individual but by the group of traders or individuals.
All the traders in the market make use of technical analysis to synchronise their trading psychology with other traders. Therefore these technical tools in the hands of traders help them to adjust with the psychology of other traders and therefore copy market psychology.
A technical analysis made it possible to predict the opportunities that can arise in future and traders can take advantage of that.
Difference between trading psychology and market psychology.
Individual's psychology cannot make any change in the market while market psychology can change the whole game.
Trading psychology should match with market psychology to see the bright outcome, otherwise, results can be negative.
In trading psychology one individual is involved in making decisions while in market psychology mindset of multiple persons is involved, they work as a community.
trading view chart for ethereum/usdt
To major market psychology with the help of Crypto chart two most widely used indicators during trade can be used to measure the market psychology. And the two indicators that I am talking about are relative strength index RSI and Moving average convergence divergence(MACD). There are definite RSI values to identify whether the asset is oversold or overbought.
RSI value of greater than 70 indicates that an asset is overbought and a value less than 30 indicates that an asset is oversold look at the chart above I have marked the areas with the arrowheads and also label them where the asset is overbought and where is oversold when will you get the corresponding market chart we can correlate it. we see where the price goes up MACD crossed the mean value and gone above 50 and when an asset or ethereum value dropped down MACD drops down and crossed below 50 and dropped towards 30.
One specific indicator to measure the market psychology is known as the greed and Fear Index this this index has more reliability to the stock market because it correlates the price of an asset to the inherent price. we know that for cryptocurrency is there is no inherent price, the value of the cryptocurrencies depend upon the supply and demand, more the demand more will be the price lesser the demand lesser will be the price.in contrast, there is a definite value of a stock to which greed and fear index can be correlated. But there is a website that provides an alternative. I which provide greed and fear index for cryptocurrencies according to this index greed tries to push the price of an asset up because people try to buy more and more assets that push the price to go up and because of fear traders try to sell the assets to prevent loss and that brings the price of crypto down.
screnshot from trading view
The majority of the biases that come into play during the uptrend phase of the market are emotional and the same holds for downtrend also during the uptrend traders are hopeful and have trust in the market as they are full of optimism about the hike in the price of an asset and therefore keep some going long. During a downtrend because of anxiety and fear of loss that traders start selling their assets that bring the price of an asset down
FOMO fear of missing out is a positive type of fear that is seen when the price of an asset is low traders buy more and more, with the hope of subsequent price hike and gaining more and more profit.
Herd mentality bias is seen during the top of an uptrend and the initial phase of downtrend because during this phase some of the traders keep on buying the asset and holding it with the hope of price hike but they ultimately land in trouble because of subsequent price dip of an asset.
The EMH hypothesis is about the randomness or volatility of the market. This hypothesis suggests that it's almost impossible to predict the value of crypto that could be advantageous for traders. Neither technical nor fundamental analysis could help the investor to make huge profits.
It is not possible to earn profits consistently from the market because the information is absorbed in the crypto markets by default and it becomes impossible to take advantage of this. If you want to earn more profits you need to invest more in various currencies higher the risk higher will be earnings.
Different forms of EMH:
Weak EMH:- It talks about technical and fundamental analysis, It says you cannot beat the market consistently by predicting future prices based on previous information because new information is reflected in the current price.
Semi Strong EMH:- This form of EMH says neither fundamental, not technical analysis can provide an advantage to earn a high alpha return.
Strong EMH:-This form of EMH says if you earn big it's your luck there is no part of the technical or fundamental analysis involved, and also I you lose it's your bad luck. It says none of the sources available can help the traders to earn rewards constantly and make huge profits.
Advantages
Save money which we spend on learning technical and fundamental analysis.
Saves time which we spend on analyzing information and charts to predict the future prices.
Fluctuations will be very high thus increased the chance of earning high profits.
Chances of falling into the expertise trap will be eliminated.
Disadvantages:-
If you don't know when to enter and exit, you could lose huge money because speculative assets rise to certain limits and call fall very down.
Markets are less efficient volatility is very high so it becomes impossible to predict the actual price movement.
Technical and fundamental analysis doesn't work here so you have to make investments based on the current situation of the market that makes a nice difference.
Risks are very high as it reacts to all the new information.
Conclusion
Market psychology and trading psychology are two different topics that have different effects on the market and individuals trading decisions. Also, different biases have different effects on a person so we should try to get control over these otherwise we can also be trapped like jane.
I would like to thank professor @asaj for this wonderful lecture about those different topics. Before doing this task I was not aware of these terms but no I have gained a significant amount of knowledge about them.
Hi @aamir07, thanks for performing the above task in the second week of Steemit Crypto Academy Season 3. The time and effort put into this work is appreciated. Hence, you have scored 5 out of 10. Here are the details:
Remarks:
While you did fine answering the Part A questions, your answers to Part B could use more depth. Again, thanks for the time and effort you put into this work.
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Please curate my home work task @steemcurator02
https://steemit.com/hive-108451/@patrickbonyah/crypto-academy-season-3-beginners-course-homework-post-for-task-2-decentralization-by-patrickbonyah-to-professor#@awesononso/qw8jk5
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