Crypto Academy / Season 3 / Week 2 - Homework Post for @asaj

Psychology

Jane's case study falls under the trading psychology, this is because trading psychology has been defined to be the decisions made by an individual in the crypto market. This deals with the mindset of such individual which infkuenecs the trading pattern of such person, this is why Jane's case study is reffered to as trading pschology.

Trading bias that influenced Jane's trading behavior.

1. Emotional Bias:

This bias can be explained as when a trader or investor makes an investment or place a trade on a particular asset based on the internal state of the person. This leads to one making irrational decisions.

This emotions can be

fear: this is the state of being afraid of the known and unknown. There is no investment without its own risk when a trader trades with fear, this causes he or she to enter a trade with small capital so as not to loose much, during the fall in price fear leads to selling off their hodlings also during the rise in price fear leads to selling off hodling quickly so as to make profit and not miss out.

In Jane's case she was scared to enter the trade when the update was first given and she entered the trade because she felt it was moving up and didn't want to miss out, this same fear is what made her use the stop loss so she won't loose too much of her funds while the price drops down.

anxiety: this is the act of being restless, this happens when a trader places a trade due to uncertainty and the price of the asset begins to go in opposite direction as expected by the trader this causes panic or restlessness for the trader and he begins to think whether to sell off or hold on to the position,

2. Disposition Bias:

This bias is based on the investor buying more of the assets which price has dropped drastically hoping for the price to rise up back soon so as to accumulate more profits on the asset. This bias is known as loss aversion, the investor refuses to sell his position because he has the notion that hodlers are the best investors.

When the price begins to go lower than expected the investor then begin to panic again just like the case of Jane who acquired more unit of the assets thinking it will go higher but the price went lower than before and she has to set a stop loss so as not to loose all her money.

3. Confirmation bias:

this is another bias in which a trader looks for a informations to justify his or her stand on a position either after a sell off or after buying more of an asset. Just like the way Jane sold her assets off and was happy when the price begins to go down, she was justifying her actions of selling off the asset.

Even when some people might have been saying the price will reverse but because that doesn't favour her she looks into the side of the price falling drastically.

4. Self attribution bias:

this type of bias is based on when a trader or investor tend to take grlory of a successful trade or investment but when the investment goes wrong the investor then blames it on an external factor beyond his or her control. Jane in our case study attributed her failure to realize profit to the stop loss features because she would have made profit if the stop loss didn't trigger to sell her assets, forgetting she was the one who placed the trade on a stop loss function.

5. Anchoring Bias:

this is another type of bias whereby a trader or investor relies solely on the piece of information given by a mentor or another investor or from a group on telegram. Whenever there is a new information about that asset we tend to view it in direction to the person who gave us the signal point.

Jane relied solely on the update from the crypto group that was what initiated her to buy more of the assets when it dipped believing the asset will rise back as predicted by the group

How can this bias be avoided by investors

1. Emotion bias

To avoid emotion bias an investor must first know that investment has nothing to do with emotion, it's either you are in profit or you are in loss but always ensure your profit is greater than your loss. This way anxiety, fear or greed won't make one loose in an investment. Fear is a choice, investment should be done with the brain than with the heart or emotion.

2. Disposition bias.

To avoid this kind of bias of taking profit from a more promising coin to buy into a dipping coin, one must set his or her priority, if such investor is still interested in the coin it is advisable to just leave the coin in its dip state without buying any more of it and wait for a reversal on the current holdings if profit is then made on the asset the profit can be used to buy back into the asset when it dips.

3. Self attribution

An investor should know nobody is perfect and we all tend to make mistakes, acknowledging only success to yourself and failure to external factors will only ruin an investor and won't make them learn from their mistakes, to avoid this always learn from mistakes and stop looking for justification for one self.

4 confirmation bias.

To avoid this bias, it boils down to always making research on the asset holding with a clear mind and not with the motive of looking for an information that will favour you. It is advised to research on a neutral ground.

5. Anchoring bias

It isn't bad to take signals from groups or someone but it is well advised to make adequate research on the asset as well and create your own trading pattern of the assets.

Trading psychology has to do with the mentality or mindset of an investor to which the investor use in trading which is known as the trading pattern while the market psychology is the trading method of multiple investors in the crypto market, this is always having various trading psychology.

So therefore without a trading psychology there is no market psychology.

To monitor both psychology in the market a fundamental and technical anlysis needs to be done. The fundamental analysis is the detailed financial information of an assets and the news about the crypto at a particular time while the technical analysis is the study of the price pattern of the asset, this two analysis is what is best used to determine the psychology of the market.

Chart showing trading bias

According to this chart, the first bias is the anchor bias where the signal has been posted by the crypto group, this makes alot of people become emotional and they start buying the assets aggressively which causes overbought, those who miss the early spot will also fomo and wait for a small dip and then buy into the asset hoping for a continuous increase in price,

while the coin gets to a level it doesn't move significantly some investors will also come in while those holding will look for information that justifies that if they sell it's a good position, this period they begin to sell amidst this, fear comes in again especially when a whale sells and the price falls drastically, so alot of people also begin to sell Wich will result in oversold.

we then have those who couldn't sell and are in loss trying to buy more assets here which is a loss aversion, the price might begin to rise again and the bias of self attribution comes in as those who bought at the lower price begins to see the trade as a success has profit has been made then sell off begins again which drops the price down again, those who allowed greed to take a better hold of them then loose again and they begin to find blame on external forces.

EFFICIENCT MARKET HYPOTHESIS

This theory shows that the fact that one does a fundamental and technical analysis doesn't mean that such asset will provide more profit for the investors unlike the ones who just bought random coin to build up their portfolio. So an investor can only make massive profits if they invest in speculative investment according to Efficient market theory.

Advantages

The one advantage of EMH is that it saves investors from spending money on technical analysis or giving money to analyst to give them potential assets.

It also saves them from investing blindly due to what an analyst has said concerning an asset.

Disadvantages

It makes an investor miss the opportunity of buying an assets when it is underpriced and selling it off when it is overpriced.

@asaj