Greetings fellow students and distinguished Professors, how are you doing, I hope you are doing well? Dear professor @asaj am glad to be a part of your lecture below is my assignment for your kind review.
The case study given is an example of what type of psychology? Explain the reason for your answer.
The case study given in class is an example of Trading physiology
Trading:- A trader is a person that is involved in with finance. He buys financial instruments such as stocks and bonds.
Phycology:- This us the study on the mind and behavior of an individual.
Therefore, in this case study given us in class, Jane made hasty and uninformed decisions fuelled by greed, fear, Hope and regrets. (Emotional Bias). This emotional bias eventually led her to stop loss, selling her coins before the Bullish trend emerged and this made her regrete her actions and wished she had held on to the coins a little more.
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?
The 5 biases that I think influenced Jane's trading behavior are:
- Hard Mentality Bias:- This is an emotional decision were an investor makes investment decisions without proper analysis but based on the the fact that other people are doing it. It is otherwise known as band wagon effect. Jane may not even be a Crypto trader, she only decided to buy the coins because she heard of it in a telegram group and decided to buy without proper knowledge of how Cryptocurrencies work, because certainly, there would be Bullish and Bearish effects.
- Anchoring Bias:- This is where an individual makes investment decisions based on a particular reference point. He or she becomes less flexible. This was one of the biases that affected Jane. She only made use of the information she got from an Instagram group and failed to exploit other possible options that may have meant well.
- Confirmation Bias:- This is when an investor tries to find evidence to justify a bad decision he may have made. That was was one of the factors that affected the decision of Jane, she was actually blaming the person that invented the stop loss instead of learning from her experience.
- Self Ambition Bias:- This is another type of bias that affected Jane. Self ambition is a concept of philosophical research that has to do with the tendency of an individual to attribute success to their personal skills and attribute failure to other factors beyond their control. The results we get most times is as a result of luck.
- Emotional Bias:- Emotional Bais is when when someone makes investment decisions based on his emotions. Such decisions are always wrong decision.
Types of Emotional Bias:-
Fear:- Fear of the possibility that you will loose money is one of the emotional biases, it is the reason some investors have refused to take risks. It have made them declined investing in possible rewarding coins.
Greed:- The effect of greed on investors is exactly the opposite of what fear causes. This means that an investor can make high risk investments without proper feasibility study, this type of decision doesn't make sense.
Hope:- Hope is both a negative and a positive emotion. It is a negative emotion when for instance one buys a coin and refuses to sell when the price is high, he is holding it because he believes that the price will go up even higher just like we saw in the case of Jane.
Regrets:- This happens when an investor mises out on a good investment opportunity, it results to the investor buying when the price is very high which is not a good investment decision.
List and explain how each bias you have mentioned can be avoided?
I will represent this in table below.
| S/n | Types Of Trading Bias | Ways They can be Avoided |
|---|---|---|
| 1. | Hard Mentality Bias | This can be avoided if Jane had conducted a technical analysis on the investment she wants to venture into, other than to capitalize on the information she got from a telegram group |
| 2. | Anchoring Bias | This can be avoided by making research on potential coins and conducting your visibility study. This will help you make informed and sound investment decisions |
| 3. | Confirmation Bias | If Jane had invested some effort to knowing the the pros and cons of the type of business (Cryptocurrencies) she would have saved herself lots of emotional stress and financial loss. |
| 4. | Self Ambition | We are all responsible for our decisions, instead of Jane allocating blames to the person that invented stop loss she should learn from this experience and henceforth conduct all necessary research on an investment before entry. |
| 5. | Emotional Basis | Jane should have separated emotions from investment, investment decisions should be solely based on research, technical and fundamental analysis. |
The above have highlighted the importance of conducting research on a potential investment opportunity, and base our investment decisions on the technical analysis thereof
Part B (Research & Analysis)
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 analysts and Fundamental analysis are the two types of analysis are the two types of analysis I think that can be used to monitor market phycology.
Reasons
Technical analysts is a methodology or forecasting future price movements of a security through the study of past market data, primary price and current volume.
Fundamental analysis Is a method of measurering a securities a securities intrinsic value This is possible when all related factors are brought into the equation, they may include;
- Strategy
- Macro Economic indicators
- Economic and financial factors (balance sheet and other accounting books of record)
Difference between trading psychology and market psychology.
| S/n | Trading physiology | Market Psychology |
|---|---|---|
| 1. | This has to do with the emotional and mental state of an individual while making investment decisions which will definitely affect their Trading decisions. | This has to do with the current behavior and corresponding sentiments of Marker actors |
| 2. | The effects of this is instant | here, the effect is very gradual because it involves many people and the way different people react to same thing differs |
| 3. | This involves the transaction of just one person. | This to do with many transactions (trading volumes) |
| 4. | this emotions can result to decisions that are not well founded(just like Jane) | here it can only cause market instability |
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)
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 is is a theory that reminds us of the flexibility of the market. It tells us that we can't always win by predicting the prise of stocks with technical and fundamental analysis. It reminds us that the crypto and stock market is synonyms with risks. We are therefore encouraged to braze up and be ready to accept the outcome which can be Bullish or Bearish because we can't always win.
| S/N | Advantages | Disadvantages |
|---|---|---|
| 1. | Saves time | High risk |
| 2. | High profit | High risk |
| 3. | Increased efficiency | Fear: Because of the uncertainties that is associated with it, traders are afraid of loosing money |
Hi @uzoma24, 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. However, you have scored 0 out of 10. Here are the details:
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