Blockchain and Cryptocurrency Advanced - How The 5 Biases Can Cause a Coin to Be Oversold and Overbought

Herd Mentality Bias

This type of bias is basically when a trader buys a coin because others are buying as well. The traders and investors are buying because other are buying and the price keeps increasing due to the buying force. This can lead to loss. We can see from the STORJ chart showing where people where buying STORJ because other were buying due to the Coinbase listing tweet. Those who bought high lost money after the price dumped back down.

Disposition Bias

This type of bias is basically when a trader decides to hold on to their position and ignore the signs in the market. The signs are point that the market is bearish but the trader is still holding their position due to their own beliefs. The traders keep holding even though there are already signs that the asset would continue falling. Because of this, the price would fall to unbearable ranges and the traders could eventually sell off at a bigger loss. The selling force by the traders can cause the market to enter an oversold.

Confirmation Bias

This type of bias basically means when traders justifies their actions or decisions by seeking or cherry-picking things that confirms actions or decisions to feel better. This can cause the market to go into an overbought position because if a lot of traders are buying the dip and the buying force becomes greater, the price of the coin would enter into overbought.

Emotional Bias

This type of bias is basically when a trader allows the emotions or feelings to control the trading decision. When the traders in the market allow their emotions and feelings control their decisions and actions due to fear, the market can enter into an oversold because of many traders and investors selling out of fear of losing all their money.

Trend chasing bias

This type of bias is basically when a trader decides to buy a coin because of the past trends of the coin. This bias causes traders to chase trends due to past records. When traders identify a trend, the want to take advantage of the new trend. We see that a lot in the cryptocurrency world which could lead to losses especially if the traders enter the market late. Because of the buying force to take advantage of a newly discovered trend, the market can enter into overbought.