Categories
Basic Assumption

Prices usually always Move in Trends

Prices usually occur in Trends, although some theorists argue that prices are completed random. Randomness of price is specifically related to the Efficient Market Hypothesis.

This theory is based on the fact that markets are “efficient” and information dissemination occurs instantaneously across the market.

In the real world however, this is never entirely achievable because of a varying number of factors and therefore complete randomness — in its true form — is never absolutely reflected.

Quite simply, the more efficient a market becomes, the faster information is dispersed to the market and as a consequence, the faster price changes to reflect this information.

From a charting perspective, this infers that prices follow a distinctly more “step-like-pattern” as opposed to a smooth trend for inefficient markets.

In consideration of this, prices can only adjust as fast as the news spreads across the market. It is important to realize that there is a subtle difference between information being available to the market, and investors actually processing this information to act rationally upon it.

Equally, since different investors have different risk preferences it infers that their reactions to this information will vary and increase the level of randomness in the market.Those that have had several years experience in the market will be able to differentiate between these factors and as a consequence, will know which stocks will trend in patterns and which will not.

Leave a Reply

Your email address will not be published. Required fields are marked *