SlideShare a Scribd company logo
1 of 7
Download to read offline
Module - 53
Noise Traders as
Technical Traders
CMT LEVEL - I
Trend-Following Noise Traders
• There are two things that are intriguing about stock price chart
analysis:
• (1) stock price charting is widely used, and
• (2) users tend to agree on what many stock price chart patterns
mean.
• The first of these considerations implies that noise traders who are
price chart traders represent a significant part of the actual trading
community.
• The second suggests that their behavior in the marketplace may be
systematic.
Trend-Following Noise Traders
• A noise trader using the extrapolative
expectations, such as depicted in
Figure 28.2, might pay little or no
attention to fundamentals.
• Bad news would not matter to such a
noise trader, unless the bad news
changed the pattern of stock prices so
the extrapolation would lead to some
different forecast.
• If there is a large number of noise
traders defined in this way, then one
would expect some self-fulfilling aspect
of such trading behavior.
Reversal Patterns in Stock Prices
• A market reversal takes place when a rising (falling) price trend
becomes a falling (rising) price trend. What stock price patterns
predict reversals There are many such as :
• Island Reversals
• Head & Shoulder Patterns
• This line of reasoning suggests that trend following is likely to be
systematic.
• Defenders of the EMH argue that noise traders will tend to cancel
one another out, and something like the Law of Large Numbers will
take hold, so that, in the aggregate, noise trader activity won't
matter. But if the noise traders are all doing pretty much the same
thing, then the cancel-out argument no longer applies.
Abreu-Brunnermeier Model
• Abreu and Brunnermeier (2003)7 provide a noise trader model
designed to deal specifically with bubbles and crashes.
• AB assume that prices begin to diverge from efficient prices without
any particular reason and the arbitrageurs observe the divergence.
• The model permits the bubble to be burst by the combined action of
the arbitrageurs, but it doesn't provide any certainty that the
combined action of the arbitrageurs will ever successfully burst the
bubble.
• The Abreu-Brunnermeier (AB) model has the interesting feature that
even arbitrage traders may find it in their interest to ride the wave of
the bubble.
Herd Instinct Models
• Herd instinct models are motivated by observing financial
market booms and busts.
• They are typically highly aggregative, and the herd behavior is
usually summarized by a single-agent model representing the
herd.
• Market practitioners have observed cycles in financial markets
that are often described as a “feeding frenzy.”
• A price of a particular asset begins to rise then develops a
momentum of its own, seemingly independent of any real
fundamental change in the things that should determine its
price.
The Shiller Model
• Shiller builds his model of stock returns on the back of two different
observations.
• First, he notes that the prevailing thought at that time (the mid-1980s)
was that the lack of forecast ability in stock returns implied investor
psychology could not have much impact in financial markets.
• Second, he notes that firms generally announce dividend movements in
advance, implying that dividend movements are somewhat forecast able.
• Since dividends should certainly have some impact on stock prices, but
price movements are not very forecast able, the prices themselves
must anticipate future dividend movements.
• With investor psychology already ruled out as a factor, that leaves an
optimal forecast of dividends as the only possible determinant of stock
prices.

More Related Content

Similar to SECTION V - CHAPTER 34 - Noise Traders as technical Traders.pdf

INDIAN INSTITUTE OF CAPITAL MARKETS_CONFERENCE_18DEC2014
INDIAN INSTITUTE OF CAPITAL MARKETS_CONFERENCE_18DEC2014INDIAN INSTITUTE OF CAPITAL MARKETS_CONFERENCE_18DEC2014
INDIAN INSTITUTE OF CAPITAL MARKETS_CONFERENCE_18DEC2014Tanmoy Ganguli
 
Financial Markets & Trading - Introduction
Financial Markets & Trading - IntroductionFinancial Markets & Trading - Introduction
Financial Markets & Trading - IntroductionAditya Dasgupta
 
Technical Analysis.pptx
Technical Analysis.pptxTechnical Analysis.pptx
Technical Analysis.pptxSRCAS
 
Lecture 7 - Stock Market and EMF
Lecture 7 - Stock Market and EMFLecture 7 - Stock Market and EMF
Lecture 7 - Stock Market and EMFRyan Herzog
 
2.1.1 Heuristics and development of society
2.1.1 Heuristics and development of society2.1.1 Heuristics and development of society
2.1.1 Heuristics and development of societydivyansh544183
 
SECTION V - CHAPTER 35 - Academic Approaches to Technical Analysis
SECTION V - CHAPTER 35 - Academic Approaches to Technical AnalysisSECTION V - CHAPTER 35 - Academic Approaches to Technical Analysis
SECTION V - CHAPTER 35 - Academic Approaches to Technical AnalysisProfessional Training Academy
 
Options pricing2
Options pricing2Options pricing2
Options pricing2Urmas Aunin
 
Security analysis (technical) and portfolio management
Security analysis (technical) and portfolio managementSecurity analysis (technical) and portfolio management
Security analysis (technical) and portfolio managementHarish Khan
 
Technical analysis - By Sohan Khatri
Technical analysis - By Sohan KhatriTechnical analysis - By Sohan Khatri
Technical analysis - By Sohan KhatriSohan Khatri
 
Overview of price action trading
Overview of price action tradingOverview of price action trading
Overview of price action tradingChristineNelson17
 
RRN-0808 Society of Actuaries article (stock compensation) (1)
RRN-0808 Society of Actuaries article (stock   compensation) (1)RRN-0808 Society of Actuaries article (stock   compensation) (1)
RRN-0808 Society of Actuaries article (stock compensation) (1)Michael Burgess
 
Efficient Market Hypothesis (EMH) and Insider Trading
Efficient Market Hypothesis (EMH) and Insider TradingEfficient Market Hypothesis (EMH) and Insider Trading
Efficient Market Hypothesis (EMH) and Insider TradingPrashant Shrestha
 
Behavioral Finance
Behavioral FinanceBehavioral Finance
Behavioral FinancePRIYA M.M
 
Introduction To Technical Analysis
Introduction To Technical AnalysisIntroduction To Technical Analysis
Introduction To Technical AnalysisWealthbuilder.ie
 
Module 1 - Technical Analysis and the Dow Theory
Module 1 - Technical Analysis  and the Dow TheoryModule 1 - Technical Analysis  and the Dow Theory
Module 1 - Technical Analysis and the Dow TheoryThe Responsible Trader
 
Dow theory by P. Sai Prathyusha (1ST M.COM BUSINESS FINANCE)
Dow theory  by  P. Sai Prathyusha (1ST M.COM BUSINESS FINANCE)Dow theory  by  P. Sai Prathyusha (1ST M.COM BUSINESS FINANCE)
Dow theory by P. Sai Prathyusha (1ST M.COM BUSINESS FINANCE)SaiLakshmi115
 

Similar to SECTION V - CHAPTER 34 - Noise Traders as technical Traders.pdf (20)

INDIAN INSTITUTE OF CAPITAL MARKETS_CONFERENCE_18DEC2014
INDIAN INSTITUTE OF CAPITAL MARKETS_CONFERENCE_18DEC2014INDIAN INSTITUTE OF CAPITAL MARKETS_CONFERENCE_18DEC2014
INDIAN INSTITUTE OF CAPITAL MARKETS_CONFERENCE_18DEC2014
 
Financial Markets & Trading - Introduction
Financial Markets & Trading - IntroductionFinancial Markets & Trading - Introduction
Financial Markets & Trading - Introduction
 
Technical Analysis.pptx
Technical Analysis.pptxTechnical Analysis.pptx
Technical Analysis.pptx
 
Technical analysis
Technical analysisTechnical analysis
Technical analysis
 
Perspective on Active & Passive Manageemnt of Fund
Perspective on Active & Passive Manageemnt of FundPerspective on Active & Passive Manageemnt of Fund
Perspective on Active & Passive Manageemnt of Fund
 
Lecture 7 - Stock Market and EMF
Lecture 7 - Stock Market and EMFLecture 7 - Stock Market and EMF
Lecture 7 - Stock Market and EMF
 
2.1.1 Heuristics and development of society
2.1.1 Heuristics and development of society2.1.1 Heuristics and development of society
2.1.1 Heuristics and development of society
 
SECTION V - CHAPTER 35 - Academic Approaches to Technical Analysis
SECTION V - CHAPTER 35 - Academic Approaches to Technical AnalysisSECTION V - CHAPTER 35 - Academic Approaches to Technical Analysis
SECTION V - CHAPTER 35 - Academic Approaches to Technical Analysis
 
Options pricing2
Options pricing2Options pricing2
Options pricing2
 
Security analysis (technical) and portfolio management
Security analysis (technical) and portfolio managementSecurity analysis (technical) and portfolio management
Security analysis (technical) and portfolio management
 
Technical analysis - By Sohan Khatri
Technical analysis - By Sohan KhatriTechnical analysis - By Sohan Khatri
Technical analysis - By Sohan Khatri
 
Overview of price action trading
Overview of price action tradingOverview of price action trading
Overview of price action trading
 
Unit 1.pdf
Unit 1.pdfUnit 1.pdf
Unit 1.pdf
 
RRN-0808 Society of Actuaries article (stock compensation) (1)
RRN-0808 Society of Actuaries article (stock   compensation) (1)RRN-0808 Society of Actuaries article (stock   compensation) (1)
RRN-0808 Society of Actuaries article (stock compensation) (1)
 
Efficient Market Hypothesis (EMH) and Insider Trading
Efficient Market Hypothesis (EMH) and Insider TradingEfficient Market Hypothesis (EMH) and Insider Trading
Efficient Market Hypothesis (EMH) and Insider Trading
 
Behavioral Finance
Behavioral FinanceBehavioral Finance
Behavioral Finance
 
value-1.ppt
value-1.pptvalue-1.ppt
value-1.ppt
 
Introduction To Technical Analysis
Introduction To Technical AnalysisIntroduction To Technical Analysis
Introduction To Technical Analysis
 
Module 1 - Technical Analysis and the Dow Theory
Module 1 - Technical Analysis  and the Dow TheoryModule 1 - Technical Analysis  and the Dow Theory
Module 1 - Technical Analysis and the Dow Theory
 
Dow theory by P. Sai Prathyusha (1ST M.COM BUSINESS FINANCE)
Dow theory  by  P. Sai Prathyusha (1ST M.COM BUSINESS FINANCE)Dow theory  by  P. Sai Prathyusha (1ST M.COM BUSINESS FINANCE)
Dow theory by P. Sai Prathyusha (1ST M.COM BUSINESS FINANCE)
 

More from Professional Training Academy

Lecture E - Standard V Investment Analysis, Recommendations, and Actions
Lecture E - Standard V Investment Analysis, Recommendations, and ActionsLecture E - Standard V Investment Analysis, Recommendations, and Actions
Lecture E - Standard V Investment Analysis, Recommendations, and ActionsProfessional Training Academy
 
SECTION VII - CHAPTER 42 - Being Right or making money
SECTION VII - CHAPTER 42 - Being Right or making moneySECTION VII - CHAPTER 42 - Being Right or making money
SECTION VII - CHAPTER 42 - Being Right or making moneyProfessional Training Academy
 
SECTION VII - CHAPTER 41 - Objective Rules & Evaluation
SECTION VII - CHAPTER 41 - Objective Rules & EvaluationSECTION VII - CHAPTER 41 - Objective Rules & Evaluation
SECTION VII - CHAPTER 41 - Objective Rules & EvaluationProfessional Training Academy
 
SECTION VI - CHAPTER 39 - Descriptive Statistics basics
SECTION VI - CHAPTER 39 - Descriptive Statistics basicsSECTION VI - CHAPTER 39 - Descriptive Statistics basics
SECTION VI - CHAPTER 39 - Descriptive Statistics basicsProfessional Training Academy
 
SECTION V- CHAPTER 38 - Sentiment Measures from External Data
SECTION V- CHAPTER 38  - Sentiment Measures from External  DataSECTION V- CHAPTER 38  - Sentiment Measures from External  Data
SECTION V- CHAPTER 38 - Sentiment Measures from External DataProfessional Training Academy
 
SECTION V - CHAPTER 37 - Sentiment Measures from Market Data
SECTION V - CHAPTER 37 - Sentiment Measures from Market DataSECTION V - CHAPTER 37 - Sentiment Measures from Market Data
SECTION V - CHAPTER 37 - Sentiment Measures from Market DataProfessional Training Academy
 
SECTION V - CHAPTER 36 - Market Sentiment & Technical Analysis
SECTION V - CHAPTER 36 - Market Sentiment & Technical AnalysisSECTION V - CHAPTER 36 - Market Sentiment & Technical Analysis
SECTION V - CHAPTER 36 - Market Sentiment & Technical AnalysisProfessional Training Academy
 
SECTION V - CHAPTER 32 - Forerunners to Behavioural Finance.pdf
SECTION V - CHAPTER 32 - Forerunners to Behavioural Finance.pdfSECTION V - CHAPTER 32 - Forerunners to Behavioural Finance.pdf
SECTION V - CHAPTER 32 - Forerunners to Behavioural Finance.pdfProfessional Training Academy
 

More from Professional Training Academy (20)

Chapter D - Knowledge Domains and Weightings
Chapter D - Knowledge Domains and WeightingsChapter D - Knowledge Domains and Weightings
Chapter D - Knowledge Domains and Weightings
 
Lecture F - Standard VI Conflicts of Interest
Lecture F - Standard VI Conflicts of InterestLecture F - Standard VI Conflicts of Interest
Lecture F - Standard VI Conflicts of Interest
 
Lecture E - Standard V Investment Analysis, Recommendations, and Actions
Lecture E - Standard V Investment Analysis, Recommendations, and ActionsLecture E - Standard V Investment Analysis, Recommendations, and Actions
Lecture E - Standard V Investment Analysis, Recommendations, and Actions
 
Lecture D - Standard IV Duties to Employers
Lecture D - Standard IV Duties to EmployersLecture D - Standard IV Duties to Employers
Lecture D - Standard IV Duties to Employers
 
Lecture C - Standard III Duties to Clients
Lecture C - Standard III Duties to ClientsLecture C - Standard III Duties to Clients
Lecture C - Standard III Duties to Clients
 
Lecture B - Standard II Integrity of Capital Markets
Lecture B - Standard II Integrity of Capital MarketsLecture B - Standard II Integrity of Capital Markets
Lecture B - Standard II Integrity of Capital Markets
 
Lecture A - Standard I Professionalism
Lecture A - Standard I ProfessionalismLecture A - Standard I Professionalism
Lecture A - Standard I Professionalism
 
SECTION VII - CHAPTER 44 - Relative Strength Concept
SECTION VII - CHAPTER 44 -  Relative Strength ConceptSECTION VII - CHAPTER 44 -  Relative Strength Concept
SECTION VII - CHAPTER 44 - Relative Strength Concept
 
SECTION VII - CHAPTER 43 - Model Building Process
SECTION VII - CHAPTER 43 - Model Building ProcessSECTION VII - CHAPTER 43 - Model Building Process
SECTION VII - CHAPTER 43 - Model Building Process
 
SECTION VII - CHAPTER 42 - Being Right or making money
SECTION VII - CHAPTER 42 - Being Right or making moneySECTION VII - CHAPTER 42 - Being Right or making money
SECTION VII - CHAPTER 42 - Being Right or making money
 
SECTION VII - CHAPTER 41 - Objective Rules & Evaluation
SECTION VII - CHAPTER 41 - Objective Rules & EvaluationSECTION VII - CHAPTER 41 - Objective Rules & Evaluation
SECTION VII - CHAPTER 41 - Objective Rules & Evaluation
 
SECTION VI - CHAPTER 40 - Concept of Probablity
SECTION VI - CHAPTER 40 - Concept of ProbablitySECTION VI - CHAPTER 40 - Concept of Probablity
SECTION VI - CHAPTER 40 - Concept of Probablity
 
SECTION VI - CHAPTER 39 - Descriptive Statistics basics
SECTION VI - CHAPTER 39 - Descriptive Statistics basicsSECTION VI - CHAPTER 39 - Descriptive Statistics basics
SECTION VI - CHAPTER 39 - Descriptive Statistics basics
 
SECTION V- CHAPTER 38 - Sentiment Measures from External Data
SECTION V- CHAPTER 38  - Sentiment Measures from External  DataSECTION V- CHAPTER 38  - Sentiment Measures from External  Data
SECTION V- CHAPTER 38 - Sentiment Measures from External Data
 
SECTION V - CHAPTER 37 - Sentiment Measures from Market Data
SECTION V - CHAPTER 37 - Sentiment Measures from Market DataSECTION V - CHAPTER 37 - Sentiment Measures from Market Data
SECTION V - CHAPTER 37 - Sentiment Measures from Market Data
 
SECTION V - CHAPTER 36 - Market Sentiment & Technical Analysis
SECTION V - CHAPTER 36 - Market Sentiment & Technical AnalysisSECTION V - CHAPTER 36 - Market Sentiment & Technical Analysis
SECTION V - CHAPTER 36 - Market Sentiment & Technical Analysis
 
SECTION V - CHAPTER 32 - Forerunners to Behavioural Finance.pdf
SECTION V - CHAPTER 32 - Forerunners to Behavioural Finance.pdfSECTION V - CHAPTER 32 - Forerunners to Behavioural Finance.pdf
SECTION V - CHAPTER 32 - Forerunners to Behavioural Finance.pdf
 
SECTION V - CHAPTER 31 - EMH Basics
SECTION V - CHAPTER 31 - EMH BasicsSECTION V - CHAPTER 31 - EMH Basics
SECTION V - CHAPTER 31 - EMH Basics
 
SECTION IV - CHAPTER 30 - VIX Index
SECTION IV - CHAPTER 30 - VIX IndexSECTION IV - CHAPTER 30 - VIX Index
SECTION IV - CHAPTER 30 - VIX Index
 
SECTION IV - CHAPTER 29 - Implied Volatility Basics
SECTION IV - CHAPTER 29 - Implied Volatility BasicsSECTION IV - CHAPTER 29 - Implied Volatility Basics
SECTION IV - CHAPTER 29 - Implied Volatility Basics
 

Recently uploaded

The Shop Floor Overview in the Odoo 17 ERP
The Shop Floor Overview in the Odoo 17 ERPThe Shop Floor Overview in the Odoo 17 ERP
The Shop Floor Overview in the Odoo 17 ERPCeline George
 
Objectives n learning outcoms - MD 20240404.pptx
Objectives n learning outcoms - MD 20240404.pptxObjectives n learning outcoms - MD 20240404.pptx
Objectives n learning outcoms - MD 20240404.pptxMadhavi Dharankar
 
18. Training and prunning of horicultural crops.pptx
18. Training and prunning of horicultural crops.pptx18. Training and prunning of horicultural crops.pptx
18. Training and prunning of horicultural crops.pptxUmeshTimilsina1
 
Transdisciplinary Pathways for Urban Resilience [Work in Progress].pptx
Transdisciplinary Pathways for Urban Resilience [Work in Progress].pptxTransdisciplinary Pathways for Urban Resilience [Work in Progress].pptx
Transdisciplinary Pathways for Urban Resilience [Work in Progress].pptxinfo924062
 
CLASSIFICATION OF ANTI - CANCER DRUGS.pptx
CLASSIFICATION OF ANTI - CANCER DRUGS.pptxCLASSIFICATION OF ANTI - CANCER DRUGS.pptx
CLASSIFICATION OF ANTI - CANCER DRUGS.pptxAnupam32727
 
Sulphonamides, mechanisms and their uses
Sulphonamides, mechanisms and their usesSulphonamides, mechanisms and their uses
Sulphonamides, mechanisms and their usesVijayaLaxmi84
 
The role of Geography in climate education: science and active citizenship
The role of Geography in climate education: science and active citizenshipThe role of Geography in climate education: science and active citizenship
The role of Geography in climate education: science and active citizenshipKarl Donert
 
Scientific Writing :Research Discourse
Scientific  Writing :Research  DiscourseScientific  Writing :Research  Discourse
Scientific Writing :Research DiscourseAnita GoswamiGiri
 
How to Uninstall a Module in Odoo 17 Using Command Line
How to Uninstall a Module in Odoo 17 Using Command LineHow to Uninstall a Module in Odoo 17 Using Command Line
How to Uninstall a Module in Odoo 17 Using Command LineCeline George
 
Grade Three -ELLNA-REVIEWER-ENGLISH.pptx
Grade Three -ELLNA-REVIEWER-ENGLISH.pptxGrade Three -ELLNA-REVIEWER-ENGLISH.pptx
Grade Three -ELLNA-REVIEWER-ENGLISH.pptxkarenfajardo43
 
CHUYÊN ĐỀ ÔN THEO CÂU CHO HỌC SINH LỚP 12 ĐỂ ĐẠT ĐIỂM 5+ THI TỐT NGHIỆP THPT ...
CHUYÊN ĐỀ ÔN THEO CÂU CHO HỌC SINH LỚP 12 ĐỂ ĐẠT ĐIỂM 5+ THI TỐT NGHIỆP THPT ...CHUYÊN ĐỀ ÔN THEO CÂU CHO HỌC SINH LỚP 12 ĐỂ ĐẠT ĐIỂM 5+ THI TỐT NGHIỆP THPT ...
CHUYÊN ĐỀ ÔN THEO CÂU CHO HỌC SINH LỚP 12 ĐỂ ĐẠT ĐIỂM 5+ THI TỐT NGHIỆP THPT ...Nguyen Thanh Tu Collection
 
4.9.24 Social Capital and Social Exclusion.pptx
4.9.24 Social Capital and Social Exclusion.pptx4.9.24 Social Capital and Social Exclusion.pptx
4.9.24 Social Capital and Social Exclusion.pptxmary850239
 
PART 1 - CHAPTER 1 - CELL THE FUNDAMENTAL UNIT OF LIFE
PART 1 - CHAPTER 1 - CELL THE FUNDAMENTAL UNIT OF LIFEPART 1 - CHAPTER 1 - CELL THE FUNDAMENTAL UNIT OF LIFE
PART 1 - CHAPTER 1 - CELL THE FUNDAMENTAL UNIT OF LIFEMISSRITIMABIOLOGYEXP
 
Jordan Chrietzberg In Media Res Media Component
Jordan Chrietzberg In Media Res Media ComponentJordan Chrietzberg In Media Res Media Component
Jordan Chrietzberg In Media Res Media ComponentInMediaRes1
 
Employablity presentation and Future Career Plan.pptx
Employablity presentation and Future Career Plan.pptxEmployablity presentation and Future Career Plan.pptx
Employablity presentation and Future Career Plan.pptxryandux83rd
 
BÀI TẬP BỔ TRỢ 4 KĨ NĂNG TIẾNG ANH LỚP 8 - CẢ NĂM - GLOBAL SUCCESS - NĂM HỌC ...
BÀI TẬP BỔ TRỢ 4 KĨ NĂNG TIẾNG ANH LỚP 8 - CẢ NĂM - GLOBAL SUCCESS - NĂM HỌC ...BÀI TẬP BỔ TRỢ 4 KĨ NĂNG TIẾNG ANH LỚP 8 - CẢ NĂM - GLOBAL SUCCESS - NĂM HỌC ...
BÀI TẬP BỔ TRỢ 4 KĨ NĂNG TIẾNG ANH LỚP 8 - CẢ NĂM - GLOBAL SUCCESS - NĂM HỌC ...Nguyen Thanh Tu Collection
 
STRAND 1 FOUNDATION OF PRETECHNICALSTUDIE.pptx
STRAND 1 FOUNDATION OF PRETECHNICALSTUDIE.pptxSTRAND 1 FOUNDATION OF PRETECHNICALSTUDIE.pptx
STRAND 1 FOUNDATION OF PRETECHNICALSTUDIE.pptxkimdan468
 

Recently uploaded (20)

The Shop Floor Overview in the Odoo 17 ERP
The Shop Floor Overview in the Odoo 17 ERPThe Shop Floor Overview in the Odoo 17 ERP
The Shop Floor Overview in the Odoo 17 ERP
 
Introduction to Research ,Need for research, Need for design of Experiments, ...
Introduction to Research ,Need for research, Need for design of Experiments, ...Introduction to Research ,Need for research, Need for design of Experiments, ...
Introduction to Research ,Need for research, Need for design of Experiments, ...
 
Spearman's correlation,Formula,Advantages,
Spearman's correlation,Formula,Advantages,Spearman's correlation,Formula,Advantages,
Spearman's correlation,Formula,Advantages,
 
Objectives n learning outcoms - MD 20240404.pptx
Objectives n learning outcoms - MD 20240404.pptxObjectives n learning outcoms - MD 20240404.pptx
Objectives n learning outcoms - MD 20240404.pptx
 
CARNAVAL COM MAGIA E EUFORIA _
CARNAVAL COM MAGIA E EUFORIA            _CARNAVAL COM MAGIA E EUFORIA            _
CARNAVAL COM MAGIA E EUFORIA _
 
18. Training and prunning of horicultural crops.pptx
18. Training and prunning of horicultural crops.pptx18. Training and prunning of horicultural crops.pptx
18. Training and prunning of horicultural crops.pptx
 
Transdisciplinary Pathways for Urban Resilience [Work in Progress].pptx
Transdisciplinary Pathways for Urban Resilience [Work in Progress].pptxTransdisciplinary Pathways for Urban Resilience [Work in Progress].pptx
Transdisciplinary Pathways for Urban Resilience [Work in Progress].pptx
 
CLASSIFICATION OF ANTI - CANCER DRUGS.pptx
CLASSIFICATION OF ANTI - CANCER DRUGS.pptxCLASSIFICATION OF ANTI - CANCER DRUGS.pptx
CLASSIFICATION OF ANTI - CANCER DRUGS.pptx
 
Sulphonamides, mechanisms and their uses
Sulphonamides, mechanisms and their usesSulphonamides, mechanisms and their uses
Sulphonamides, mechanisms and their uses
 
The role of Geography in climate education: science and active citizenship
The role of Geography in climate education: science and active citizenshipThe role of Geography in climate education: science and active citizenship
The role of Geography in climate education: science and active citizenship
 
Scientific Writing :Research Discourse
Scientific  Writing :Research  DiscourseScientific  Writing :Research  Discourse
Scientific Writing :Research Discourse
 
How to Uninstall a Module in Odoo 17 Using Command Line
How to Uninstall a Module in Odoo 17 Using Command LineHow to Uninstall a Module in Odoo 17 Using Command Line
How to Uninstall a Module in Odoo 17 Using Command Line
 
Grade Three -ELLNA-REVIEWER-ENGLISH.pptx
Grade Three -ELLNA-REVIEWER-ENGLISH.pptxGrade Three -ELLNA-REVIEWER-ENGLISH.pptx
Grade Three -ELLNA-REVIEWER-ENGLISH.pptx
 
CHUYÊN ĐỀ ÔN THEO CÂU CHO HỌC SINH LỚP 12 ĐỂ ĐẠT ĐIỂM 5+ THI TỐT NGHIỆP THPT ...
CHUYÊN ĐỀ ÔN THEO CÂU CHO HỌC SINH LỚP 12 ĐỂ ĐẠT ĐIỂM 5+ THI TỐT NGHIỆP THPT ...CHUYÊN ĐỀ ÔN THEO CÂU CHO HỌC SINH LỚP 12 ĐỂ ĐẠT ĐIỂM 5+ THI TỐT NGHIỆP THPT ...
CHUYÊN ĐỀ ÔN THEO CÂU CHO HỌC SINH LỚP 12 ĐỂ ĐẠT ĐIỂM 5+ THI TỐT NGHIỆP THPT ...
 
4.9.24 Social Capital and Social Exclusion.pptx
4.9.24 Social Capital and Social Exclusion.pptx4.9.24 Social Capital and Social Exclusion.pptx
4.9.24 Social Capital and Social Exclusion.pptx
 
PART 1 - CHAPTER 1 - CELL THE FUNDAMENTAL UNIT OF LIFE
PART 1 - CHAPTER 1 - CELL THE FUNDAMENTAL UNIT OF LIFEPART 1 - CHAPTER 1 - CELL THE FUNDAMENTAL UNIT OF LIFE
PART 1 - CHAPTER 1 - CELL THE FUNDAMENTAL UNIT OF LIFE
 
Jordan Chrietzberg In Media Res Media Component
Jordan Chrietzberg In Media Res Media ComponentJordan Chrietzberg In Media Res Media Component
Jordan Chrietzberg In Media Res Media Component
 
Employablity presentation and Future Career Plan.pptx
Employablity presentation and Future Career Plan.pptxEmployablity presentation and Future Career Plan.pptx
Employablity presentation and Future Career Plan.pptx
 
BÀI TẬP BỔ TRỢ 4 KĨ NĂNG TIẾNG ANH LỚP 8 - CẢ NĂM - GLOBAL SUCCESS - NĂM HỌC ...
BÀI TẬP BỔ TRỢ 4 KĨ NĂNG TIẾNG ANH LỚP 8 - CẢ NĂM - GLOBAL SUCCESS - NĂM HỌC ...BÀI TẬP BỔ TRỢ 4 KĨ NĂNG TIẾNG ANH LỚP 8 - CẢ NĂM - GLOBAL SUCCESS - NĂM HỌC ...
BÀI TẬP BỔ TRỢ 4 KĨ NĂNG TIẾNG ANH LỚP 8 - CẢ NĂM - GLOBAL SUCCESS - NĂM HỌC ...
 
STRAND 1 FOUNDATION OF PRETECHNICALSTUDIE.pptx
STRAND 1 FOUNDATION OF PRETECHNICALSTUDIE.pptxSTRAND 1 FOUNDATION OF PRETECHNICALSTUDIE.pptx
STRAND 1 FOUNDATION OF PRETECHNICALSTUDIE.pptx
 

SECTION V - CHAPTER 34 - Noise Traders as technical Traders.pdf

  • 1. Module - 53 Noise Traders as Technical Traders CMT LEVEL - I
  • 2. Trend-Following Noise Traders • There are two things that are intriguing about stock price chart analysis: • (1) stock price charting is widely used, and • (2) users tend to agree on what many stock price chart patterns mean. • The first of these considerations implies that noise traders who are price chart traders represent a significant part of the actual trading community. • The second suggests that their behavior in the marketplace may be systematic.
  • 3. Trend-Following Noise Traders • A noise trader using the extrapolative expectations, such as depicted in Figure 28.2, might pay little or no attention to fundamentals. • Bad news would not matter to such a noise trader, unless the bad news changed the pattern of stock prices so the extrapolation would lead to some different forecast. • If there is a large number of noise traders defined in this way, then one would expect some self-fulfilling aspect of such trading behavior.
  • 4. Reversal Patterns in Stock Prices • A market reversal takes place when a rising (falling) price trend becomes a falling (rising) price trend. What stock price patterns predict reversals There are many such as : • Island Reversals • Head & Shoulder Patterns • This line of reasoning suggests that trend following is likely to be systematic. • Defenders of the EMH argue that noise traders will tend to cancel one another out, and something like the Law of Large Numbers will take hold, so that, in the aggregate, noise trader activity won't matter. But if the noise traders are all doing pretty much the same thing, then the cancel-out argument no longer applies.
  • 5. Abreu-Brunnermeier Model • Abreu and Brunnermeier (2003)7 provide a noise trader model designed to deal specifically with bubbles and crashes. • AB assume that prices begin to diverge from efficient prices without any particular reason and the arbitrageurs observe the divergence. • The model permits the bubble to be burst by the combined action of the arbitrageurs, but it doesn't provide any certainty that the combined action of the arbitrageurs will ever successfully burst the bubble. • The Abreu-Brunnermeier (AB) model has the interesting feature that even arbitrage traders may find it in their interest to ride the wave of the bubble.
  • 6. Herd Instinct Models • Herd instinct models are motivated by observing financial market booms and busts. • They are typically highly aggregative, and the herd behavior is usually summarized by a single-agent model representing the herd. • Market practitioners have observed cycles in financial markets that are often described as a “feeding frenzy.” • A price of a particular asset begins to rise then develops a momentum of its own, seemingly independent of any real fundamental change in the things that should determine its price.
  • 7. The Shiller Model • Shiller builds his model of stock returns on the back of two different observations. • First, he notes that the prevailing thought at that time (the mid-1980s) was that the lack of forecast ability in stock returns implied investor psychology could not have much impact in financial markets. • Second, he notes that firms generally announce dividend movements in advance, implying that dividend movements are somewhat forecast able. • Since dividends should certainly have some impact on stock prices, but price movements are not very forecast able, the prices themselves must anticipate future dividend movements. • With investor psychology already ruled out as a factor, that leaves an optimal forecast of dividends as the only possible determinant of stock prices.