MARKET DYNAMICS

#1
UNDERSTANDING PRICE MOVEMENT SCIENTIFICALLY AND ECONOMICALLY -MY STUDY

Scientific version of price motion is that If the motion of prices were with uniform velocity and uniform acceleration , price motion would have it plotted as straight line if depicted in a chart (linear motion).But in reality prices moves with variable velocity and variable acceleration and hence when we plot we see it as zigzag (nonlinear motion). Economic version of price movement is that price moves with varied speed and varied volatility and this volatility gives opportunity for trader to trade and make money in the markets. Had the volatility been constant and speed be constant prices would have moved in a straight line and investors would have got fixed returns in fixed time lengths.(CAGR and log return) If volatility is zero market would not move at all. Volatility gives trading opportunities .If there was no volatility prices would not move and traders will have no opportunity. Returns in the market (positive or negative)are as a result of dispersion from the price equilibrium point created by demand and supply at that instance. A new equilibrium point is created with each trade and based on the equilibrium point in the underlying is the futures equilibrium point and options equilibrium point evolved. In Indian market context the shift of equilibrium point is set at 5 paisa for all scrips and indices. The shift of the equilibrium point in underlying translates its effect to the futures equilibrium point in turn passing its effect on to the options equilibrium point. Dynamics of the equilibrium point shift is complex and not merely apparently visible demand and supply. It is neither fundamental nor technical but natural like a river flow around the theoretical value line. It is a mixture of rational calculus and irrational randomness. The whole market is mathematically programmed in such a way that when underlying moves(without any effect of time) futures and options too moves in a mathematical way dependant on time length to expiry. Fundamental analysis tries to look the linear motion of the underlying value based on macros and micros and not bothered bout the noises in between where as technical analysis is bothered only on the effect of the noises benchmarking certain points in economic space like price ,volume and open interest but not taking the time length and underlying value. If robots with artificial intelligence could be created with infinitesimal calculus skills and chaos reading skills which can comprehend, synthesise analyse and evaluate infinitesimal data, macro and micro, it would be good bye fund managers. Many conglomerates are already on the move to tap AI. Could happen in five years time. Lets wait and see.
 

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