Prediction and Quantum Leap By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran
Posted by bobbysrinivasan on January 4, 2017
The US Federal Reserve releases a host of data during any given month which generally has an impact on interest rates, currency value and the stock prices. Added to these, is the US President elect who is promising to deliver higher economic growth and with lower taxes. How does then one evaluate where the dollar value is heading against its major trading partner currencies. Janet Yellen of US Fed has indicated that she may nudge the interest upward atleast 3 times in 2017 provided the released economic data will justify it. For a trader predicting volatility and price movements of a commodity or a stock or a currency becomes a challenge in this environment.
Academicians who have done considerable research using the secondary data have not come out successfully predicting market behavior. Their prediction when compared with the actual market prices hardly ever tally. For example, using Block and Scholes model to predict option prices and comparing it with the market prices is a wasted effort because they hardly match.
Practical experience suggests that the answer to predictive efforts rely on quantum thinking. Consider a situation, when you have to deal with several data points of economic events and using any of the algorithm or model that is available in the literature to do prediction. After all the hard work is done most of the times prediction falls short of expectation. This is where the quantum thinking fits the bill. In this approach your mind or the neural network processes volumes of a data instantly and comes out with a recommendation to buy to hold or to sell decision. My experience has shown that while the direction of a price up or down is not easily predictable but the size of variation with in a period to some extent is not that difficult to predict. This results in a support and resistance price for a commodity or a currency during the trading horizon.
For example, in any given month scores of economic indicators are released. While some indicators confirm the direction of the market others stay either neutral or suggest the opposite. This is where the theory of reflexivity propounded by George Soros the legendary investor works. Basically it is not where the market is? Then what is relevant is how the investors or traders are viewing the market. A new area fashionably called “Behavioral Finance” has come into existence which tries to explain human behavior and its impact on the market.
Assuming that half the participants in the market win (either you are right or wrong in prediction) the focus should be what as a trader; I should do to stay on the winning side. Studying past behavioral experiences of a trader becomes the real knowledge relevant for predicting future course of action. Of course some extraordinary events such as the Brexit which destroyed the value of the Pound against the Dollar which then brought so much anxiety among the investors and traders. In summary quantum leap is necessary to comprehend the various gamut’s of market behavior. Even that is challenged by algorithmic traders who trade in large volumes in a short period of time. In summary, trading becomes fascinating and the more you contemplate on what you trade, clarity emerges which guides you to achieve phenomenal returns. It is my sincere hope that students pick up this skill.