A stock operator's thoughts and ideas about market principles
Stock Trader and
Economy Student
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May/05/2006
Focusing on change
It's fascinating to observe how focused most stock operators (including me) are on the recent changes in prices rather than the absolute price itself. The contrarian may buy if a stock has fallen ten percent and the trend follower may sell short. The fundamentalist may buy if the fall has nothing to do with the value of the company, and the professor may not even consider the price fall because the efficient equilibrium is ten percent lower and thus is neither a better or worse investment.
I have a hard time fitting supply and demand curves for stocks into a price-quantum diagram. The reason is simply that the derived of price (dP/dt) is at least as important as the price. The demand for a stock is most likely different after a decline from 11 to 10 than at a day the price is unchanged at 10.
The hunter
It is a lot easier to spot a moving object than one standing still. This can have to do with survival. Moving objects, be it marching troops, rocks, or animals, all have in common that our consciousnesses should be aware of them. Consider a cheetah for instance, which quietly observes a prey. If the prey starts to run the cheetah must follow. I wonder if the same is the case with stocks. When the price starts to go up the participants who find the price attractive, but hesitated while the price was not moving, will jump on as well in fear of the stock "escaping". The opposite with a declining price; like you want to escape if a mouse runs towards you, a stop loss may be convenient if a stock falls. On the other hand, a contrarian will react opposite.
The test
Just to make sure I am correct when saying volatility increases volume, I made a test on S&P 500 from 1990 to the end of 2004.
It is no doubt increased volatility amplifies volume as shown with the blue graph. The gray graph represents the number of observations in each interval, and the resemblance to a bell curve is obvious.
If I want to use to the price-quantum diagram, this can easily be illustrated with a short term change in supply and/or demand (1), before a long term stabilisation (2). However, I'm not sure how adequate this is and there may be better ways of illustrating.
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