Stock Forecast Methods

Stock Market Trading and Investing

Model To Predict Stock Market Using Butterfly Effect

As it was reported in the research “The Technical Indicator to Watch Rapid Sell-off“, one of the ways to predict a steep downtrend could be to monitor the speed and acceleration of prices (high-order derivatives). As statistics showed, a typical picture is that specific stock market short-term changes are coupled to big long-term negative changes in the future. Evidently, the same idea can be applied to long-term positive changes.

Considering the impact of short-term changes on longer periods can look revolutionary since normally analysts use a longer period to predict a shorter one. For example, to predict one-day price change, chartists consider up to 12 previous candlesticks in patterns. If we assume that markets are partly obeyed general natural laws, a similarity when a small seed is able to grow into a huge tree might look less surprising.

There is a hypothesis that many dynamic processes including financial markets can be described by Chaos theory. One of the theory’s ideas is “Butterfly Effect” (BE). According to this effect, the slightest disturbance of input parameters can cause a huge change in the outcome (a high sensitivity to initial conditions – link to video).

There is another explanation why BE might be applied to financial markets. Big market participants (BMP) have powerful resources to get important information before it becomes known to others. They also deal with a much bigger volume of funds and, therefore, are able to affect the market by changing supply-demand equilibrium. Also BMP have resources to react quickly and due a huge volume of money inflow or outflow, the market equilibrium can be changed very fast.

One of simple conclusions is that fast market movements might signal a high probability of changing long-term expectations. Except fast moves, BMP may move prices with different degrees of acceleration. So that in most cases, BMP’s short-term actions should have special pattern signatures and, therefore, some typical short pattern signatures can literally predefine following huge long-term changes.

Creating Model To Predict Stock Market Using Butterfly Effect

July 10, 2011 Posted by | Stock Market Forecast | , , | Leave a comment