Price Dynamics
Overview
The standard view of the prices of market assets decomposes the current price into two components,
the "true" value of the asset, plus some noise. (similar to a signal and noise decomposition in time series analysis)
{% Price = Value + Noise %}
The value of the asset is generally seen to be the
present value
of the assets future cash flows.
Efficient Market Hypothesis
Efficient Market Hypothesis
says that the price of a publicly traded asset reflects all the information available about the asset. Essentially,
this Hypothesis asserts that the noise in the price equation is effectively equal to zero.
Behavioural Effects
Market Players
Market Players -
an understanding of what drives market prices is only truly gained when one understands who the players in the market
are and what motivates their trading decisions.
Price Changes
When the price of an asset changes, according the fundamental decomposition, it is driven by a change in the underlying value
of the asset, or being driven by noise.
{% \Delta Price = \Delta Value + Noise %}
Recognizing Price Patterns
Within the context of the fundamental decomposition, patterns in the change in price may indicate whether the price
has been changing due to changes in the perception of value, or from noise trading.
The source of a price change can be a significant help to forecasting where the price is headed. As a
Trends : Changes in the value of an asset can be expressed multiple ways.
Typically the fundamental value of an asset changes due to some new information being made public.
If the information does not impact the price by much, the price may adjust quickly to the new information.
If the
Sometimes the changes in value are due to trends occurring in the broader economy. When this occurs, the
Noise : when the price of the asset changes due to noise in the market,
it is common for the price to eventually change direction and revert back toward
Common Price Patterns
Machine Learning and Price Patterns
