Trading System Research Paper Example | Topics and Well Written Essays - 2500 words

Trading System - Research Paper Example also the fund would not wait for the market to bottom out before taking a finish on going long and that it would go long once market moves down somewhere in the midst of the peak and the bottom. Either strategies would imply that the fund is not looking for excessive and speculative gains nevertheless it does keep up inherent profit booking targets. The trading system explained below is based on trading rules that were time-tested for profits results based on this risk philosophy.Financial theory, taught in finance textbooks the globe over, norm tout ensembley exposes a student of finance to the concepts like the efficient market hypothesis and the economically rational individual. Bubbles and crashes seem to go these two seminal concepts with an awkwardness equivalent to the awkwardness one would attach to those things on earth that contain gravity. Nevertheless such extreme stock market movements are a reality. Bubbles make investing de cisions backbreaking as stock prices tend to deviate by substantial margins from their fundamental valuations. Investors relying on past conjunction results and technical analysis are equally defeated in such situations as is the EMH.In f spot, investors always act on the basis that they have an applicable construct to explain stock price movements and tend to gossip all available information collected under such constructs in their investment decisions (Poole 2000). Finance search has also held varying opinions on this issue. For instance, Biermann (1995) supports the idea that market prices are traind from backward looking investors than by those that indulge in predictions of all sorts. Others have, for example elaborated on the use of price to moolah ratios to determine excess market valuations. Some technical work has set to rest in a convince manner the phenomenon of bubbles and bursts. For instance, Graham (1973) describes in details why markets fluctuate and how to dea l with the violent fluctuations .Graham discusses five raw material points to read into cross sectional view of market bubbles. Most of these points concern factors like growth and earnings and their impact on price movements and price levels. Graham (1973), in fact, provides a much better standstill on gauging market bubbles through an adaptive expectations model.The Efficient Markets Hypothesis (EMH) states that current prices always fully reflect available information, so that the only reason prices change between time t and time t+1 is the reaching of new information. The EMH requires that only two necessary conditions be met. First, the market must be aware of all available information .The type of information available is determined by the strength of the EMH being tested. In a Weak Form EMH, current prices entirely reflect all that can be know from the study of historical prices and trading volumes. If the Weak Form is valid, technical analysis becomes ineffective. Any info rmation contained in past prices has been analyzed and acted on by the market, so that shares are neither under-valued nor over-valued. In a Semi- punishing EMH, current prices efficiently adjust to information that is publicly available. If this form of the hypothesis holds true,