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Posts tagged ‘Algorithms’

Russian Bear Rattles Stock Markets, but Plunge Protection Team Rides to the Rescue

By: Gary_Dorsch

Investing is an inherently risky business with lots of uncertainties. At any given moment, the bullets can fly from any direction, and at a bare minimum, the investor hopes to emerge unscathed from the battlefield. But of course, the goal of investing is not just to break-even, but to earn a sizeable profit in the marketplace. And for the past 5-½ years, there has been no better way to maximize gains, than sticking with the traditional “Buy-and-Hold” strategy. It requires a lot of patience, a lack of emotion, and a firmly held belief that the Federal Reserve and its central bank allies will always bail you out of a difficult position.

Billionaire investor Warren Buffet reminds us that most investors are often blinded by the markets’ gyrations and the latest quotations, and foolishly listening to market pundits, rather than dollar cost averaging for the long-term. “Forming macro opinions or listening to the market predictions of others is a waste of time,” Buffet says, and warns against “letting the irrational behavior of other investors, make you behave irrationally as well.” Instead, “Ignore the chatter about markets, the economy, interest rates, price behavior of stocks, etc, and don’t listen to pundits and, don’t consider acting upon their comments.”

Legions of analysts have tried to predict the future trends in the marketplace, by collecting whatever information is available, connecting the dots, and making deductions about the future. However, there are so many moving parts in the equation, such as P/E ratios, central bank intervention, geopolitical events, the macro outlook, corporate revenues and profits, the direction of interest rates, terrorism, droughts, bumper crops, and leveraged trading, etc.), which makes it very difficult to accurately predict the future. “The only value of stock forecasters is to make fortunetellers look good,” Buffett says.

Instead, computer programs have replaced human analysts and traders, and the US-stock market is now mostly running on algorithmic auto-pilot. New developments, including high-frequency trading, a proliferation of exchange-traded funds and free information via bloggers and social media, are behind this seismic shift. Algorithms can analyze 150 different variables at any moment in time, and fire off trades in milliseconds based on complicated fundamental and technical models and front-run the average small investors, before the human eye can read company or government news releases. This kind of trading accounts for up to 70% of volume on some days with the full support of the US-exchanges.

However, there are very rare events that occur somewhere around the world, otherwise known as “Black Swan Events” that can befuddle “financial science” and the best designed computerized models. For example, heading into 2014, few traders could’ve predicted that the Kremlin would act to seize Crimea’s territorial waters along with the region itself, and that Moscow would deploy 20,000 to 45,000 troops along the eastern and southern borders of Ukraine, thus marking the start of the biggest confrontation between Moscow and the West since the Cold War, and triggering a round of economic sanctions with Europe and the US.

full article at source: http://www.marketoracle.co.uk/Article46898.html

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