has been said the stock market is a place where people who
understand make a lot of money from people who do not understand.
There is new artificial intelligence software in use by stock
analysts, called neural networks. This is based on the idea
that financial systems mimic the human brain. Its focus is
to capture an array of data on the days closing prices,
trade volumes, highs and lows, across several markets, globally.
The software then plots the trends and offers forecasts on
the input market data. It mimics the human brain by virtue
of the vast amount of inputs that can be accommodated every
second, every minute and still result in an interpretation
for a course of action.
It is superior to the traditional forecast methods from the
point of view that like the human brain it can also render
an interpretation of inputs that do not make logical sense,
or data that is incomplete. The system will still spit out
the best, reasonable course of action.
This is how the human brain works!
There is another artificial intelligence system in use by
stock analyst, based on physics and mathematics, called chaos
theory. In a nut shell, the system interprets trends based
on physical laws that predict that every system of order will
proceed to a state of disorder.
Its usefulness lies in the belief that the so called disorder
is governed by a set of rules and laws. The challenge for
the stock analysts is to uncover the set of rules in the state
The order in the stock market is seen in those times when
people sell because stock prices, are falling, and the prices
continue to fall, primarily because people are selling off
stocks, in a market where none or few are buying.
Conversely, people buy when prices are rising, and because
they are buying, prices continue to rise. Then drama happens,
the order begins to agitate and chaos results. This leads
to a state of inaction and chaos is the order of the day.
But something will happen to start a new trend.
There is yet anther model based on biological systems, it
is called the genetic algorithm. This is based on the concepts
of evolution: mutation, genetic coding and survival of the
Founded in computer science, genetic algorithms have their
origin in a search mechanism for optimal searches that lead
to the best approximate results. Behaviour in the system is
charted on the basis of experience, such as the learning that
goes on in a living organism, based on memory and recall.
Stock analysts are using these new systems to make more accurate
forecasts, about how the market will behave the next day,
or over the next period.
The question we need to ask ourselves is: what happens when
everybody is doing the same thing? If we are all following
the same stocks what is the opportunity to move first? Certainly
if the market is fairly efficient, we will all move at the
same time, and maybe only a few will be ahead of the bottleneck.
Therefore, I am forced to conclude it is the people who understand
the market better than the rest, who can make the most rapid,
and the most efficient move.
Outside of that, what is the chance of making good gain, from
following those stocks that nobody is watching?
There is another concept called the neglected firm effect
for people who really want to be among those who truly understand.
Continued next week