Friday, March 26, 2010

A mathematician plays the stock market by John Allen paulos

The book touches many aspects of the stock trading and the author show it by referring to his own experience of loosing money in WCOM during the 2000 crash. He shows the deceptiveness of the media, chatrooms, technical analysis, fundamental analysis and the common fallacies of the masses. But the author being a mathematician tries to find any mathematical correlation with stock market reality. The author agrees that there is more to stock market then the random walk theory and efficient market hypothesis. Though each of these theories have their partial truths and moments when they can be applied, exact timing of which hypothesis will work in the future is impossible to be certain of.

It is a fine book but i found that he as underestimated the technical analysis. Indicators such as the volume of stock traded can show the starting of a pattern of upward movement or downward in technical analysis. It has been nicely explained in Secrets for profitting in bull and bear markets by Stan weinstein. This book that i mention has gotten less attention as i would like but it shows how volume and 30 day average can really show the tread for atleast a couple of months.

I also found that there are select periods of stock growth that make the major moves in stock markets either upward or downwards. These are the periods when people really make money or loose everything. And it is during these times of collapse or exuberance that one needs to know what to do and one also needs to when to
ride with the boat of mass hysteria and when to get off the boat and go against the mass opinion.(shorting)

Over all from the mathematical point of view the author agrees that though math as a science is accurate its application to stock movements cannot be accurate. It can happen sometimes but not always. There are too many forces in play in the stock market. It is a chaos but during certain periods the mass psychology moves in certain directions such as the uptrends and downtrends. The downtrend of the recent collapse of the stock market( 2008) the DOW reached 6500  from 14000 and the uptrend of 2009 the DOW came back to 10500. These are the major movements when real profits or losses incur. And it is during this time that technical analysis and knowledge of trend following and indicators is useful. Even otherwise volume indicator is in my opinion a very useful tool in technical analysis and trend following and also the 30 day average as mentioned in Stan's book.

The back logic is to identify these trends and use it for our advantage. Everything in the market cannot be understood because it depends a lot of factors some rational some irrational.

Overall its a good book to read to know the basics of the current theories and speculations in stock market.
It may help the beginner to understand the forces in play and a precaution before losing one's shirt.

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