Analyzing why stock markets crash

Stock Market Crash
Stock Market Crash

Who doesn’t love a good stock market crash? Short-term traders aside, it’s an opportunity to supercharge your portfolio if you’re a long-term investor and a chance to dip your toes in the world of Wall Street if you’re a newbie. The lore associated with stock market crashes fascinates almost everyone involved in the investing game, except the fear of a crash paralyzes most traders, keeping them up at night and afraid of taking a trade deduction in extreme cases to operate. One can get caught up in the drama of a crashing market, this book attempts to uncover the reasons that actually cause markets to fall through analysis of past crashes, simulated models, and high-tech math equations. While the book can easily be criticized for being overly technical, I think the author does a great job of explaining the science behind this math and provides solid insights that any trader will appreciate.

The book where you would expect it to be

Didier Sornette begins the book where one would expect any study of stock market crashes to begin, with many of the most famous stock market crashes in history. I found this interesting as there is always some information that was not previously known from studying history, such as how much the South Sea bubble has been very similar to the ponzi schemes of late. It’s a shame it wasn’t published recently, it would have been interesting to see the author’s perspective on the 2008 economic meltdown and the May 6, 2010 Flash Crash. However, if you look back at a daily chart of the Dow Jones, the Flash Crash hardly registers a blip in the recent economic recovery. If there’s one thing all crashes have in common, it’s that they are “caused by the slow build-up of long-term correlations leading to global cooperative behavior in the market.”

Author Pits The Random Walk

The author contrasts the random walk theory with efficient Börsencrash 2022 market theory, and I could not see a clear winner as I worked my way through the many graphs and complicated formulas that only a geophysicist like Sornette would truly understand and appreciate. I think you should replace the word random with irrational because “this rationality is hampered by cognitive biases, emotional quirks, and social influences”. Your social network with which you discuss the markets, be it your friends, family or other twitterers , becomes your tribe and has a major impact on your trading and investment decisions.

Discover myself

One thing I have discovered about myself, being a short-term trader, is that I am one of those “noise” traders needed to provide the liquidity that is essential for capital markets to function efficiently . A noise trader in Sornette ‘s sense is “speculators or traders who base their strategies on technical indicators”.

Simplicity is an essential concept when attempting to model an early warning crash detection signal. Crashes are outliers by nature, ie . a phenomenon that is outside of everyday experience, and trying to devise a simple system that takes advantage of it. This is what makes them so difficult to predict as they only occur every few decades. It is the stock market bubbles that many believe lead to these outliers, but the author dismisses this myth as most bubbles are self-correcting.

This book focuses on a lot of psychological

Given that trading is so emotional, this book focuses on many psychological issues, such as the disposition effect, which I think most traders can relate to as well. It is passages like the following that define this effect that make this book so valuable as it is filled with many more.

“People estimate gains and losses relative to a reference point and tend to seek risk when faced with potential losses but avoid risk when a particular gain is possible” and that most traders are “cocky about their own.” relative ability and being unduly optimistic are their future.” These are some important concepts for all traders to keep in mind when they are so confident that a trade will go in their favor that they forget to add a stop.

Determine what type of dealer

While it’s difficult to pinpoint what type of trader would enjoy this book the most, I think there’s something for everyone, whether you’re a quirky, technical trader or a fundamentalist. At the time of writing, Didier referred to the US as the biggest bubble of all, so I would be very interested to hear what you think of the future implications of QE1 and the continuation of QE2. Yes, there are areas of the book that got completely out of my head, but for every formula that had too many x ‘s and y ‘s , there was one key concept that made me reach for my pencil to make a note to do so that I could revisit that concept or idea in the future. I feel wiser after finishing this book and I thoroughly enjoyed the long Börsencrash 2022 journey and would recommend it to any stock market enthusiast.

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