Johanes L. Sitanggan
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It takes more than seven years for me to research, develop and establish my equilibrium trading strategy. The strategy is to target the exchange rate differential between the equilibrium exchange rate (EERs) and the equilibrium interest rates (EIRs). At what exchange rates the targeted currency pairs at EERs and EIRs as the turning points are the market entry and exit decision making tools.
I now start to enjoy my trading. Interestingly and recently, I tried to check the profile of professional traders and found that George Soros has popularized the concepts of "dynamic disequilibrium", "static disequilibrium" and "near-equilibrium" conditions.
I now realized that what I researched, developed and tested is what the strategy used by one of the successful trader, George Soros. :cheers: Below is the article quoted from wikipedia George Soros - Wikipedia, the free encyclopedia
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Reflexivity, financial markets, and economic theory
Soros' writings focus heavily on the concept of reflexivity, where the biases of individuals enter into market transactions, potentially changing the perception of fundamentals of the economy. Soros argues that different principles apply in markets depending on whether they are in a "near to equilibrium" or a "far from equilibrium" state. He argues that, when markets are rising or falling rapidly, they are typically marked by disequilibrium rather than equilibrium, and that the conventional economic theory of the market (the 'efficient market hypothesis') does not apply in these situations. Soros has popularized the concepts of dynamic disequilibrium, static disequilibrium, and near-equilibrium conditions.
He has stated that his own financial success has been attributable to the edge accorded by his understanding of the action of the reflexive effect.
Reflexivity is based on three main ideas:
Reflexivity is best observed under special conditions where investor bias grows and spreads throughout the investment arena. Examples of factors that may give rise to this bias include (a) equity leveraging or (b) the trend-following habits of speculators.
Reflexivity appears intermittently since it is most likely to be revealed under certain conditions; i.e., the character of the equilibrium process is best considered in terms of probabilities.
Investors' observation of and participation in the capital markets may at times influence valuations and fundamental conditions or outcomes.
A current example of reflexivity in modern financial markets is that of the debt and equity of housing markets. Lenders began to make more money available to more people in the 1990s to buy houses. More people bought houses with this larger amount of money, thus increasing the prices of these houses. Lenders looked at their balance sheets which not only showed that they had made more loans, but that their equity backing the loans – the value of the houses, had gone up (because more money was chasing the same amount of housing, relatively). Thus they lent out more money because their balance sheets looked good, they were guaranteed by the Federal Government, and prices went up more.
This was further amplified by public policy. Many governments see home ownership as a positive outcome and so first home owners grant and other financial subsidies – or influences to buy a home such as the exemption of a primary residence from capital gains taxation – mean that house purchases were seen as a good thing. Prices increased rapidly, and lending standards were relaxed. The salient issue regarding reflexivity is that it explains why markets gyrate over time, and do not just stick to equilibrium – they tend to overshoot or undershoot.
I now start to enjoy my trading. Interestingly and recently, I tried to check the profile of professional traders and found that George Soros has popularized the concepts of "dynamic disequilibrium", "static disequilibrium" and "near-equilibrium" conditions.
I now realized that what I researched, developed and tested is what the strategy used by one of the successful trader, George Soros. :cheers: Below is the article quoted from wikipedia George Soros - Wikipedia, the free encyclopedia
-------------------------------------------------------------------------------------------------------
Reflexivity, financial markets, and economic theory
Soros' writings focus heavily on the concept of reflexivity, where the biases of individuals enter into market transactions, potentially changing the perception of fundamentals of the economy. Soros argues that different principles apply in markets depending on whether they are in a "near to equilibrium" or a "far from equilibrium" state. He argues that, when markets are rising or falling rapidly, they are typically marked by disequilibrium rather than equilibrium, and that the conventional economic theory of the market (the 'efficient market hypothesis') does not apply in these situations. Soros has popularized the concepts of dynamic disequilibrium, static disequilibrium, and near-equilibrium conditions.
He has stated that his own financial success has been attributable to the edge accorded by his understanding of the action of the reflexive effect.
Reflexivity is based on three main ideas:
Reflexivity is best observed under special conditions where investor bias grows and spreads throughout the investment arena. Examples of factors that may give rise to this bias include (a) equity leveraging or (b) the trend-following habits of speculators.
Reflexivity appears intermittently since it is most likely to be revealed under certain conditions; i.e., the character of the equilibrium process is best considered in terms of probabilities.
Investors' observation of and participation in the capital markets may at times influence valuations and fundamental conditions or outcomes.
A current example of reflexivity in modern financial markets is that of the debt and equity of housing markets. Lenders began to make more money available to more people in the 1990s to buy houses. More people bought houses with this larger amount of money, thus increasing the prices of these houses. Lenders looked at their balance sheets which not only showed that they had made more loans, but that their equity backing the loans – the value of the houses, had gone up (because more money was chasing the same amount of housing, relatively). Thus they lent out more money because their balance sheets looked good, they were guaranteed by the Federal Government, and prices went up more.
This was further amplified by public policy. Many governments see home ownership as a positive outcome and so first home owners grant and other financial subsidies – or influences to buy a home such as the exemption of a primary residence from capital gains taxation – mean that house purchases were seen as a good thing. Prices increased rapidly, and lending standards were relaxed. The salient issue regarding reflexivity is that it explains why markets gyrate over time, and do not just stick to equilibrium – they tend to overshoot or undershoot.
