Science Behind Stock Trading

money signs

Stock trading represents the growth and shrinkage of a company’s performance. It is affected by numerous factors within geopolitics, production output, supply and demand and more, but is also affected by the emotional response of the trader and investor.

Technical stock market trades

Some would say that technical trading is purely based in the science of mathematics, where every single decision is based on inventory, order flow, and risk/reward. Price movement depends on supply and demand at each price level. Traders will know from their research what a key supply level is for the company in which they hold stocks. Institutions/banks will know when to sell at prices where the odds have been calculated to show the price is likely to fall. They will also have calculations that show the time a price spends at a level, quantifying the balance supply and demand at any given point. When looking for key support and resistance levels these too can be shown in charts.

Technical trading using science in mathematical equations, theories and science hypotheses to help predict future developments for a particular company chart. Studying the history of the company’s developments, mathematical models can be established for futures trading. As an example, the Elliot wave chart helps establish a staircase pattern.

There are various charts that help traders, all with their own purpose. Stock traders often resort to science, calculations and predictions based on several charts and not just one. As an example, information seen in a candlestick charts will help the trader understand the resistance points and in turn help in determining the point where the share value can be expected to rise.

Charts formations like “death cross,” “cup and handle,” “dragonfly dojo” and “falling knife” may not sound like science, but behavioural finance is unearthing growing evidence that shows technical analysts that plotting stock prices visually leads to better investing decision-making.

Market Dynamics

Studies of market dynamics, while still in their infancy, have already demonstrated an ability to understand many aspects of financial markets, Using tools of neuroscience and behavioural studies it can be shown that markets are ruled primarily by emotions, challenging the long-held view that they price stocks based on information alone. Yet, other researchers warn against basing a stock market purchase on particular charts, since research shows people often see patterns that are not there, or that others do not see in the same way.

Despite the difference of opinion, charts present information visually that helps counteract information overload and complexity, enabling users to interactively discover information from large information sets to improve the financial decision-making processes. When creating charts to assist in decision making it is vital to use the same metrics consistently. Watching moving averages is the basic concept of charts. When a stock moves out of its trading range, it suggests movement, up or down. What is most important is not to become carried away with charts. Evaluation of the fundamentals is necessary as they are what supports everything.

Fundamental stock market trades

Should a Chief Executive Officer of a company unexpectedly resign, or even rumoured to be resigning, or when a plant is taken out of production due to accident or ‘acts of God’, it is usual for the news to spread fast and the stock index of the company usually drops by several points. This fall is due to loss of confidence in the company by investors and traders, leading to the sale of company stocks and resulting in the reduced index value in the market.

A company’s share value can see a significant change on any given day for a number of reasons. Stock traders have to be vigilant about these various factors when dealing with a particular company’s shares, needing to monitor the market performance as well including any active rumours. The basis for fundamental trading strategies in these cases do not involve much mathematical calculations, based more on the science of psychology giving traders and investors the opportunity to gamble which stock will rise and which one will fall.

Top money makers in the markets must have some type of common strategy whether it be science of not. Investors have been inventing new formulas and ways to beat the market since the market was invented. New developments are being made and new strategies are being discovered to work. It can be agreed there is, as yet, no one single formula or numerical sequence is required to be successful in the market. There is the need to have risk taking skills and the ability to see into companies and their plans.
Technical analysis is just one tool to use along with a full view of a company’s earnings and business fundamentals. Current formulas and strategies will not suit every situation, but can be chosen wisely.