The Spectrum Of Stock Market Trading Theories
People who do a lot of stock trading will tend to have a particular theory or philosophy that they follow. If those theories and methods are taken away, then investing in the stock market will essentially be nothing more than gambling, no different from betting in a casino. By using a financial theory that has evidence of success, a trader will be able to manage their risk more effectively when investing. The theory does not necessarily have to have evidence of always working; instead, it is enough that a high number of other people use that theory.
Fibonacci is a name that most people involved in stock trading know. This theory based on the Fibonacci numbers is a popular one, as it suggests that all of nature is in sync with these numbers, and that the financial markets are heavily influenced as well. While it is true that the golden ratio, which is a number derived from the terms in the Fibonacci sequence, is present in nature to a large extent and that patterns in financial markets can be seen that match these numbers too, yet there is no scientific backing to this equation. The reason why the market moves in these waves is because people are making their trading decisions based on their belief on the Fibonacci ratio theory.
The Elliot Wave Principle is another theory used in the trading of stocks that has similarities to Fibonacci trading patterns. What this theory suggests is that the group mentality of investors is strong enough to force the market to move certain ways. The founder of this theory, Ralph Nelson Elliot, believed that there were five main waves to how the market moved, with three corrective waves. Each wave has its own type and is determined by the historical mood of investors. As a result, trading decisions are often made with these waves in mind.
A third trading theory is called the Random Walk Hypothesis. This theory essentially states that nothing can be predicted in the stock market and so whatever decision you make has a fifty-fifty chance of being the correct one. There is a lot of research that supports this theory though few investors feel comfortable making decisions with their money that are the equivalent of playing roulette. However, belief in this theory allows an investor to invest confidently in knowing that everything comes down to chance.
The ultimate goal in stock trading is to increase profits. This is possible largely when traders take the time to learn and follow a particular trading plan or system. Each trader will have their own preference, but usually it does not matter which theory is chosen. What is important is that the theory is one practiced by many other people. This will help increase the percentage of the theory's patterns to appear in the market.
Article Source: FxTradingStock.com
About the Author
Fibonacci trading is a complex form of stock trading, but the rewards can be tremendous. Click here to learn more about Fibonacci retracements and how they can help you earn more.
by: Ken Anderson
Total views: 40
Word Count: 481
Date: Fri, 9 Jul 2010
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