Posted by & filed under Behavioral Finance, Reinventing Finance.

How do investor behavior change according to the reaction time and the investor attitude? Why a systematic analysis approach is much more efficient than a traditional analysis strategy? We are going to explain it by building a link between charting patterns, technical analysis and behavioral finance.

Let’s start with an analogy to introduce you the charting patterns and imagine a crane and all its parts: there are the main cords, the diagonals and the lattices. A big structure, made of small parts connected together, to make it solid and balanced.

Investor Beahvior: Tower Cranes

The market, and the investor behavior patterns (no matter the time frame), look the same way. Let’s take the example of a flag pattern in an Elliott wave:

Investor Behavior: Elliott Wawe

As you can clearly see, the similarity with the crane is undeniable.

But what really matters here is that, according to their attitude, different kinds of investors interact within the market in different ways.

The flaw of traditional analysis methods is that they lead to a partial view of the market, pairing the investors 2 by 2 for a certain flag. Furthermore, they can only be applied to a small sample of tickers.

These bugs can lead investors to missed opportunities or, worse, to losses following faulty interpretations of investor behavior.

That is where an automated and systematic technology, able to look at the market as a whole (not just Daily/Weekly or Weekly/Monthly) makes all the difference, without being influenced by randomly selected, potentially misleading patterns.

As for example, Quantesys (through its systematic algorithm) predicted precisely the bottom of S&P500 in March 2009 because, at ~670, the market was testing:

  1. the EXTREME limit of FEAR of “Monthly” investors’ while
  2. “Weekly” investors slipped all the way down to the boundary of starting a new FEAR.

Investor behavior S&P500 March 2009

Such cross roads of behavior are often key turning points in the markets.

Have nice holidays, enjoy the hot sunny weather and keep staying ahead of the curve!

Alberto Ravandoni

Marketing & Communication at Quantesys
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