Related Topics
Investing
Share This Page         

FAQ: Is it possible that today's widespread computerized trading including HFT might cause the market to stray from the Wave Principle?

by Editorial Staff
Updated: March 28, 2015

The following response is excerpted from Prechter's Perspective, a Q&A-style book edited by Peter Kendall that compiles actual trading knowledge from a career that took Bob Prechter three decades to build.

Question: Is it possible that the markets are evolving away from the rule of emotion? At some point, will trading be so highly computerized or so heavily hedged through derivatives trading that emotion will cease to be a significant force in the markets?

[Prechter] No way, ever. First, I expect most derivative stock market products to be outlawed sometime during or shortly following the next major bear market. For emotional reasons, of course. Second, and this also applies to the futures markets, a lot of computer programs have the emotional factors built in. Remember portfolio insurance? Its strategy was to sell more as the market declined, just like people in panic. Those programs participated with gusto in the 1987 crash.

The same idea applies to all trading programs. To the same extent that the world of investors is divided into those who sell rallies and buy declines versus those who buy rallies and sell declines with "stop" strategies, this ratio will persist in the computer programs, which of course are designed by people. Entries and stops will all be triggered at points that the same people would presumably have chosen anyway. Even today, you can often predict "emotional" days by observing times when the market is about to break a 40-week moving average, which many computerized strategies employ as a trigger point. As new programmers try to anticipate such days by triggering action earlier or to scalp in the opposite direction, what will ultimately emerge is the same market action that would have existed otherwise.

Financial Forecast Service | Financial Forecast, Elliott Wave Theorist, Short Term Update

Jump on once-in-a-lifetime opportunities and avoid dangerous pitfalls that no one else sees coming

When the mainstream is calling for permanently calm markets, that's usually when a rude awakening is just around the corner. We can help you prepare for opportunities and side step risks that will surprise most investors.

Financial Forecast Service prepared its subscribers for the 2008-2009 financial crisis, the dramatic volatility in stocks in January 2016 -- and the strong rally that followed.

And we're doing it again. Subscribe now and get complete coverage for the next 3 months AND $237 worth of gifts to help you end 2017 strong and start 2018 off on the right foot.

Main Street to Wall Street: Pay Attention

A View From the Top: Skyscrapers, Economic Booms, and the "Impulse to Build."

Will the SEC Raise Crowdfunding Limits to $5 Million? Here's What It Might Imply

First Brexit, Then Catalonia: What's Up with Europe's Secession Fever?

Using Elliott Waves: As Simple As A-B-C

Basic Tenets of the Elliott Wave Principle

FAQ: Is it possible that today's widespread computerized trading including HFT might cause the market to stray from the Wave Principle?

FAQ: Sometimes on your charts there is overlap between waves one and four within wave 5. Doesn't that break a rule?