Applied statistics for finance and economics - Coursework Example

The spread of recession globally made share prices go down dramatically. Changes in pricing is a fundamental aspect in chart analysis. Traders usually watch out for stocks assuming a certain direction or impressions of a possible stock price change (McWhirter, 2008). Momentum becomes a dealers partner if well analyzed and identified. The assumed logic behind price momentum is that price movements are random. A popular argument among many is that share prices change fast to portray new information and new information cannot be predicted.

This, therefore, means trend analysis does not lead to a better long term performance. The actions of market participants usually determine price momentum. Traders being opportunistic the way they are, orders tend to be placed once a given direction is determined on stock price. The more sales is experienced the upward or the downward form is increased. This trend proceeds until word is out that a new trend now warrants selling or buying the stock. Price direction now becomes chaotic nevertheless not random.

Taking the case of random walk argument trends will be seen on a random manner. A good example is tossing a coin. No matter how many you toss it and land on tails the last five times, the probability in coin toss will always remain on 50%. Take another example on roulette wheel ball. The previous spins doesn’t necessarily mean that one might land on red or black. The rate sits steadily on 47%. Traders who follow the random walk theory note that the timing of new data and news is not predictable.

They also note that that stock prices change very fast with the coming of new information, The constant variation of stock market is the simple definition of volatility. Suppose today the stock market goes up, tomorrow it goes down it goes up again in the following five days, then this is called volatility of stock. The most common cause for this