HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
XM information and reviews
XM
86%
Exness information and reviews
Exness
86%

How to avoid analysts' mistakes?


We often hear about an undervalued asset, an unfair exchange rate, or an overvalued dividend forecast. In my opinion, such "expert" statements can not be trusted, but serve as a sign of speaker’s ignorance. In such case, the person puts his opinion above the market's efficiency, although often such radical forecasts are carried out simply by virtue of the theory of probability.

Many are confused, so I’ll briefly remind you that "market efficiency" is understood as its ability to reach a fair price of an asset at any given time. This does not mean at all that an "efficient market" should effectively bring in money to investors and managers, although such a bundle can often be heard from analysts.

Arguing to their trading ideas, very often for the sake of wit, "experts" throw quotes from behavioral finance theories and effective market analysis into a discussion. They sound convincing, but as a rule, it does not indicate in any way that it is reasonable to accept these ideas. It is important to understand the terms here, and you will be able to find similar, sometimes funny, errors in analytical reviews.

The essay below briefly explains the essence of these two theories. From myself I will add that I have always believed that it is only the market which is always right. It is made by people and the robots created by them, and it is the diversity of their opinions and strategies that makes it possible to adequately evaluate this or that tool. Good luck!

A game for fools?


Of course, behavioral finance experts recognize the role of diversity in pricing. Here is what Andrei Shleifer writes in his remarkable book "Inefficient Markets: An Introduction to Behavioral Finance":

The hypothesis of an effective market is not confirmed and is not refuted by the assumption of investor rationality. Many models based on the irrational behavior of some investors, nevertheless, predict efficient markets. The argument is usually given the case when irrational investors in the market trade as necessary. If there are a lot of such investors and if their trading strategies do not correlate with each other, their transactions will neutralize each other. As a result, in such a market ... prices will be close to the base value.

The problem is that in behavioral finance, a variety of investors is seen as the exception rather than the rule. Shleifer continues:

"This argument relies mainly on the lack of correlation of strategies among irrational investors and therefore applies to a rather narrow circle."

Finally, Shleifer argues that arbitration - another mechanism that brings prices into line with fundamental value - is risky, so the possibilities for arbitration are in reality limited.

Thus, Shleifer makes the following conclusions: since investors are irrational, and their strategies are more often correlated than not, markets are inefficient. In addition, arbitration may not always make the market efficient. Therefore, market inefficiency is the rule, and efficiency is the exception. And active portfolio management in a fundamentally inefficient market is a game for fools.

We believe that the majority of professional market participants believe exactly the opposite: market efficiency is the rule, and inefficiency - the exception. After all, we see how, in many complex systems, diverse decisions and actions of individuals create rational outcomes. The team invariably replays the average individual. An investor ecosystem on the market is usually sufficient to ensure that there is no systematic way to replay the market. Thus, diversity is assumed to be the default, and loss of diversity is always a notable (and potentially profitable) exception.

See money, imitate money.


If diversity generates an efficient market, then the loss of diversity makes the markets prone to inefficiency. In short, if you turn to behavioral finance as a tool for finding investment opportunities, then look for them at the collective level.

A good example is the herd when a large group of investors perform the same actions on the basis of observing others, regardless of their individual knowledge. From time to time in the markets there are periods when any one mood begins to dominate. Such a loss of diversity usually leads to a market boom (everyone becomes bull) or sharp falls (everyone becomes bear).

As far as I know, there is no tool that would accurately and consistently measure the level of diversity in the market. Good hints can give an objective assessment of publicly expressed in the media and private opinions. The key to successful counter investing is to focus on the behavior and mistakes of the crowd, not its individual members.

Author: Kate Solano, Forex-Ratings.com

RELATED

TOP-10 stocks of major US companies that did not notice COVID-19

Many stock and bond markets have won back 50% or more of the fall wave that started at the beginning of the year by now...

Regulation of Cryptocurrencies in South Asia

The scalability of financial technologies depends on legal system adaptability. India, with 93 million cryptocurrency owners, ranks first globally. However, India isn't among the top 20 countries for favourable crypto regulations. Establishing a favourable legal regime is crucial for India's financial market development, especially with the middle class projected to reach 90% of the population by 2039.

How to invest in gold

Many investors are keen on the precious metals market. So many seem to be looking to buy gold - a time-tested, safe-haven asset - especially as COVID-19 continues...

Cardano vs. Solana: Which one is the Better Investment?

Cardano and Solana have captured the imagination of crypto enthusiasts in the last few years, rising with the previous bullish run of crypto. The two cryptocurrencies...

Is EOS A Good Investment? Top Altcoin Insights For 2021

The cryptocurrency market is filled with innovation and ambition, where projects aim not just to be platforms for developers to build on, but full-scale ecosystems that can...

What Are The Bulls Power And Bears Power Indicators?

To make forex trading as productive as possible and to make trades more accurate, it is recommended to use technical tools, such as indicators. The choice of indicators directly depends...

What Forex Pairs to Trade in 2021: Our Top Picks

The year 2020 is gone, but the problems it has brought upon the world and all of the major Forex markets will linger in 2021 as the COVID-10 pandemic is far from...

Living Through Economic Crisis: Top Hedging Instruments in 2022

There has been absolutely no doubt that the post-pandemic global economy will be recovering at a turtle pace. But instead of a gradual recovery, the economy has plunged into a rapidly...

Libertex: Dash Price Prediction for 2021-2025

At one point, investments in Dash were highly profitable. Many traders received significant gains from the Dash cryptocurrency when the price action surpassed the $1,500...

What are binary options in the global financial market

In the global financial market, as in many other areas of commercial activity, there are often categories that seem to the uninitiated person very difficult to understand and use...

The Guide to cryptocurrencies

Several years ago, say eight or nine, it would have been easy to write a short cryptocurrency list, because following Bitcoin's release in 2009, digital currencies...

Top 5 undervalued stocks CFDs right now

During the pandemic, we saw some of the most vigorous equities growth since the 1920s. A great number of companies had their valuation treble, quadruple or increase...

What is TradeCopier? Complete Guide to Copying Smart

With such technological advancements taking place every day, forex trading could not have been left behind. One of the most anticipated platforms of the year...

A Guide to Indices Trading

Indices measure the price performance of a basket of securities or a group of shares. Indices trading provides investors with the opportunity to gain exposure...

How Options Expiration Can Change How You Trade

Forex trading can be a very profitable venture, but it can also be quite dangerous. One of the risks you take when trading forex is the risk of options expirations...

Pair Trading: Effective Strategies

Pair trading is used by experienced traders as a reliable tool for risk diversification. For the successful implementation of a long-term trading...

Ripple in 2021: Any Chances for a Rise?

Besides Bitcoin and Ethereum, Ripple or XRP is another cryptocurrency that deserves to be considered for investing. In many minds, Ripple is a digital asset...

Unlocking The Power Of Correlation In Forex Trading

Correlation plays a crucial role in forex trading, providing valuable insights into the relationship between currency pairs. By understanding and analyzing correlations...

HF Markets Enhances Its HFcopy Trading Platform for Enhanced Trading Synergy

HF Markets has announced significant upgrades to its HFcopy program, catering to both Strategy Providers (SPs) and Followers, thereby solidifying its position as a premier copy trading platform...

Current trends in the precious metals market

Gold and other precious metals are widely recognized as an investment asset class, that is why we would like to tell our readers about current trends...

FP Markets information and reviews
FP Markets
81%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Just2Trade information and reviews
Just2Trade
76%
FXNovus information and reviews
FXNovus
75%
Riverquode information and reviews
Riverquode
75%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.