• Disposition effect（处置效应）
The tendency of investors to hold on to losing investments. Behavioral investors seem reluctant to realize losses. This disposition effect can lead to momentum in stock prices even if fundamental values follow a random walk. The fact that the demand of “disposition investors” for a company’s shares depends on the price history of those shares means that prices could close in on fundamental values only over time, consistent with the central motivation of technical analysis.
• Conservatism bias（保守性偏差）
A conservatism bias means that investors are too slow (too conservative) in updating their beliefs in response to new evidence. This means that they might initially underreact to news about a firm, so that prices will fully reflect new information only gradually. Such a bias would give rise to momentum in stock market returns.
• Representativeness bias(代表性偏差)
The notion of representativeness bias holds that people commonly do not take into account the size of a sample, acting as if a small sample is just as representative of a population as a large one. They may therefore infer a pattern too quickly based on a small sample and extrapolate apparent trends too far into the future.
A systematic tendency to overestimate one’s abilities. As traders become overconfident, they may trade more, inducing an association between trading volume and market returns. Technical analysis thus uses volume data as well as price history to direct trading strategy.
• 惯性定律 “墙倒众人推，破鼓万人锤”
Introduction: Behavioral Finance Indices and Application
1.1 Basic Psychological Factors Revisited（基本心理因素回顾）
• Forecasting Errors.
(Barber & Odean, 2000-01)
• Sample Size Neglect and Representativeness.
• Mental Accounting（心理账户）.
• Regret Avoidance（逃避后悔）.
(De Bondt and Thaler, 1987)
• Prospect Theory（期望理论）.
(Statman, Fisher and Anginer, 2008)
Limits to Arbitrage（有限套利）
• Fundamental Risk（基本风险）.
• Implementation Costs（实施成本）.
• Model Risk（模型风险）.
1.2 Indices Derived from Theories Developed（理论发展衍生的指数）
Trends and Corrections（趋势与修正）
Much of technical analysis seeks to uncover trends in market prices. This is in effect a search for momentum. Momentum can be absolute, in which case one searches for upward price trends, or relative, in which case the analyst looks to invest in one sector over another (or even take on a long-short position in the two sectors). Relative strength statistics are designed to uncover these potential opportunities.
It concludes that the market has three movements, denoted as ”main movement”, ”medium swing” and ”short swing” respectively. They are divided mainly due to the lengths of time intervals and can get seemingly contradicted simultaneously. More information can be discovered by the audience if interested. Elliott Wave Theory and Kondratieff Waves are introduced with the basic thoughts carried out by Mr. Dow.
• The moving average of a stock price is the average price over a given interval, where that interval is updated as time passes.
• MovingAverage =
• Time elapses. The new moving average is calculated by simply changing the numerator.
• What can be inferred from a growing moving average? Do the math.
After a period in which prices have been falling, the moving average will be above the current price (because the moving average continues to average in the older and higher prices until they leave the sample period). In contrast, when prices have been rising, the moving average will be below the current price.
Prices breaking through the moving average from below is taken as a bullish signal, because it signifies a shift from a falling trend (with prices below the moving average) to a rising trend (with prices above the moving average). Conversely, when prices drop below the moving average, analysts might conclude that market momentum has become negative.
Other Common Indices（其他指数）
The breadth of the market is a measure of the extent to which movement in a market index is reflected widely in the price movements of all the stocks in the market. Simple method of measurement can be a substraction of the number of stocks declined in price from that of advanced. It can also be used to derive cumulative breadth data and moving average of cumulative breadth.
Relative strength measures the extent to which a security has outperformed or underperformed either the market as a whole or its particular industry. Relative strength is computed by calculatingthe ratio of the price of the security to a price index for the industry.
For example, the relative strength of Toyota versus the auto industry would be measured by movements in the ratio of the price of Toyota divided by the level of an auto industry index. A rising ratio implies Toyota has been outperforming the rest of the industry. If relative strength can be assumed to persist over time, then this would be a signal to buy Toyota.
Similarly, the strength of an industry relative to the whole market can be computed by tracking the ratio of the industry price index to the market price index.
Behavioral finance devotes considerable attention to market sentiment, which may be interpreted as the general level of optimism among investors.
Above 1.0 are considered bearish because the falling stocks would then have higher average volume than the advancing stocks, indicating net selling pressure. For every buyer, there must be a seller of stock. Rising volume in a rising market should not necessarily indicate a larger imbalance of buyers versus sellers.
The confidence index is the ratio of the average yield on 10 top-rated corporate bonds divided by the average yield on 10 intermediate-grade corporate bonds. The ratio shall be less than a hundred percent and positively correlated with the confidence in the market by the participants as a group.
The ratio of outstanding put options to outstanding call options is called the put/call ratio. Typically, the put/call ratio hovers around 65%. Interestingly though, different people have rather different forms of interpretation with respect to the trend of this index.[Especially considering contrarian investors]
Because put options do well in falling markets while call options do well in rising markets, deviations of the ratio from historical norms are considered to be a signal of market sentiment and therefore predictive of market movements.
However, a change in the ratio can be given a bullish or a bearish inter-pretation. Many technicians see an increase in the ratio as bearish, as it indicates growing interest in put options as a hedge against market declines. Thus, a rising ratio is taken as a sign of broad investor pessimism and a coming market decline.
Contrarian investors, however, believe that a good time to buy is when the rest of the market is bearish because stock prices are then unduly depressed. Therefore, they would take an increase in the put/ call ratio as a signal of a buy opportunity.
1.3Warning:Don’t be overoptimistic（警告：不要过度乐观）
A problem related to the tendency to perceive patterns where they don’t exist is data mining. After the fact, you can always find patterns and trading rules that would have generated enormous profits. If you test enough rules, some will have worked in the past. Unfortunately, picking a theory that would have worked after the fact carries no guarantee of future success.