What is the psychology behind the Dead Cat Bounce Pattern and how can it be traded?
You are correct, a possible Dead Cat Bounce is forming on the stock markets. If it does form it will mean that prices have not reached their bottom, as this pattern is a bearish continuation pattern. For a Dead Cat Bounce to form prices will need to break through support formed by the lows last week. If prices bounce off the support and go back up it could become a double bottom pattern, which is a reversal pattern. The double bottom would be confirmed if prices break above the recent high a couple of days ago. Regarding the psychology of the dead cat bounce pattern, is that after a distinct and quick reversal of prices from recent highs you have 2 groups of market participants who create demand in the market. Firstly you have those who were short covering their short positions to take profits, and secondly you have those who are looking for a bargain buying at what they think is the low. So for a few days you have the bulls taking over the bears.  Then as more less positive news comes in, the bears hit the market again. These are more participants opening short positions, but more so those who missed out in selling previously because prices fell too quickly, seeing another opportunity to sell at a better price. So the bears take over again.  Unless there is very good news around the corner it is likely that the bears will stay in control and prices will fall further. How to trade a dead cat bounce (assuming you have been stopped out of your long possistions already)? If you are aggressive you can go short as prices start reversing from the top of the bounce (with your stop loss just above the top of the bounce). If you are more conservative you would place your entry for a short position just below the support at the start of the bounce (with your stop above the top of the bounce). You could also place an order for a long position above the top of the bounce if a double bottom eventuated. A One Cancels the Other (OCO) would be an appropriate order for such a situation.
The Bobs tend to show up at the top of bubbles, then disappear soon after. For example, your next door neighbor who talks about Oracle in 1999, even though he doesn't know what Oracle does for a living. I don't think the Bobs' assets represent a large chunk of the market's value.  A better analogy would be a spectrum of characters, each with different time horizons. Everyone from the high-frequency trader to the investor who buys and holds until death. Leptokurtotic is a term I haven't even heard from my friends *with* math **player hating Degrees**.  I had to look it up, and this was annoying.  I view using it as some sort of complicated power play to keep me off balance, and it makes me confused and subsequently angry. I am not sure why.   In dumb person speak, I've always been under the impression that fatter tails are natural in social distrubutions. And have always been seen as prevalent in free markets of any form, regardless of leverage. "Your explanation is nearly perfect and not ""hand wavy"" at all. Stock prices reflect the collective wisdom of all participating investors. Investors value stocks based on how much value they expect the stock to produce now and in the future. So, the stability of the stock prices is a reflection of the accuracy of the investors predictions. Investor naivity can be seen as a sequence of increasingly sophisticated stock pricing strategies: If investors were able to predict the future perfectly, then all stock prices would rise at the same constant rate. In theory, if a particular investor is able to ""beat the market"", it is because they are better at predicting the future profits of companies (or they are lucky, or they are better at predicting the irrational behavior of other investors......)" "To answer your question directly..  you can investigate by using google or other means to look up research done in this area.  There's been a bunch of it Here's an example of search terms that returns a wealth of information. effect+of+periodic+rebalancing+on+portfolio+return I'd especially look for stuff that appears to be academic papers etc, and then raid the 'references' section of those.  Look for stuff published in industry journals such as ""Journal of Portfolio Management"" as an example. If you want to try out different models yourself and see what works and what doesn't, this Monte Carlo Simulator might be something you would find useful The basic theory for those that don't know is that various parts of a larger market do not usually move in perfect lockstep, but go through cycles.. one year tech might be hot, the next year it's healthcare.  Or for an international portfolio, one year korea might be doing fantastic only to slow down and have another country perform better the next year.    So the idea of re-balancing is that since these things tend to be cyclic, you can get a higher return if you sell part of a slice that is doing well (e.g. sell at the high) and invest it in one that is not (buy at the low) Because you do this based on some criteria, it helps circumvent the human tendency to 'hold on to a winner too long' (how many times have you heard someone say 'but it's doing so well, why do I want to sell now""? presuming trends will continue and they will 'lose out' on future gains, only to miss the peak and ride the thing down back into mediocrity.)  Depending on the volatility of the specific market, and the various slices, using re balancing can get you a pretty reasonable 'lift' above the market average, for relatively low risk. generally the more volatile the market, (such as say an emerging markets portfolio) the more opportunity for lift. I looked into this myself a number of years back, the concensus I came was that the most effective method was to rebalance based on 'need' rather than time.  Need is defined as one or more of the 'slices' in your portfolio being more than 8% above or below the average.  So you use that as the trigger. How you rebalance depends to some degree on if the portfolio is taxable or not.  If in a tax deferred account, you can simply sell off whatever is above baseline and use it to buy up the stuff that is below.   If you are subject to taxes and don't want to trigger any short term gains, then you may have to be more careful in terms of what you sell.  Alternatively if you are adding funds to the portfolio, you can alter how your distribute the new money coming into the portfolio in order to bring up whatever is below the baseline (which takes a bit more time, but incurs no tax hit)  The other question is how will you slice a given market?  by company size?  by 'sectors' such as tech/finance/industrial/healthcare, by geographic regions?" There isn't a formula like that, there is only the greed of other market participants, and you can try to predict how greedy those participants will be. If someone decided to place a sell order of 100,000 shares at $5, then you can buy an additional 100,000 shares at $5. In reality, people can infer that they might be the only ones trying to sell 100,000 shares right then, and raise the price so that they make more money. They will raise their sell order to $5.01, $5.02 or as high as they want, until people stop trying to buy their shares. It is just a non-stop auction, just like on ebay. The only purpose the ILS market fills is directly lining up capital to pay for potential cats. Unless you're doing directly that you don't really have a way to participate, long or short.  The cat bond market really isn't liquid or developed enough for derivatives to exist at this point.   Due to the losses this year the cat bond market could shrink significantly too because all the existing catastrophe models have seemed to be inadequate to model these occurrences and investors are losing their shirts. There are questions of the extent to which the alternative capital in the reinsurance market will reload in the wake of 2017. It is called the Monday Effect or the Weekend Effect. There are a number of similar theories including the October Effect and January Effect. It's all pretty much bunk. If there were any truth to traders would be all over it and the resulting market forces would wipe it out. Personally, I think all technical analysis has very little value other than to fuel conversations at dinner parties about investments. You might also consider reading about Market efficiency to see further discussion about why technical approaches like this might, but probably don't work. Here are a few things I've already done, and others reading this for their own use may want to try.  It is very easy to find a pattern in any set of data. It is difficult to find a pattern that holds true in different data pulled from the same population.  Using similar logic, don't look for a pattern in the data from the entire population. If you do, you won't have anything to test it against. If you don't have anything to test it against, it is difficult to tell the difference between a pattern that has a cause (and will likely continue) and a pattern that comes from random noise (which has no reason to continue). If you lose money in bad years, that's okay. Just make sure that the gains in good years are collectively greater than the losses in bad years. If you put $10 in and lose 50%, you then need a 100% gain just to get back up to $10.  A Black Swan event (popularized by Nassim Taleb, if memory serves) is something that is unpredictable but will almost certainly happen at some point. For example, a significant natural disaster will almost certainly impact the United States (or any other large country) in the next year or two. However, at the moment we have very little idea what that disaster will be or where it will hit.  By the same token, there will be Black Swan events in the financial market. I do not know what they will be or when they will happen, but I do know that they will happen. When building a system, make sure that it can survive those Black Swan events (stay above the death line, for any fellow Jim Collins fans). Recreate your work from scratch. Going through your work again will make you reevaluate your initial assumptions in the context of the final system. If you can recreate it with a different medium (i.e. paper and pen instead of a computer), this will also help you catch mistakes. Candlesticks and TA are a relic of pre-computer trading, period. Market makers use sophisticated algorithms not for trading, but manipulations. This is dumb on many levels.  First are they really trying to blame the Flash Crash for investors leaving the market. It's 2014 and they claim in 17 of 25 months since the 2010 crash investors have withdrawn (not really sure what this means either, since shares don't disappear- does this just mean the market is up? It's unclear). Either way the article quoted is from 2012! And for a research team creating an empirical model, this is a very scary usage of small sample size,  mistaking correlation for causation,  etc.  And the algo,  though they don't give much info,  seems to be the very essence of data mining. Pick a million signals and filter on those that are empirically the best.  If you are an individual investor or a small fund thinking of purchasing something like this,  first consider: if it really worked, why are the founders selling it when they could just use it themselves and profit from it? It's almost guaranteed not to work out of sample For starters, that site shows the first 5 levels on each side of the book, which is actually quite a bit of information.  When traders say the top of the book, they mean just the first level.  So you're already getting 8 extra levels. If you want all the details, you must subscribe to the exchange's data feeds (this costs thousands of dollars per month) or open an account with a broker who offers that information. More important than depth, however, is update frequency.  The BATS site appears to update every 5 seconds, which is nowhere near frequently enough to see what's truly going on in the book.  Depending on your use case, 2 levels on each side of the book updated every millisecond might be far more valuable than 20 levels on each side updated every second. My guess is that both the blue and pinkish lines are hand drawn by someone. The blue line indicates 'higher lows' while the pinkish line represents 'higher highs'. Together they form a trading channel in which you can expect future prices to be (unless there is some unanticipated event that occurs).  Edit: since the price broke out above the trading channel at the start of the year (and is verified by the increase in volume at that time) something must have occurred to increase the value of the stock.  Edit2: this news likely explains the breakout in price. Edit3: this chart shows that the stock price is now 'seeking equilibrium'. The price will, likely, be volatile over the next few days or weeks. "If i do this, I would assume I have an equal probability to make a profit or a loss. The ""random walk""/EMH theory that you are assuming is debatable. Among many arguments against EMH, one of the more relevant ones is that there are actually winning trading strategies (e.g. momentum models in trending markets) which invalidates EMH.  Can I also assume that probabilistically speaking, a trader cannot do worst than random? Say, if I had to guess the roll of a dice, my chance of being correct can't be less than 16.667%. It's only true if the market is truly an independent stochastic process. As mentioned above, there are empirical evidences suggesting that it's not.  is it right to say then that it's equally difficult to purposely make a loss then it is to purposely make a profit?  The ability to profit is more than just being able to make a right call on which direction the market will be going. Even beginners can have a >50% chance of getting on the right side of the trades. It's the position management that kills most of the PnL." I have watched the ticker when I have made a transaction. About ¼ of the time my buy (or sell) actually moves the going price. But that price movement is wiped out by other transactions within two (or so) munites.  Is your uncle correct? Yes. Will anyone notice? No. Ok, so disregarding passivity, could you help me through a simplified example?   Say I only had two assets, SPY and TLT, with a respective weight of 35 and 65% and I want want to leverage this to 4x.  Additionally, say daily return covar is:  * B/B .004% * B/S -.004% * S/S .02%   Now, if I read correctly, I should buy ATM calls xxx days in the future.  Which may look like: Ticker, S, K, Option Price, Delta, Lambda  * TLT  $126.04  $126.00  $4.35  0.50  14.5 * SPY  $134.91  $134.00  $6.26  0.55  11.8  ^ This example is pretty close but some assets are far off.   I feel like I'm on the wrong track so I'll stop here.    I just want to lever up my risk-parity. Margin rates are too high and I'm docked by Reg-T.