Bangor, Wales
Posts: 16 since Sep 2015
Thanks Given: 6
Thanks Received: 10
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In simple terms, this will depend on your philosophy about how markets behave. If you think that they are irrational and can sustain behaviour beyond the limits of what you would expect a chance distribution to produce, then they will produce trends - strings of self-similar behaviour.
In this case, a market that has been range expanding is likely to continue range expanding, and a market that is range contracting is likely to continue range contracting.
Conversely, if you think that markets are mean reverting and move in cycles, then they will be unlikely to produce strings of self similar behaviour.
In this case, a market that has been range expanding is likely to begin range contracting, and a market that is range contracting is likely to begin range expanding.
A third possibility also exists: that markets alternate between these two modes. However, if they do that, you might ask whether a self-similar mode is likely to be followed by another self-similar mode, or whether . . . As you can see, the argument continues endlessly - part of why the markets are so complex!
Dave
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