Science and Stock Markets
Over years, science has brought about many advancements in many fields. As human lives revolve around spiritualism, scientific inventions, all the devices we use, revolve around scientific principle. Science gives these devices the law of operation and makes sure everything works according to the laws, should anything go wrong, we have it’s consequences. In the same way, financial markets are also guided by science.
Mathematics, the queen of science is the pivot in which financial markets hang around. Mathematicians, right from 1000 AD till today have been trying to break the codes of markets. Some of them have been fairly successful and their success has made a lot of money for them. Jim Simons for one is an example.
With advancement in technology and increased computation capacity, graduates from many reputed educational institutions are coming into the markets. They hope to make money for the fund managers they work with or even for themselves with their computational skills with the large set of data they glean to find correct opportunities.
The term “quants” is used to refer to those brainy people. But here is an interesting fact, even before the arrival of these nerds and computation skills, markets have obeyed the laws of mathematics. A fact that is proven and accepted by the who’s who of markets today, after careful back testing. For our study, we will consider al couple of mathematical principles.
- Fibonacci ratio: we are exposed to Fibonacci number series, from our school days, most of us would halve written computer programs to calculate Fibonacci number series, but scarcely did we understand the importance of these number series. ( I don’t get the function of dividers in our geometry boxes until now, some say it is related to civil engineering, we will keep that discussion away for now). But Fibonacci number series and especially the ratio is an sparkling illustration of the combination of our own hindu arabic number system and an inquisitive human mind. Leonardo Fibonacci used our number system to measure trend lengths. These ratios give profit to many institutional traders as well as retailers. The ratio discovered by some one who lived about 800 years ago is still making people richer. Apart from markets, Fibonacci’s impact is widespread across multi discipline, many natural phenomena are also explained, mysteries solved by Fibonacci ratio, thus scientist have gone as far as calling Fibonacci ratio as God’s hand print. The next time when you see a snail’s shell, pause and remember Leonard Fibonacci.
- Square numbers: what does 12*12 have to do with markets? The answer is 144, which is a square number. These square numbers act as either support and resistance, areas of buying and selling in the markets. This relation is used by market experts to predict all time highs in the market with a degree of certainty. There are particular stocks which respect these square numbers to the tee. If you ask me how, I can only tell you that market respects these numbers.
Unlike many other fields which have seen the impact of science, especially numbers to the fullest, stock markets are yet to uncover the mysteries of number behind their operations. When retail traders are struck between the cycle of fear and greed, many institutions are working to uncover the mysteries with their large computers and computing brains. I am sure that in the future, we will get more idea about how numbers have impacted the markets.
Have any other scientific logics behind market operations? Feel free to let us know in your comments. Thanks for your time.