Sunday, April 13, 2008

Markets are driven by .....?

Forex market (as other financial markets of course) uses continuous double auction mechanism to match orders and execute trading. ECN-broker clients can easily understand this mechanism by looking their Market Depth/Level II window. They see that limit orders arrive every moment (continuous), there are Bid/Ask sides ( double ) , and they put their own limit orders to the order book at the appropriate price (so it is auction) .

There are many mathematic models of this mechanism and many research institutes try to build the theory of the market behaviour. One of the models is based at fact that every market participant is motivated by making profit and he(she) uses all his intelligence to make that profit - so the whole market is a perfect rationality and it is driven by very clever participants.

The other model is based at zero-intelligence market participants ( COMPLETE IDI0TS??? ). This model can be used to make strong predictions based on a compact set of assumptions, even if these assumptions are not fully believable.

So what is the conclusion? If zero-intelligence model is good one how do you feel when you give away your money to idiots? Do idiots know what the price will be the very next moment?
So never give your money away.


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