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Market Episodic Patterns
Unexpected news, move the market and at this point there is no arguing against it and prices react quickly in response. The move that occurs from one strong level to another, in the investment world is called an episodic pattern. An example for such pattern is the 9.11 terrorist attacks which caused such pattern and also the fears around the Grexit. Other events such as surprising results in an election, unforeseen big change in interest rates, natural disasters, assassinations and many more.
dddNot only FOREX prices reacts to dramatic world changes, but also prices of stocks, futures and other markets. Prices are continually adjusting to new price levels and all markets experience occasional surprises. Every new article, economic release or government statement impacts little by little the price on daily basis. Other example of occurrence of episodic pattern can be seen when a company develops a new drug which gets rejected by the US government. Then prices make sharp changes in order to follow world events.
The move that results from the unexpected event forms a pattern that one might expect. After the sharp initial move, a period where volatility declines occurs. For example when the event on nine-eleven occurred, stock prices made a plunge and in the next few days prices were volatile and unstable after that a sharp drop in volatility followed, as equilibrium was found. Some stocks for example insurance stocks jumped to the roof at that time due to sudden increase in purchasing of life insurance after the event.
Sometimes, errors occur in the price shock usually when misleading news are announced or when speculators with vast resources interfere. When this happens prices immediately move back to the levels prior to the news or the play and price will settle in a near the extreme high/low. At that time it is considered that prices are absorbing the consequences of the news and many traders will not enter due to risk fears.
Patterns like the episodic one discussed here, have become a main focus for many analytical work. Because of its unpredictable nature price move such as this cannot be forecast. Knowledge of patterns such as this is essential for any trader, to take into consideration when developing and testing a trading strategy. However after time passes and the same price is analyzed by software, you will find that a trend or charting pattern predicted this move. When this happens it is important to keep in mind that this conclusion is based on false premise.
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