Fin 4775 Technical Analysis

Direct Search

1. Lack of Centralized Organization – There is no formal exchange or central marketplace.

2. High Search Costs – Buyers and sellers spend time and effort finding each other.

3. Sporadic Trading – Transactions occur irregularly and depend on individual needs.

4. Price Uncertainty – Prices vary based on negotiation, lack of transparency, and individual circumstances.

5. Limited Standardization – The quality and specifications of goods/services may differ significantly between transactions.

Examples of Direct Search Markets

• Used Cars (Pre-Carvana, Craigslist, etc.) – Individuals had to rely on newspaper ads, word of mouth, or local dealerships.

• Real Estate (For Sale by Owner - FSBO) – Sellers list properties independently, and buyers search without agents.

• Collectibles & Antiques – Buyers and sellers connect at flea markets, garage sales, or auctions.

• Private Business Sales – Owners seek buyers without brokers or marketplace

Brokered Markets

brokers specialize in bringing buyers and sellers together. RealEstate is an example of a brokered market

Dealer Market

dealers trade assets for their own account, offering to buy and sellat specific prices. Nasdaq is a dealer marke

Auction Market

all participants converge in one place where all information iscentralized. It can be an exchange or electronic. The NYSE was the most famousauction market prior to technology.

Types

Cash Market or Spot Market

the oldest type of market where a contract is entered that results in an immediate exchange of the agreed upon items. The majority of equities trade in the cash market. Liquidity is usually very high in cash markets.

Futures Market

the buyer and the seller agree to trade at specific terms on aspecific date. First traded in the U.S. on the CBOT in 1848. You often don't pay thefull amount when you enter the contract, only an initial margin. What are some of the risks to futures trading? Who are the big players?

Options Market

the buyer of an option has the right, but not the obligation, tocomplete the transaction before the expiration date. Specific terms are usually setby the exchange.

Informed Market Players

known as the smart money. These are professional money managers,company insiders, position traders and speculators.

Noise

also known in the past as "dumb money." This used to describe the averagepublic investor. The theory is that professionals wanted to do the opposite of whatthis group is doing. These are "uninformed" traders

Liquidity

investors who are acting because they have to. A hedge fund that isshutting down or has had large redemptions. An index fund that has to buy a stockbecause it is being added to a particular index

Equally Weighted

Takes an average of each of the percentage price changes of each stock in the index.● Assumes that an investor invests the same dollar amount in each stock in the index.● Can be useful for confirming strength and weakness in the market at a broad level.● Best to use when one or two stocks make up a large percentage of an index whichcan skew the performance of the index

Better indication than s&p 500

Characteristics of a Tradable Market

● Easy Access: You get information on prices and can you trade on a specific market through your platform

● Fungibility or Parity: The same contract should trade in the same way across exchanges. S&P 500 Futures in the U.S. and Singapore

● Liquidity: You can buy and sell what you want without making a significant impact on the price of what you are trading?

● Continuous Trading: It is not helpful if the market never opens

Dow Theory Opinions

The Primary Trend is Inviolate - many believed at the time that the secondary and minor(short) trends in the market could be manipulated but the primary trend could not.

2. The Averages Discount Everything - prices are the result of people acting on their knowledge, interpretation of information and expectations.

3. Dow Theory is not Infallible - nothing in the market is going to work 100% of the time

Trends

Up -Higher Highs and Higher low

Down -Lower highs and lower lows-

Sideway-Hardest to trade ___ defined by a range between highs and lows.

John Murphys ten laws of tecnical ttrading

Find the trend and go with it

Bonds are bad investments because

Unpredictable interest rates

Primary/Secular Trends

Measured in Months or Years

Secondary/intermediate Trend

Measuredd in Weeks and Months

Short Term Trend

Measured in Days

Intraday Trend

Measured in Minutes and Hours

Price of stock is always determined by

supply and demand

Market Cap Weighted

Not a good indicator because it is largely dominated by ceartin stocks