Saturday, January 5, 2008

The Real World

While the Efficient Market Hypothesis (EMH) continues to enjoy strong support in academia, I have found that it doesn't hold up in the real world.

In the real world:

- Financial information is neither evenly distributed nor smoothly acted upon. The resulting inefficiencies create trading opportunities. Sales and earnings growth data is an example where the information is not smoothly acted upon by the market. Also price momentum.

- Profit generation processes and forecast techniques tend to be compressed together by the forces of consensus. This results in a "herd mentality" that can take markets to extremes, creating both risks and trading opportunities.

The key success factor is to discover these inefficiencies and use them to develop a "winning edge." Once you have a winning edge, you can develop a profitable trading system around it.

The Alpha Stock Model provides the tradeable edge for the trading system to be outlined here over the next several weeks.

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