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What role do Gann’s “Law of Action and Reaction” play in market analysis?
What role do Gann’s “Law of Action and Reaction” play in market analysis? “The market is acting, and we should watch the market; we should not form our own theories of what the market is going to do; we should seek to find out what the market is doing and study the market.” – Ben Graham So says a Clicking Here famous student of Warren Buffett, Benjamin Graham, in his book Financial Analysis. Market guru John Bolles wrote, “A smart active investment firm is not one that follows the crowd and moves longs and shorts at the direction of the outside forces of public opinion; rather its managers will, when they see the market acting, react to the situation in a fast, firm, and safe way that does not involve overbought or oversold conditions.” Now the famous Law of Reaction says, “The stock market reacts faster to new information than it decides on new information. A company’s stock price depends on the combined action of thousands of individual investors in response to information at the margin.” So to hedge their vulnerability, a fund manager will look to fill the stock positions they have the day prior. This is not a theoretical thought; the law actually gives value to taking a little and then a little more. Warren Buffett explains the significance of this law, “To be prepared to increase your holdings when the stock becomes overvalued is far more likely to lead you legitimately to a sale when it becomes undervalued than to cause you to develop an investment philosophy along general or radical lines. Many investors try to determine the overall value of the market by watching the progress of its individual components. However, they only become aware of the market’s changes when they see swings of 1 percent or 2 percent. This is the reaction time of most individual investors. Therefore, they will often fail to recognize the very market conditions which will be most valuable (will change in order to change in their favor) until that very moment when they decide they have just seen a desirable change in market conditions and reach forWhat role do Gann’s “Law of Action and Reaction” play in market analysis? The subject of this posting is that of both the “Law of Action & Reaction” (Gann) and “the Law of Force & Levers” (Edgeworth, Fama, and Mendelsohn). The key point is how the Law of Effect is a critical aspect of any theory.
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In his Law of Reaction, Gann establishes that risk is closely related to the risk premium. Stock returns tend to be riskier than either bonds or money, which means that there is a risk premium implicit to returns. Excess returns are a “reaction” to the risky nature of stocks. Likewise, risk-seeking traders are a “reaction” to the higher expected return on risky equities — their response is to invest even more so that they can realize an even higher expected return (risk premium). If some theory holds, “risk-seeking traders” should not exist. They will make decisions as a response to the theoretical expected return on the security (which should be zero — a pure equity). If the expected return is positive, we should observe risk-seeking behavior (risky, high-risk equities). If the expected return is negative (riskless securities as I describe here and here), we should observe risk-averse behavior (risk-averse to equity, low-risk securities). The Gann’s Law of Reaction serves to explain the expected return in a highly related way. Our Law of Action & Reaction says that the value of the share price is determined by supply & demand forces. The market makers bid the share price, supply is revealed by the interest rate and the economic calendar (the Fed announcements). Interest rates reveal the market’s price expectations of future rates, and then market demand — i.e.
Gann Diamond
, supply — is driven by the interaction between these two factors. If the market makers’ expectations are correct (correct expectations being the “price”), we observe excess returns, which areWhat role do Gann’s “Law of Action and Reaction” play in market analysis? I saw a couple of videos from Joe Calamatta where he said that he doesn’t like to use the Law of Action and Reaction because it tends to confuse some people. I am a great fan of how Joe speaks and thinks, but I’m not sure this is so. We can learn a lot from how this works for example with regards to stocks. I read that we should be looking for security with the lowest beta. Then as investors try to sell and close. But the low beta security will slide along with the market so the selling cannot continue, it has to reverse and return to where it first was, price going lower. However, bonds are supposed to reverse the market from the downside. You sell something what happens? It returns to where you bought it, right? Again, the law of action and reaction says to sell low to high so to speak. In fact, bonds are more in the news lately than stocks. We are told over and over to “own low beta, sell high beta”. What does that mean? – Get out of stocks and put your money in bonds. Back to stocks.
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If I am looking for stock that the low beta security, or security that will buy low go back higher, or sell high to go back lower. That Visit Website that in my mind as the theory goes that it’s a low beta security. So instead of going up I might want to select a stock that will go down, which will be low beta so I get to try to sell high when the market goes lower? It’s “low beta” this tells us that it’s going to end up going lower, so we “sell higher”. If this security says it’s “high beta” so it should continue on it’s current path. Yet bonds so “high beta” should push the stock market lower. Bonds can’t go higher except through inflation, so they “sell” but lower as inflation happens. I find this reasoning, a step in the right direction, but it does confuse me. Can you explain it better? Any other experiences you might have in dealing with the impact this might have on your thinking? The Law of Action and Reaction states that the higher in a stock’s beta its upside potential is the greater that upside it’s likely to deliver. For example, a really well-run company that’s got huge intrinsic value might be a “beta positive” stock. It’s likely to go up over the long term, because it has such good prospects. Look at any industry that’s going gangbusters right now and pick stocks in that industry that are beta-positive…
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..you’ll probably do very well A long time ago, Joe Calamatta and some of his followers were (accurately) criticising what he and others called ‘bubble logic’….that is, logic and wisdom based on finding stocks with low beta to sell high to go back lower. BTW
