Behavioral Finance - implementation of our approach using analysis of trend phases and trend structures
We regard the stock market as a communication system, in which new themes gradually take hold in evolutionary processes. This adjustment of individual thought patterns in line with changing circumstances leads to trends on the market. These trends do not just represent random price movements, but instead have psychological and social causes.
This knowledge enables us to analyse trends from two sides:
- In the "phase analysis" we directly analyse the communication of the market participants and the expectations formed on this basis.
- In the "structural analysis" we analyse the consequences of the formation of expectations among investors, namely the reflection of this in price movements.
We draw a distinction between several types of trends. Systematic trends are the result of complex change processes and a high level of uncertainty. Random trends stem from a sequence of events of low complexity. We also draw a distinction between various trend frequencies: primary trends (measured on the basis of monthly data), secondary trends (measured on the basis of weekly data) and tertiary trends (measured on the basis of daily data).
Example of trend analysis from the equity investment process
The results of this analysis are the assessment of shifts in risk/return correlations, which give us our bearings for tactically navigating our way around the market, this being reflected in our broad range of investments.