I had an interesting conversation with a chap that is into Artificial Neural Networks. His goal is to design the ultimate ANN for share trading. There are, as you may know, a great deal of solutions already for trading in microscopic time intervals, trying to train machines to do it. Is is a real strategy and I guess there is money made there. But our path is different insofar that it still involves human interpretation of the reality of the market. But it is an interesting field none the less. From that conversation it became clear that there were a couple of things that needed clarification on the way we designed our VIRA application. The most contentious part of the discussion dealt with market equilibrium. My colleague’s view of the world was that if the price of the share is trending up, then that means that there is demand for the share. I had an uneasy feeling about that theory. There are several ways that this may unfold.
– If we think of equilibrium then one way to look at things is that the market is always in equilibrium when the transaction is done. So in a way it is in equilibrium and yet it moves. So how can this happen? Well, the equilibrium is the point in which, for that day the shares were traded at a particular price. So there was a micro-equilibrium if you will. But not for the entire market. So my colleague had the right idea in thinking that if the share price is trending up then there is demand. But for how long? Well that is the question.
– So let’s think of the unknown part of the market then. That is to say let’s think on the shares that were not traded, hence the ‘un-equilibrated’ part of the volume. This is precisely what we are showing in the VIRA volume graph. A proxy of the proportion of shares traded is the volume of shares traded for that day for that share. So if we can keep an eye on the trend of that volume then we can have a grasp on the momentum on the market, or in other words we can infer the equilibrium, or non equilibrium of it.
– So if the share price is trending up then you may have three scenarios volume wise (at least). We can have the volume up high too, which will confirm that there is demand for the share. We could have the volume trending low, which means that the demand is gone for that share, and we could have just a random or expected volume of shares traded which may suggest that it is best to wait and see – depending on whether you are holding or not -.