Five principles are traits of the market and you must pay attention to them
As Pascal vander Straeten, Senior Risk Management Executive - Managing Shifting Global Risk Trends - Effective Risk, explains these
principles are things that make markets "misbehave" and affect your company profit.
1. Markets are turbulent
Pascal vander Straeten explains that "markets are turbulent because of the outside world made out of exogenous effects. Scaling enters the system from the fundamentals of weather patterns, resource distributions, and industrial organizations". Scaling finishes, he adds, and feeds back through the system again, in the marketplace.
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2. Markets are risky.
Turbulence is dangerous as changes in prices can swing unexpectedly. These are hard to predict neverthless.
"Conventional financial risk management ignores this; it assumes the financial system is a linear, continuous, rationale machine. That kind of thinking ties conventional risk managers into logical knots. But averages mean nothing as the key are the extremes of profit or loss that matter the most. The bell shape cannot capture the reality of risk as volatility quantified by the standard deviation does not embed the extremes the Gaussian standards assume. Actually, the common people know better than the professional broker/investor as the people do not care about the averages returns. For them, the rare out-of-the-average catastrophes loom larger, and the ultimate fear is bankruptcy. Bottom line, prices in the real world do not move in accordance with the bell curve", he explains.
3. Market timing matters
Volatility is concentrated in a financial market and you should not focus on the averages, but instead time the stock market, and take cognizance of concentration, advises van der Straeten.
4. Prices often leap, they don't glide
This adds to the risk. It's no mystery that prices vary and fluctuate and the distribution of prices doesn't always reflect the decision of someone who has a business and wants to invest.
5. In markets, time is flexible.
According to the same specialist, "this is true in daily life: we perk up during high drama, nod off when bored. Markets do the same: the more dramatic the price change, the more the trading time scale expands. Time has cycles, that statisticians and economists have in vain tried to make disappear through seasonal adjustments; but you cannot do that."
Keep in mind these aspects when dealing with the financial management of your business or whenever trying to make a decision and thinking about analysing the market first. In the end, sometimes it can also be about the instinct, together with a thourough market research!