Linear, from James Sogi

April 3, 2009 |

 I don't understand why prices seem to chart out along a line along their tops or bottoms of the bars in a line. A random walk would not and does not do that. What is the function that makes it happen?

Victor Niederhoffer replies:

What we need to do is write a little essay on the linear thing of Jim's. He asks "why lines drawn between highs or lows tend to be straight in markets." Its a very good question. It reminds me of the work that The Professor and his student Chris Hammond did to test whether there were turning points or bear and bull markets in the Dow. An anonymous donor will give $500 for the best answer for this. Committee of me and Doc Castaldo and Jim Sogi to decide. I would point out that the above duo concluded there was no such thing as bull and bear markets, that the turning points were completely consistent with chance. My working hypothesis is that the same thing is true here.

Phil McDonnell responds:

One possible idea is the cobweb theory. In this, the declines come back to the demand curve which is a 45 degree line supporting successive bottoms. The upper bounds (the tops) are delineated by a parabola. The whole thing can be described by a difference equation. The following site describe the math and have some graphics. The graphs with the rising 45 degree line and the overlaid parabola above it are the most interesting.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008


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