Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

Bubble Prediction Analysis and Indicators

1 min read

Didier Sornette, a risk economist and expert on complex systems, Sornette is the chair of entrepreneurial risk at the Swiss Federal Institute of Technology, and director of the Financial Crisis Observatory, a project to test the hypothesis that markets can be predictable. He’s the author of Why Stock Markets Crash: Critical Events in Complex Financial Systems.I recommend everyone to watch out the video before continuing into getting know more about the bubble prediction.

httpv://www.youtube.com/watch?v=C_eFjLZqXt8

 
Download the white paper Dragon Kings, Black Swans and the Prediction of Crises

Sensex – Shorter Term Bubble Analysis

Shorter timeframe bubble

How Bubble is Predicted

In a bubble, the dominant mechanism is positive feedback; the key to understanding bubbles is understanding this positive feedback. How, then, does positive feedback arise?

The most obvious explanation is the conventional one: positive feedback is a consequence of irrationality in the market. And there’s certainly an element of truth in this explanation. Greed, self-delusion, unjustified extrapolation, caring more about relative returns than absolute profits (a.k.a. “keeping up with the Joneses”), conformism (a.k.a. “if everybody else is doing it why can’t we?”), confusing the improbable with the impossible (“house prices will never go down nation-wide”) and other persistent behavioral flaws lead inevitably to bubbles. This has been true throughout the history of speculation.

FCO ofen tracks the Power Law, Positive feedback and other mechanisms to identify a bubble aka (Super Exponential Growth)

The Bubble is predicted based on the positive feedback

A positive value of the DS-LPPL bubble indicator suggests a future drop and/or higher volatility.
A negative value of the DS-LPPL bubble indicator suggests a rebound and/or higher volatility.

Four indicators are offered in Risikopedia(FCO)

1)early bubble warning, long time scale
2)bubble end flag, long time scale
3)early bubble warning, short time scale
4)bubble end flag, short time scale

Short time scale corresponds to 1month to 6 months.
Long time scale corresponds to 6 months to 3 years.

Where i can see this DS-LPPL Indicator?
Financial Crisis Observatory Provides such Analysis in their Risikopedia Section for various class of Financial Instruments like Global Indices(Includes Sensex too), Commodities and US Sectoral Indices and Selected US Large Cap Stocks.

Long Term Bubble Prediction in Apple from FCO

Long Term Bubble In Apple

Possibly Gold Bear Market Ends?

Extreme negative Values in DS LPPL confidence Indicator indicates that possible reversal in Gold (Both Long Term and Short Term shows extreme negative values)

Gold Bottomed Out

Rajandran R Founder of Marketcalls and Co-Founder Algomojo. Full-Time Derivative Trader. Expert in Designing Trading Systems (Amibroker, Ninjatrader, Metatrader, Python, Pinescript). Trading the markets since 2006. Mentoring Traders on Trading System Designing, Market Profile, Orderflow and Trade Automation.

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10 Replies to “Bubble Prediction Analysis and Indicators”

  1. Your information is always exquisite. Thanks Rajandran. Could I suggest one thing.. How about putting in the date you write the article just below the title/subtitle so that in case we view it a little later we have an idea to the time span of the article. Thanks…

  2. another verymuch usefull article collected & posted by Rajendran R
    for welfare of market inverstor
    Thanks a lot to Ranjendran & his team for good contirbution

    1. Currently Trading Options with Indicators is not recommended as due to the nature of the risk and leverage involved in options a simple mathematical model will ends in a huge failure most of the times and backtesting options data is quite challending. And the problem is widespread among system traders. Hope we will slowly overcome such bottlenecks in the future.

      1. karthikeyan February 15, 2014, 2:03 pm (2 days ago)
        sir iam studying ur article for last few months ihave lost some amount on fresh entry itseif but after i dont leave the market i bought ami broker and as per ur advice i back tested all indicators including spt but u honestly agrees that it gives only 42%nice of u then i get an indicator from my friend and backtest for last 5 months it gives me an average profit of 10000 in silver micro i use some ma to exit my position can i re invest amount to trade using this software plkz advice me sir

  3. sir iam studying ur article for last few months ihave lost some amount on fresh entry itseif but after i dont leave the market i bought ami broker and as per ur advice i back tested all indicators including spt but u honestly agrees that it gives only 42%nice of u then i get an indicator from my friend and backtest for last 5 months it gives me an average profit of 10000 in silver micro i use some ma to exit my position can i re invest amount to trade using this software plkz advice me sir

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