predictable patterns, that there are not enough marginal
investors taking advantage of these patterns to eliminate
them,andthat theaverage investorin themarket isdriven
morebyemotionthanbyrationalanalysis.Whilevaluation
doesnotplaymuchofaroleincharting,therearewaysin
whichanenterprisingchartistcanincorporateitintoanalysis.
Forinstance,valuationcanbeusedtodeterminesupportand
resistance lines
5 on price charts.
Information Traders
Prices move on information about the firm. Information
tradersattempt to trade in advance of new information or
shortly after it is revealed to financial markets. The
underlying assumption is that these traders can anticipate
informationannouncementsandgaugethemarketreactionto
thembetterthantheaverageinvestorinthemarket. Foran
informationtrader,thefocusisontherelationshipbetween
informationandchangesinvalue,ratherthanonvalueperse.
Thusaninformationtradermaybuyanovervaluedfirmifhe
believesthatthenextinformationannouncementisgoingto
cause the price to go up because it contains better than
expected news. If there is a relationship between how
undervaluedorovervalued acompanyisandhowitsstock
pricereactstonewinformation,thenvaluationcouldplaya
role in investing for an information trader.
Market Timers
Markettimersnote,withsomelegitimacy,thatthepayoffto
callingturnsinmarketsismuchgreaterthanthereturnsfrom
stockpicking.Theyarguethatitiseasiertopredictmarket