Moving Averages
Stock charts are a fascinating combination of technical and mathematical specificity and human psychology. One one hand they can be a very accurate representation of a company’s health. On the other hand, they are a pure expression of human psychology.
One way to look at a chart is to compare the day to day price action with a moving average. Moving averages can help smooth out the daily price action, which can seem chaotic. But ten day, fifty day, and two hundred day moving averages can help get a better overall picture of a stocks health over a long period of time.
What is particularly interesting is when a stock starts to diverge from it’s moving average. Mostly when a stock has been going slowly up, five to ten percent a year, but then suddenly starts going up a lot more. When a stock’s daily price goes significantly higher than it’s moving average is when things get interesting.
We’re Gonna Get Rich!
One thing this does is attract a lot of attention. This extra attention represents more people who see this stock shooting up which triggers the fear of missing out. These people buy the stock, which of course makes it go up even further.
One of the most under appreciated breakthroughs of the Industrial Revolution has nothing to do with industry, and everything to do with agriculture. The Industrial Revolution helped farms to get significantly more food out of the ground, per acre, for two important reasons.
One is that before the Industrial Revolution, farmers needed to use domesticated animals. This meant they needed twice as much land. Half to grow the food for people, and the other half to grow food to feed their animals.
Carefully Manage The Yield
But a much more important reason has to do with crop rotation. During the middle ages the farmers had developed a very complicated system of rotating various crops to keep the soil fertile for as long as possible. If they kept growing the same crops over and over, the soil would become quickly depleted and they wouldn’t be able to grow anything else.
The first thing the Industrial Revolution did was allow farmers to use mechanized equipment rather than animals, which gave them access to twice as much land, which allowed them to produce twice as much food.
But the second thing was that with fossil fuel driven equipment, they could use a combustion process to extract nitrogen from the air. This allowed them to maintain a much higher level of soil nutrients, which allowed them to grow even more food per acre.
More Food More People
This, of course, led to a massive increase in population since farmers could, from the same land produce much more food to support the growing population.
On planet Earth there have evolved several extremely complicated self contained and essentially self regulating systems. These self regulating systems seem to have natural upper and lower bounds that keep the systems in a kind of equilibrium.
For example, a population of rabbits on a certain patch of grass are constrained by population size, food or calories per animal, the birth rate and the death rate. If any one of these variables changes, the others will naturally change to maintain the equilibrium.
Multi-Variable Inter-Dependent
If you add a few more variables, like predators of the rabbits or other animals that are competing for the same food source, this simply adds to the complexity of the system. But so long it slowly and organically evolves, it can maintain a very stable and self-correcting equilibrium.
If any one variable goes too far in one direction, all the other variables will correspondingly change to keep everything in equilibrium.
This hasn’t always been the case. During the long course of Earth’s history, there have been a few times when most of the life has suddenly died.
We’re All Gonna Die!
It’s also an interesting fact that 99% of every type of life form that has ever lived is now extinct. Which seems to lead to a general rule that if you are a life form, you have a 99% chance of being extinct one day.
We humans tend to think that since we can realize this, and understand this, we can somehow keep ourselves from being extinct.
But a combination of partial differential equations and chaos theory tell us that measuring the current state of a situation is one thing. Understanding all the laws of science in a current state is one thing. But chaos theory says that the more complex a system is, and the more variables there are, the more impossible it will be to predict any future states that may result from any current changes.
Our Time Is Limited
It’s safe to say that there is a very good chance there will be a time in Earth’s future when humans will have long been instinct, as well as all other life forms that currently exist.
One thing that happens sometimes in nature is that a food supply will suddenly increase which will lead to a sudden increase in the population that is dependent on that food supply. But that large population is utterly dependent on the continued existence of that food supply.
If something changes and the current food supply levels are unsustainable, that generally leads to a sudden and catastrophic die off of the particular species.
Continued Increases In Productivity
The interesting thing about food production since the Industrial Revolution is that the amount of calories taken out of the ground per acre has been consistently increasing, as has the population which depends on that consistently rising food supply.
But as soon as the food supply stops increasing, or if it starts to decrease for any reason, then humans will experience a sudden drop in population. And since we are capable of being aware of what’s going on around us, chances are that whoever is alive during this time will experience a life much less enjoyable than the one we have.
The thing about stock charts is, in order for them to keep going up, they require a consistent flood of new buyers. As soon as the new buyers run out, then everybody who owns the stock will want to get out.
What Goes Up…
This is when stocks that have been shooting up in a bubble will tend to collapse. When all the buying frenzy suddenly turns into selling frenzy.
This is when the stock mean reverts, or stops being much higher than it’s moving average, even crashing through and going far below it’s moving average.
They do say that reversions to the mean can be very painful.
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