You may have already asked yourself: “What drives the market?”. An answer might be fundamental news of companies listed on the stock markets. In this context, successfull investor and legendary fund manager George Soros suggests in his book “The Alchemy of Finance: Reading the Mind of the Market (1987)” to bet on future crowd behavior, instead of betting on fundamentals. This implies that is more important to know about the behavior of the majority of the traders in a market. These traders, by following a certrain strategy, react to avorementioned news or technical market observations and thus actually move prices. We thus give answers to the question: “Who drives the market?” and quantify market behavior, i.e. estimate fractions of chartist (trend following) and fundamentalist strategies. This information then allows for realizing outperforming adaptive trading strategies.

Coming back to George Soros, he gives a splendid example of such an adaptive trading strategy. Soros basically anticipates steadily increasing trend following behavior in respone to initial buying of informed fundamental investors. These investors first move prices, which is then observed by chartists. They assume the trend induced by fundamentalists to continue and start buying. This triggers further buying of other trend followers, thus creating a self-reinforcing price process. This might lead to the creation of a price bubble. One instance for such bubbles is the boom of internet stocks at the end of the 1990s. More historically, other occurances have been computers in the 1980s, Real Estate Investment Trust (REIT) in the 1970s, and electronics in the 1960s. Soros exploits such self-reinforcing price trend following behavior by buying more in the early stages of this process and later selling to late trend followers.

By providing you with our quantifications and in the future also with forecasts of the fractions of chartists / trend followers and fundamentalists in the markets, we put you in the position to act like George Soros and to realize respective adaptive strategies . Such an adaptation for example could be triggered by a strongly increasing fraction of trend followers from a low level. This clearly indicates the advent of a self-reinforcing process, which Soros exploits.