“Economic bubble” might be a new term for many traders. People having years of experience don’t even have a clear idea about the term economic bubble. Driving luxury cars and making a decent income from trading might be possible with the help of strong technical knowledge. But without having a strong knowledge of the economic bubble, you can’t become the big players. We all know the major players make an insane amount of cash on massive market crashes. Even a major portion of the pro traders fails to survive such a market crash. So who makes money on such a major market crash? The answer is smart investors who have intense knowledge of this market.
The fact you don’t know about the economic bubble signifies you need to learn a lot about the market. And there is nothing wrong to admit you have to learn more about trading. An economic bubble is a phase when a certain investment section gets bump up with crazy speed. No one sees the potential risk of losing money in such a sector except big investors. So the market starts swelling up and creates a massive bubble in the economy.
If a bubble is created, it is bound to burst. The big players bet against the economy and make insane cash from such a bubble burst. The thing about the housing crisis in the U.S back in 2008. Almost everyone lost their jobs and homes due to the housing bubble but the smart investors made a fortune by betting against the economy.
Analyzing the economic bubble
Analyzing the economic bubble is a very tough task. It requires strong analytical ability. You have to have to go through thousands of datasheets and spot the potential bubble in the market. Even the elite traders in society fail to spot such a bubble by analyzing such tons of data. Usually, the institutional traders manage to spot such a bubble as they have hired the top class analyst across the globe. But the good news is that you don’t have to hire individual people to analyze the economic vulnerabilities. This can be done with the help of smart EAs.
The EAs are not going to be regular rather they will continuously analyze some of the key metrics of a certain economy. For instance, it can be programmed to analyze the interest rate, average hourly income, unemployment rate, CPI index, etc.
EAs for extrapolation
“Extrapolation” is a very advanced term and very few retail traders have heard this term. But if you get a job in the hedge fund, the word extrapolation will be a household name. It is the process of analyzing the data by which the rate of change in price is calculated. Instead of using manual labor, we can calculate the rate of change in the price of a certain asset for a fixed period. Usually, the EAs pick the asset which has an abnormal growth rate. If the growth is too fast, the price is most likely to drop faster. It’s a strong indication, the bubble is forming in the economy.
By assigning EAs to analyze rate change in price the traders can always monitor abnormal growth rates in any instrument. This can help them to spot the bubble just like the top traders in the world.
“Herding” is the study of the behavior of the mass community regarding a price movement of a certain market. As human beings are emotional, it is very hard to assess the herding factor of the market. But if the EAs are designed to deal with the herding metrics, it can easily find the behavioral anomaly of the consumers. The premium EAs can often study the trading volume and create a report on how the herding factor is pushing the price of a certain asset to a new high. The overvalued asset is nothing but the result of human emotional acts. Use the EAs to analyze such economic behaviors as it can help you to spot the bubble in the economy.
Taking advantage of the bubble
The EAs must have the ability to analyze the stealth, awareness, mania, and blow-off phase of the bubble. The Stealth phase is the first phase where the bubble starts to form. And the blow-off phase is the time when the price drastically falls causing a massive crash in the market. If these four phases are not identifiable by the EA, it is very hard to make a profit from the blow-off phase. You must be prepared to short the asset in the mania phase.
The advanced traders often manage to identify the mania phase without having any EAs. They start to realize the price of the asset is way higher than it was supposed to be. Slowly they get prepared for the bubble burst. All these processes will become easier if you can take advantage of the EAs from the starting of a bubble.