How You Can Profit With Mosaic Theory
This is a first in a series of short discussions on how traders and active investors use information, data, and intuition in the construction of certain trades.
Since no trader is an island and information is typically compiled to create a short term and longer term play, there are certain truths that consistently play out in the capital markets arena. One of more esoteric yet widely used analysis is the Mosaic Theory.
Mosaic Theory is a method of analysis used by security analysts to gather information about a corporation. Simply said: think of a 9 piece puzzle and you can only compile 6 of the pieces. The compilation may not be complete, but one may begin to see the entire picture. This concept is widely accepted in capital markets to the extent that the CFA Institute has deemed it a reputable analysis tool.
We bring this to light because in the current trading environment it is incumbent upon the trader and active investors to be completely in tune to the flow of information. Market participants are typically barraged by an overwhelming amount of seemingly uncorrelated events, information and data.
Some of the most recent examples of correlating written news items and data based information includes a Liberia based article on an ebola case and its impact on a US equity, LAKE. This week market participants witnessed rather interesting volatility in the SWHC and RGR as articles surfaced relating to global and domestic perception of terrorism and gun laws. Although articles such as these can bypass the interest of the general public, experienced market professionals pay close attention to explicit and implicit information about equities.