Market logic

Market logic is the discursive logic of messages formulated by a group of individuals sharing common values based on which reasoning satisfies or not the criteria of consistency and completeness. While research methods on pricing efficiency are typically based on statistical analysis to assess whether markets provide the best possible aggregation of probabilities of all future outcomes affecting prices, market logic for its part defines the line of reasoning by which traders can infer information from the pre-determined meaning of specific price comovements.

Logic and language

Seeking to understand the logic behind market conversations about the state of the economy is also a departure from the use of economic models representing fragments of knowledge interacting with intuition the same way incomplete pieces of a puzzle will show ideas about reality. Consequently, economic models tend to provide compact, consistent but partial descriptions that often neglect the causes by treating them as exogenous factors. The language of rational behavior on the other hand exists in its own space of values and probabilities and offers the possibility to create complete arguments that describe both behavior and its causes.

Wherever consistent standards of presentations of facts are preferred over true descriptions about the whole the world, language becomes "sufficiently" complete to provide "high inductive" probabilities about the structure of facts, and because of competition among market participants to acquire reliable knowledge, language is constantly reevaluated for its ability to provide "sufficient" evidence. The language of the markets thus becomes the expression of both the "scientific" half and the "deliberating" half of reason, as described by Aristotle in "Nicomachean Ethics".

Language and market structure

In their constant quest for price direction markets seek to agree on the current state of the economy with conversations (market sessions) based on a codified knowledge of the properties that describe recurring major economic forces at play. The sets of properties used to form "pictures of facts" (Wittgenstein 2003:proposition 2.1) vary very little through time to represent macroeconomic or microeconomic perspectives on facts: "Valuation parameters remain remarkably constant. Success metrics rarely change. Simple measures of revenue and profit still determine the market value of an enterprise. And new thinking often obscures the old, time-tested rules of supply and demand" (Insana 2002:13). When rare new phenomena such as the "New Economy" of the roaring 90's are noticed and are seen to have a major impact on national income, markets then start to explore new points of reference and new profit opportunities, leading to price bubbles once "the participants' value systems are hunhinged" with "mutual self-reinforcing interaction between the values that guide people and the course of events" (Soros 1995:224).

Because information is converted into messages with a concrete mean of communication -- money that is -- extra-informational factors regularly influence pricing. Traces of activity commonly called support and resistance levels are created by profit targets and stop-loss orders to eventually become rigid zones of activity temporarily interfering with normal market conversations when for example a market index goes down on the basis of profit taking.

References

* Aristotle. "Nicomachean Ethics", translated and with an introduction and notes by Terence Irwin [second edition] . Indianapolis: Hackett Publishing Company, 1999, pp.86-99.
* Insana, Ron. "Trendwatching". New York: HarperCollins, 2002, pp.13,17,133.
* Soros, George. "Soros on Soros: Staying Ahead of the Curve". New York: John Wiley, 1995, pp. 224, 312.
* Wittgenstein, Ludwig. "Tractatus Logico-Philosophicus", translated from the German by C.K. Ogden with an Introduction by Bertrand Russell. New York: The Barnes & Noble Library of Essential Reading, 2003, pp.13-19 (propositions 2.03 to 3.02).