Source: Fractal Market Analysis: Applying Chaos Theory To Investment And Economics, pg.33 (https://polar-sun.xyz/index.php?topic=21.msg29)
- The market is stable when it consists of investors covering a large number of investment horizons. This ensures that there is ample liquidity for traders.
- The information set is more related to market sentiment and technical factors in the short term then the longer term. As investment horizons increase, longer-term fundamental information dominates. Thus, price changes may reflect information important only to that investment horizon.
- If an event occurs that makes the validity of the information fundamental information questionable, long-term investors either stop participating in the market or begin trading based on the short-term in formation set. When the overall investment horizon of the market shrinks to a uniform level, the market becomes unstable. There are no long-term investors to stabilize the market by offering liquidity to short-term investors.
- Prices reflect a combination of short-term technical and long-term fundamental valuation. Thus, short-term price changes are likely to be more volatile, or "noisier", than long-term trades. The underlying trend in the market is reflective of changes in expected earning, based on the changing economic environment. Short-term trends are more likely the result of crowd behavior. There is no reason to believe that the length of the short-term trends is related to the long-term economic trend.
- If a security has no tie to the economic cycle, then there will be no long-term trend. Trading, liquidity, and short-term information will dominate.