Looking For Inefficiently Priced Stocks by Thomas K. Lloyd
The story is the same everywhere: Find the inefficiency and take advantage of it. This author presents some ideas on how to recognize market inefficiencies by analyzing stock charts and making use of what he calls the inefficient market theory.
Every trader knows that the way to trade profitably and easily is to take advantage of the inefficiencies
in the marketplace. That means you have to be able to recognize inefficient pricing, have some idea about
how badly the price is off, and then time your trade to take advantage of the pricing mechanism error as
the price starts to return to the fair market price, the efficient market price where it belongs. To do that,
you need to recognize and use the inefficient market theory, so to speak, as well as the better-known
efficient market theory. The equity trading examples and charts here will help you learn to do just that.
EFFICIENT MARKET THEORY
The insights of efficient market theory are well known. All that is known about the tradable is already in
the price! The market is an efficient pricing mechanism because armies of analysts and traders scour the
landscape to discover everything possible, report it to their customers, get paid with orders for such
information and get the information into the price structure as quickly as possible.
But the true value of the efficient market theory is that when you recognize inefficient pricing, you know
it is not going to last long and that price will quickly become efficient. And there is the short-term
window of opportunity for a trader to profit. The inefficient market theory leads to profits because the
market is efficient — eventually.