Market Disequilibrium occurs when market and external forces combine to unbalance a market, creating inefficiency in the market in the process. A disequilibrium produces what’s called a “deadweight loss,” “welfare loss,” “excess burden,” or “allocative inefficiency.”
As described by efficient market theory, the price fluctuations we see in market behavior are the market trying to find its truly efficient price and quantity – the theoretical point of equilibrium. Investors attempt to locate it using moving averages and other means of technical analysis.
Technical analysis is a method of evaluating the worth and probable future direction of security prices using charts and data concerning prices and volume. The chartists who practice technical analysis believe that the most important information about a security will be found in price data, volume, and the moving averages and volatility associated with each – and enable them to make effective, profitable trades, in part by identifying inefficiencies, where traders can make short-term money as the price regresses back toward a theoretically true valuation of the security in question.
Traders use technical indicators like Moving Averages to verify how well a specific indicator works for a particular security, then make predictions about future prices. The moving averages for different intervals, shorter or longer, are compared for crossover points which may indicate the start or end of a trend. Moving averages are an important component of many technical indicators, including the Simple Moving Average (SMA).
The SMA is an indicator of trends over different intervals. On a chart, it is a line which plots the average closing prices of a security or index over a set number of prior days (or other intervals). Traders can plot a 30-day moving average by averaging the closing prices in the index or security in question for the 30 days preceding each point on the chart. Because the SMA may lag trends, traders may prefer the Exponential Moving Average (EMA), which is weighted to give the most recent prices more influence over the final number.
While today’s markets are often more efficient than preceding ones, trading opportunities abound. Artificial intelligence technology is one tool that can further help traders identify and execute advantageous trades, whether market disequilibrium or equilibrium is in effect.