I live in Europe, in a rather small country, and we also have a stock exchange. It's really ridiculously small, compared to NYSE, NASDAQ, the Frankfurt Stock Exchange and similar.

Lately I've been following the markets on the local stock exchange, and I've noticed that the volatility is low. For example, the technical analysis tools and patterns we all learn can't be applied here. It seems like the graphs are random. Especially when you look at shorter periods, like months, weeks or days. There is literally no room for technical analysis. Only when you see the graphs as of 2000 - 2015, you notice that the global crisis had an impact in 2008, and you can draw conclusions.

So, it seems that investing in the local stock exchanges is only useful in the long-term, if even that. Am I right? Is there a way to predict prices in this kind of environment?

  • 7
    One could argue it is impossible to predict future prices accurately no matter how high the volatility. Jul 23 '15 at 13:48
  • Are you talking about mumbo-jumbo hand-wavy "technical analysis" like what people spout on TV? Or are you talking about rigorous statistical modeling? From your use of the words "tools" and "patterns" I'm suspecting the former. And yes, that qualitative approach is essentially useless even in major stock markets, let alone tiny ones. Quantitative modeling, on the other hand, can be applied in any size market, and the process itself will reveal to you whether your model will be profitable or not.
    – dg99
    Jul 23 '15 at 16:53
  • @dg99 Thank you. Well, I'm currently learning about stock analysis, and I keep running into those mumbo-jumbo "technical" stuff. How can I learn statistical or quantitative modeling? Do you have any book recommendations?
    – Quant
    Jul 24 '15 at 15:20
  • You can spend all of college and graduate school learning about it. Assuming you already know the fundamentals of math and statistics, a well-regarded book about statistical modeling is this one.
    – dg99
    Jul 24 '15 at 16:48
  • For some Technical Analysis books, I have listed some books which will give you some basis for evaluating TA. money.stackexchange.com/questions/47660/…
    – Marcus D
    May 20 '16 at 14:29

Assuming that you accept the premise that technical analysis is legitimate and useful, it makes sense that it might not work for a small market, or at the very least that it wouldn't be the same for a small market as it is for a large market.

The reason for this is that a large stock market like the U.S. stock market is as close to a perfect market as you will find:

  • There is a lot of access to market information, as the market and companies are well reported in the media.
  • There is no shortage of stocks. Everything is for sale, every day.
  • It is easy and inexpensive for anyone to participate.
  • There are lots of potential buyers and sellers. There is always someone looking to buy or sell.

Compare this to a small market in a small country. Market information is harder to get, because there are not as many media outlets covering the news. There aren't as many participants. And possibly it might be more expensive to participate in, and there might be more regulatory intervention than with the large market.

All of these things can affect the prices. The closer you get to a perfect market, the closer you get to a point where the prices of the stocks reflect the "true value" of the companies, without external forces affecting prices.

  • 1
    In addition, to your good points, I might suggest that smaller stock markets have the capacity for price manipulation easier.
    – Marcus D
    May 20 '16 at 14:23

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