Positive reinforcement in the market is there when the subject can make money. If they do not, as in a bear market it is harder to get them to sell short and make money, although as much or more money can be made. Although you need more money, unless you are in a prolonged bull, you can make money on guessing short with the right stocks in the right sectors. It is easier to detect a basket of stocks that will tank, and in the medium term, far more will tank than accrue. But your losses can be "unlimited" or as high as the stock may go in price. This in practice is never more than 100 dollars a share. It has ruined many brokerages though, who as a rule make their living on shorting stock. All promoters short stock. They are never long if they have any brains.
First I think it is necessary to see where the market will go over time. So you look at the market in constant dollars. Then normalize theconstant dollar price differences according to the formula diff= (x1-x2)/x2. Then do summa(avg_diff - any_diff)squared/total_number_of_diffs = the "rms" or "variance of the diffs". (x1 is price at day one, x2 is price at day2.)
Take all the day to day, week to week, month to month, quarter to quarter differences of the normalized prices, and a group of year to year differences as well. In ten years there are 2000 day to day differences, and also 2000 of each of the other differences. These are your marginal rates of return on selling at the differences. You average these differences.
For one difference group ...
P = ((avg_diff/rms) +1)/2
P is the probability of an upness on any difference period. It is about .02 of the average price 66% of the time on the NYSE.
This is the Shannon probability of upness.
So ...
F=2P-1
F is the optimal amount of money you should invest in the stock. It is called the optimal wager.
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