Two kinds of traders, one price
One stock, two kinds of traders. Value investors have a rough idea of what the stock is worth; they buy when the price is well below it and sell when it is well above. Trend followers ignore value; they buy when the price has risen over the last few days and sell when it has fallen. Each trader has a personal threshold and a personal look-back. Their orders, added up, move the price. Nothing else does — apart from a little noise and a slowly wandering true value.
There are always 100 value investors. Before you turn the dial: how many trend followers make this toy market look like the real S&P 500 — fat tails, calm and wild phases, and no easy way to predict tomorrow?
With no trend followers the market is too well-behaved: value investors pull the price back toward value, returns are close to a bell curve, and one quiet day looks like the next. Real markets are not like that. Add trend followers and the price starts to overshoot: a rise draws in buyers, which makes the rise bigger, until the gap to value is large enough for the value investors to lean against it. Those tug-of-wars are the fat tails and the wild clusters. Nobody had to bring bad news.
“Markets are ecologies. The strategies of the traders are the species, and the price dynamics come from how they interact.”
Market ecology · after J. Doyne Farmer
Where the real market sits
One market is one roll of the dice; the same mix can look tame in one run and wild in the next — try the button above. So here every mix runs several times and the dots show the spread. The shaded band is where the S&P 500 and the DAX sit, measured on their real daily returns.
Read the three pictures together. Fat tails and clustering appear as soon as trend followers join. But a crowd of trend followers also makes returns predictable — bubbles build day by day — and a predictable market is money on the table. In a real market someone takes it: the value investors earn from every bubble, grow, and push the mix back. Farmer's point is that the mix is not fixed. It drifts, and the market's character drifts with it.
A market's wildness comes from its mix of strategies, not only from news.
The model follows J. Doyne Farmer and Shareen Joshi, “The price dynamics of common trading strategies” (2002), and Farmer's book Making Sense of Chaos (2024). Value investors and trend followers trade with personal entry and exit thresholds; value investors carry a personal error on the true value, trend followers a personal look-back of 1–99 days. Net orders move the log price linearly, plus Gaussian noise; the true value is a random walk. Everything is computed live in your browser with a seeded random generator. The model is not fitted to any index and forecasts nothing; it shows which mixes of strategies produce the patterns real markets have. Index figures from daily closes via Yahoo Finance. Not financial advice. Part of a family with It's Just More (reinforcing loops — what the trend followers are), It's Just a Thermostat (balancing loops — what the value investors are) and It's Just Unknown (fat tails). See all concepts →