We develop a model in which informed overconfident market participants and informed
rational speculators trade against trend-chasers. In this model positive feedback traders
act as Computer Based Trading (CBT) and lead to positive feedback loops. In line with
empirical findings we find a positive relationship between the volatility of prices and the
size of the price reversal. The presence of positive feedback traders leads to a higher
degree of trading activity by both types of informed traders. Overconfidence can lead to
less price volatility and more efficient prices. Moreover, overconfident traders may be
better off than their rational counterparts
