Everything you know about market behavior is wrong. Here’s how you’ve been played.

From Supply & Demand to external causes; economists, traders, market analysts, and investors all share this common belief about the market:

Prices have a reason for moving.

More specifically, prices have a reason for being where they are, and they also have a reason for moving where they move.

Don’t get me wrong, there IS a reason why prices move, but it’s certainly not what most people believe.

Quick Disclaimer: I discuss topics like this in my Twitter Account all the time, which is @yrodos, you’re welcome to follow me there if you’d like.

Let’s start by making the most important distinction in this article that’ll set up everything that comes next: Economic Markets & Financial Markets are totally different things, in fact, they behave like opposites.

Difference between Economic & Financial Markets

The most basic premise of economics probably is the law of supply & demand.

You’ve been taught since you were a child (unless you were born in a socialist country) that markets self-regulate, and that it all tends towards equilibrium.

This all stems from the Efficient Market Hypothesis (EMH). It states that in a market, all there is, is precisely the way it should be because otherwise it would be another way. Everything tends towards equilibrium. From Supply to Demand, to prices.

The fun part of this is that it works!

But only if we’re talking about economic markets.

Economic Markets

In an economic, physical, tangible market, your motivation for purchasing an asset stems from a desire to get the actual value the asset provides.

You go to a bakery to buy bread with the motivation of actually eating that bread.

If the bread is too expensive relative to other products in that market and its price has been rising for a while, you don’t buy it. Price matters.

This is why Economic Markets self-regulate, the seller’s desire is to sell you a product as expensive as possible, while a buyer’s desire is to buy that same product as cheap as possible. These forces counteract each other and they achieve balance.

If we put it in more technical words, in economic markets:

• As prices go up, demand goes down.
• As prices go down, demand goes up.

Financial Markets

In a financial, non-tangible market, however, your motivation for purchasing an asset comes from a desire to re-sell that asset for a profit. You don’t necessarily care about what “intrinsic value” this asset has or hasn’t, as long as you can make money flipping it.

In this case, you’d go to that bakery but instead of buying that bread to eat it, you’d buy it with the intention of keeping it for a while, and then selling it at a higher price than you bought it.

If the bread is too expensive relative to other products in that market and its price has been rising for a while, you are ecstatic, there are more chances you’ll get to re-sell it for a profit later if that trend continues. Price doesn’t matter.

This is why Financial Markets do NOT self-regulate, the seller’s desire is to sell you a product as expensive as possible, while a buyer’s desire is yeah -to buy that product as cheap as possible- but primarily, to re-sell that product as high as possible for a profit. These forces do NOT counteract each other, creating bubbles and bursts that repeat like infinite cycles.

If we put it in more technical words, in financial markets:

• As prices go up, demand goes up.
• As prices go down, demand goes down.

I can prove this to you by showing you glassnode’s chart for the Number of Active Addresses on Bitcoin’s blockchain. In the image below, you’ll notice that as prices surge, the number increases, as prices decline the number decreases.

Repeating myself but proving that as the price goes up, demand also goes up, as price goes down, demand also goes down.

This is a better way of understanding it:

“A rising asset in a financial market creates its very own new demand, while a dumping asset creates its very own surplus of supply/offer.”

This isn’t to say financial markets are pump & dump schemes, they steadily grow over time, but they grow in this rhythmic cycle of pumping and dumping. Two steps forward, one step back.

More depth into how Financial Markets behave

Remember what the primary motivation in this market was: To make money by re-selling.

Well, as you can imagine, for someone to win, someone else has to lose.

Everyone can’t win.

The mechanism explained previously is the way financial markets enter cycles of growth and decay.

As people see an asset rising non-stop, they want to join in on the action.

But for the rally to continue, new buyers must come around to keep purchasing the asset with the expectancy of it continuing to go up.

You can imagine how, at a certain point, the rally is so mature that there just aren’t as many people who think it can go that much further. And if there aren’t enough buyers, prices crash and the market goes into the opposite trend which usually is a catastrophic dump.

Then the same thing happens but the opposite way, everyone sells in panic as prices crash, not wanting to lose the profits they made on the way up.

As people see an asset dumping non-stop, they don’t want to have anything to do with it.

But then what happens is that everyone who could sell has already sold. And if there aren’t enough sellers, prices reverse up and the market goes into the next rally.

You now see how rising prices makes people want to buy, while falling prices make people want to sell. This is the opposite of what people should be doing if financial markets were rational, or economic markets for that matter.

The irrationality of Financial Markets

The role of Supply & Demand is laughable.

As we just saw. Demand is increased while prices rise, supply is shortened at the same time because people won’t sell in an uptrend.

But while prices fall, demand is decreased, and supply is heightened as people want to get rid of the asset.

This is precisely why, even though I don’t question the efficacy of the Wyckoff Method itself for the purpose of trading, I don’t agree with the logic it uses to justify why it works.

I just proved previously that, even if you knew that for example: In the future oil reserves will be extremely low, you wouldn’t be able to use that supply argument to know if oil prices will go up or down.

Because what drives prices is basically just the demand.

Which comes and goes irrationally and subjectively in cycles. That’s why price moves don’t have “reasons”, they move because they move. The same way money is worth anything, money is worth anything because it’s just worth something.

There’s no reason, we just subjectively all individually value it, until we don’t and then inflation kicks in. But that’s a topic for another day.

But what about External Causes?

Can tragic events, news, or whatever thing impact prices?

The short answer is no.

The long answer is that, while external shocking events can have an immediate effect on a price chart, you must remember the primary motivation of a financial market, which is to make money.

Meaning what drives prices in a financial market is none other than subjective appreciations of future value.

It is NOT the same to have a shocking bad news roll out in an uptrend than in a downtrend.

Why? Because what does it matter if bad news is rolling out if in my chart all I see is a clear uptrend? I don’t care what bad thing they have to say about my asset, I care about making money.

This is why trading news or events is such a bad strategy. It basically has no correlation and this strategy isn’t based on what motivates people to buy an asset in financial markets.

What can it do?

In my own experience, the only thing that a bad event can cause on a price chart is to increase the volume. It can never, ever, break structure.

Remember that the volume raising doesn’t mean more demand.

Volume only signals the number of transactions taking place at any given time.

Meaning an external event can only trigger sudden interest in buying or selling said asset, but the decision of either buying or selling is purely subjective by each individual and was already premade beforehand.

Does Fundamental Analysis Work?

No, if your goal is to predict future prices I wouldn’t use it.

This is because it relies on making claims about future conditions of supply & demand. We’ve already seen that doesn’t work.

Financial Markets don’t care about what things should be worth, but what people believe they’re worth.

The only type of fundamental analysis that does have some merit to it, is marketing strategy analysis.

If you see an asset about to be launched to the market, and the marketing team is doing a great job at creating hype, then you can be sure it’ll be successful at least in the very beginning.

This whole article is dedicated to my good friend Gonza. Twitter: @bouzas_gonzalo

If you learned something from this article, be sure to share & follow me on my Twitter @yrodos

That’s all for today, thanks for reading!