What drives the financial markets?
The price of an asset is simply determined by the balance of supply and demand. In other words, it’s decided by the buyers and sellers. Where supply meets demand, there’s a market. But what else can drive the value of a financial asset?
There can be fundamental factors, such as the state of the economy. In addition, there can be technical factors like the market capitalization of a cryptocurrency. Also, there may be other factors to consider, such as market sentiment or recent news.
However, these are just that – factors to consider. What really determines the price of an asset in a given moment is simply the balance of supply and demand.
What is a market trend?
A market trend is the overall direction where the price of an asset is going. In technical analysis, market trends are typically identified using price action, trend lines, or even key moving averages.
Generally, there are two main types of market trends: bull and bear market. A bull market consists of a sustained uptrend, where prices are continually going up. A bear market consists of a sustained downtrend, where prices are continually going down. In addition, we can also identify consolidating, or “sideways” markets, where there isn’t a clear directional trend.
It’s worth noting that a market trend doesn’t mean that the price is always going in the direction of the trend. A prolonged bull market will have smaller bear trends contained with it, and vice versa. This is simply just the nature of market trends. It’s a matter of perspective as it all depends on the time frame you are looking at. Market trends on higher time frames will always have more significance than market trends on lower time frames.
A peculiar thing about market trends is that they can only be determined with absolute certainty in hindsight. You may have heard about the concept of hindsight bias, which refers to the tendency of people to convince themselves that they accurately predicted an event before it happened. As you’d imagine, hindsight bias can have a significant impact on the process of identifying market trends and making trading decisions.
What is a market cycle?
You may have heard the phrase that “the market moves in cycles”. A cycle is a pattern or trend that emerges at different times. Typically, market cycles on higher time frames are more reliable than market cycles on lower time frames. Even so, you can eventually find small market cycles on an hourly chart just as you may do when looking at decades of data.
Markets are cyclical in nature. Cycles can result in certain asset classes outperforming others. In other segments of the same market cycle, those same asset classes may underperform other types of assets due to the different market conditions.
It’s worth noting that it’s almost impossible to determine in any given moment where we currently are in a market cycle. This analysis can be done with high accuracy only after that part of the cycle has concluded. Market cycles also rarely have concrete beginning and endpoints. As it turns out, being in the present moment is an exceptionally biased viewpoint in the financial markets.