Introduction
If you are a beginner in investments and the financial market, you must have wondered "How does price move," "Why did it drop or rise." If the answer is yes, this post is for you. This article, will explore the reasons for price fluctuations, what influences these movements, and more.
What is the Financial Market?
The financial market is a complex environment, with each country having its peculiarities. In brief and simple terms, it is a space where buyers and sellers interact to trade financial assets (securities, currencies, stocks, commodities, goods), virtually any goods, and assets with financial value. This environment includes the stock exchange(s) of each country, such as the NYSE in the case of the USA.
In the financial market, the law of supply and demand plays a crucial role in determining the prices of any asset. Generally, when the demand for an asset increases compared to the available supply, prices tend to rise. On the other hand, when supply exceeds demand, prices tend to fall.
But be cautious, while this is true, do not take it as an ABSOLUTE rule.
Factors Influencing Market Movements
Numerous factors can influence price movements. Among them, the most prominent ones are:
Monetary Policy: Decisions about interest rates by each country's central bank have a significant impact on the financial markets. Higher interest rates discourage investments, causing prices to drop, while lower interest rates can stimulate investment and boost asset prices.
Economic and Political News: Reports on economic indicators, government policies, and geopolitical events can generate significant volatility in the markets. For example, Payroll, the world's most famous financial indicator, which deals with jobs created or lost in the non-agricultural sector in the US.
Global Events: International occurrences like conflicts, wars, sanctions against countries, changes in trade agreements, and natural disasters can impact the formation and movement of prices.
Law of Supply and Demand: As mentioned earlier, this law plays a fundamental role in prices.
Price Manipulation by Smart Money
In addition to natural factors that can impact price movements, there is also the issue of price manipulation by the so-called "smart money" or "composite man." This refers to major market players, financial institutions, investment funds, and professional traders who have the skills and financial capacity to influence prices.
Smart money employs various means to change price perceptions for less-informed investors. They might use sophisticated trading strategies, such as placing large volume orders to steer the price in their favor or to reverse the price direction. They can also use insider information to anticipate future price movements and even spread false information with the help of the media.
Using all of this, in addition to manipulating prices, smart money manipulates traders' emotions, tapping into their primal emotions of fear and greed.
It's important to be aware of this manipulation and make decisions based on solid analysis and reliable information, avoiding blindly following market trends and even foolish actions.
Emotions: Don't Let the Wave Take You
Price movements can be highly influenced by our emotions. As mentioned before, "Smart Money" can use our emotions, primarily fear, and greed, to change price perceptions and create the illusion of a broad market. These psychological factors can lead to irrational decisions and negatively impact investment outcomes.
To prevent emotions from interfering with trading, it's crucial to develop a strong, disciplined, and rational mindset. Additionally, establishing an objective trading strategy based on data and sticking to it, even in times of higher volatility, can be the key to success in the financial market. Time will ultimately determine whether you succeed or not, which is why the Wyckoff methodology is so impressive – its concepts have been working for over a hundred years.
Another thing to consider is the concept of "confirmation bias." This bias can lead traders to seek out information that confirms their pre-existing beliefs about the market, their analysis, and their strategy while ignoring information that goes against those beliefs.
Technical Analysis: Identifying Trends and Patterns
In addition to fundamental factors in price movements, technical analysis plays an important role in understanding market movements. By using technical analysis techniques, you can study price and volume charts along with other indicators to identify trends and patterns that may indicate future price movements of the assets you are analyzing.
For example, you could use a trendline to identify an uptrend, characterized by a sequence of rising highs and lows. By drawing a line connecting the lowest lows of the trend, you would have an uptrend line, and an optimal buying point would be when the price is in the region of this line.
A downtrend follows the same logic, with a series of descending highs and lows. Consolidation would involve highs and lows in the same region.
Technical analysis is much deeper than these simple examples, so be sure to study.
Practical Example of How Markets Move
If you want to grasp everything that has been discussed in this article, study the 2008 financial crisis. You'll see how the described factors influenced price movements. Bankruptcies of major financial institutions, manipulation, and fear, among other things.
If you don't want to research that, a hypothetical example can help: Imagine a technology company announcing the launch of a revolutionary product (use your imagination). This announcement increases investors' interest in buying shares of that company. Consequently, stock prices rise in response to the growing demand.
Conclusion
Financial markets move in response to a series of factors that go far beyond chart patterns. Understanding how these factors interact is essential for making well-informed and successful trading decisions. Being aware of the possibility of price manipulation by smart money and adopting a technical and informed approach when trading in the financial market is crucial.
I hope this article has helped you gain an understanding of how financial markets move. Remember that this is just the tip of the iceberg; continuous study of the market is essential to achieve success in investments.
Books on the Financial Market
If you want to learn more about the financial market and perhaps about the Wyckoff methodology and wish to enhance your knowledge in this approach, here are some recommended books that can be of great help.
Purchase through the link and support the Blog :)
#AmazonSponsoredLink - You will be redirected to Amazon.
Trades About to Happen
Written by David H. Weis, the creator of the Weis Wave indicator. Learn how to use Wyckoff concepts to succeed in the financial market.
Author: David H. Weis - Foreword: Alexander Elder.
A Complete Guide To Volume Price Analysis
Want to learn how to use volume in your trades? This is the book for you.
Author: Anna Coulling.
El Método Wyckoff (Spanish)
Another excellent book to start understanding the concepts of the methodology.
Author: Enrique Díaz Valdecantos.
Wyckoff 2.0: Structures, Volume Profile, and Order Flow
This book covers advanced concepts about the methodology, the use of Volume Profile with the Wyckoff Method, and Order Flow.
Author: Rubén Villahermosa.
Trading and Investment for Beginners
A mandatory book if you are a beginner. You will be introduced to basic concepts about investments, technical analysis, market theory, and much more.
Author: Rubén Villahermosa.
The Wyckoff Methodology in Depth
Get started with the Wyckoff methodology, learn how markets move, about structures, phases, and events; and the three basic laws of the methodology.
Author: Rubén Villahermosa.
Questions and Answers
What are the main factors affecting financial market movements?
The main factors influencing financial market movements include economic and political news, monetary policy decisions, global events, and even psychological factors of investors. The combination of these elements can result in fluctuations in asset prices.
How does technical analysis help understand market trends?
Technical analysis uses price charts and indicators to identify patterns and trends in the market. By studying these charts, technical analysts can gain insights into the likely direction of asset prices, helping investors make more informed decisions.
What is the smart money, and how can it manipulate asset prices?
The term "smart money" refers to large investors and financial institutions with significant resources and investment expertise. These players can influence asset prices through advanced trading strategies, placing large buy or sell orders, and disseminating insider information.
How can market psychology influence my investment decisions?
Market psychology can lead investors to make emotional decisions based on fear, greed, or euphoria. To avoid these effects, it's important to adopt a disciplined and rational approach based on objective analysis and concrete data, and not let emotions dominate your decisions.
What is confirmation bias, and how can it affect my investments?
Confirmation bias is the tendency to seek out information that confirms our beliefs and to ignore or dismiss data that contradicts them. This can lead to biased and poorly-founded investment decisions. It's essential to be aware of this bias and seek impartial analysis when making financial decisions.
How can I stay informed about changes in the financial market?
To stay informed, it's important to regularly follow economic news, market analysis reports, and information released by reliable sources. Additionally, staying updated on global events and economic trends can be valuable for understanding the current financial landscape.
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