“One of the funny things about the markets is that every time one person buys, another sells, and both think they are astute.”

Markets are complex systems and their paths are unpredictable.

But ultimately, there are only two forces that cause prices to move:

• Traders who believe the market will go up
• Traders who believe the market will go down.

And whoever team has the most conviction wins.

Different factors influence the beliefs of those market participants (time horizon, fundamental, technical,…) and the interaction of those elements led to a price at each point in time.

But it is worth noting that markets are complex systems (not to be confused with complicated systems).

This means that the behavior of small variables (that we might consider useless) could actually have a big effect when interacting with other variables in ways that cannot be predicted. Ultimately, this property of the market makes predictive models unreliable in crucial moments (a butterfly in California could cause a hurricane in Brazil).

While strong predictions are useless, we can use different analysis tools to get an overview of how a market might react.

Reflexivity:

Reflexivity is a theory put forward by George Soros (no need for an introduction) that tries to explain the behavior of markets. In short, it states that market price distorts the asset fundamental and hence creates reinforcing feedback loops.

There are two types of feedback loops:

• Negative feedback loop: High oil price —> disincentivize people to consume oil —> oil price means revert over time
• Positive feedback loop: Increase in bitcoin price —> More people interested —> Fundamental increase —> More Buyers —> Increase in price