The Real Nature of Market Behavior

Key Takeaways

To understand anything, you have to understand what its purpose is and who its participants
are.

The purpose of any market is to facilitate trade. Understanding this allows us to think of
market behavior in terms of value (places of fair prices where trade facilitation can occur), and
price probes away from value (in search of new areas of value).

Since the participants of the market are human beings, and human beings are creatures of
habit with repeatable psychological and emotional patterns, human psychology greatly affects
the perception of value and the resulting price behavior.

Any market has intrinsic supply / demand fundamentals that affect it, but supply and demand
is itself affected by human psychology. So these two things interplay to cause price behavior
and value determination.

Prices that are too high will cause a lack of demand, and the seller will take prices lower to sell
inventory. Prices that are too low will cause a surge in demand as buyers scoop up all
inventory. Prices will naturally have to go too high and too low in order to discover what the
correct value is, and where normal trade facilitation can take place.

Keeping this simple framework of price discovery, value, supply / demand, and human
psychology will allow you to understand the more complex financial markets at a deeper level.
And once you have a deeper understanding of the dynamics of market behavior, youll be in a
position to trade them much more profitably.

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