Why the markets are unpredictable

by | Nov 16, 2023

I like to say.

Trading is about probabilities rather than predictions.

As soon as you see the potential future, it changes.

When you analyse potential moves in the markets, it is based on history.

And so it is humbling as a trader, to know you cannot predict anything.

But we can probability predict. And with those probabilities bring on a better chance of succeeding.

But I want to go further and explain why the markets are so unpredictable.

Once you understand this, then you’ll live with less ego, fear and greed.

Sound good?

Let’s start…

  1. Demand and Supply

Trading, if I can sum it in one word it is…

Auction.

And with the perpetual buying and selling from buyers and sellers, this makes the market moves unpredictable.

There is always fluctuations between demand and supply, based on market sentiment.

And these are always presently influenced by economic indicators, geopolitical events, and investor behavior.

Change one and this can swiftly alter the equilibrium. This inevitably leads to sudden price shifts that defy conventional analysis.

  1. External events

Markets are alive, changing and ever evolving.

And what causes the disruptions in price is that…

Financial markets are inextricably linked to the global economic landscape.

I’m talking about external events like:

Black Swans (Covid, Financial crisis, Oil crash)

Economic announcements (Interest rates, CPI, PPI, NFP)

Micro releases (Growth prospects, bankruptcies, earnings).

Without any inside information, these unexpected events will have unforeseen reactions.

And this will continue to disrupt the established trends and analyses.

  1. Algorithm changes

In the age of high-frequency trading, algorithms play a pivotal role in shaping market dynamics.

Smart Money (large financial institutions) are constantly buying, selling, transferring and changing their positions.

And many times, the decisions are mechanical.

This causes a shift in algorithms with trading analyses, markets and price action.

And these moves cause cascading effects, which aplify volatility and create sudden changes in market patterns.

  1. New buy and sell volume

There is always an influx of new buy and sell orders.

These are driven by retail traders and institutional investors.

No body can predict what they will buy or sell – Thanks to “Free will”.

But when they do, this changes the dynamics of market direction.

One day you’ll get millions of buyers with Bitcoin – Thanks to a new deal done by BlackRock or MasterCard.

Next day you’ll get an insane amount of selling because Michael Bury has decided to predict another short or crash in the markets to come.

The following day the earnings from tech companies come out with amazing results, welcoming a flood of buying orders from tech savvy investors.

New buy and sell volume will always cause a shift in the market sentiment and price.

  1. Currency fluctuations

Currencies also drive up markets.

That’s because there is an intricate relationship between currency movements and the broader financial markets.

Take the US dollar for example.

The US dollar is considered a global reserve currency.

Its movements have a ripple effect across international markets.

When the US dollar experiences a decline in value or “crashes,” it often leads to a phenomenon known as a “market rally.”

A weaker US dollar makes American exports more competitive.

This benefits multinational companies, which helps boost their stock prices.

  1. Change in financial legislations and regulations

The financial landscape is changing ever so quickly.

And Governments and regulatory bodies quite often introduce new laws and regulations.

This is to help make the market more transparent, protect investors and maintain financial stability.

We’ve seen stricter reporting and criteria for when earnings and announcements are released.

We are seeing higher regulations and licences required with financial services and providers like brokers and market makers.

And we’ve seen changed with the accounting standards which has shown an impact the operations and profitability of financial institutions.

This all influences the way companies, investors and traders operate and what and when to buy and sell.

This makes the market even more unpredictable with the laws and rules changing…

  1. Social influence

Every influential Tweet, post and announcement – can have a major change in the sentiment of investors.

For example, when Jim Cramer predicts a market rally, everyone runs for the hills and SHORTS (Sells) the markets.

Or if Elon Musk smokes another joint or Tweets something silly on Twitter, this causes panic and selling with investors.

You have no idea how powerful social influence has nowadays on the markets.

Social media, or market gossip, can inject major irrationality into the markets. And this alone will create unpredictable behaviour.

  1. Sentimental sheep analysis

I call this Sheep mentality.

Everyone is buying – then more people buy.

Or when you see the barometer of sentiment as a sell – people RUN and sell everything they got.

And yet what percentage of investors and traders succeed and profit? 2% Maybe.

And yet this herd mentality continues to drive up the illogicality of market behaviour.

And this sentimental sheep analysis can create market movements that defy fundamental and even technical analysis.

 

FINAL WORDS:

Markets is and WILL always be unpredictable.

The enigma of trying to predict the market will remain an ever quest and challenge for traders and investors.

So get rid of the ego trying to predict where it’s going.

Trade what you see, not what you believe or feel.

Trade what is in front of your and not what is to be.

Trade well by trading probabilities rather than certainties.

Let’s sum up the 8 reasons why markets are unpredictable.

  1. Demand and Supply
  2. External events
  3. Algorithm changes
  4. New buy and sell volume
  5. Currency fluctuations
  6. Change in financial legislations and regulations
  7. Social influence
  8. Sentimental sheep analysis

Trade well, live free.

Timon Rossolimos
Founder, MATI Trader

 

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Timon Rossolimos

Founder, MATI Trader

 

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