What drives financial markets?

The value of financial assets depends on the balance of supply and demand. When buyers are interested in an asset, its price rises. Fear and lack of interest cause the price to decline. When supply meets demand, a market emerges. It seems simple and straightforward. Except for one thing: what influences buyer interest? Let's try to figure it out.

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We have already said earlier that the price of financial assets is influenced byfundamental and technicalFactors. Fundamental factors include macroeconomic indicators, such as the level of political stability in the country and globally, changes in the pace of economic development, inflation, exchange rates, etc., as well as microeconomic factors related to the activities of an enterprise or industry. Technical factors include, for example, the historical price movements of an asset, and in the world of cryptocurrencies, its market capitalization. Market sentiment, an indicator of market sentiment, is also important.

Market sentiment

This is a term that defines the feelings or sentiments of participants in a process that influence their opinion of the future value of an asset. In the stock market context, we are referring to the sentiment of buyers and sellers. These can include:

• small private traders;
• companies managing the affairs of private investors;
• large investment companies and investor communities.

Moods can be of two polar directions:

• the belief that the value of an asset will rise and that it is worth buying;
• a premonition of a decline in popularity and a decrease in the price of an asset, and therefore a mood to sell.

These sentiments are closely related to such concepts as “bulls” and “bears” of the financial market and, accordingly, “bull” and “bear” markets.

"Bulls" are traders who buy assets when the price rises, essentially riding on their horns. They buy assets cheaply in order to sell them later at a higher price.

Bears are bears. They sell an asset during a downtrend, effectively crushing it, so they can buy back the stock at a lower price.

The movement of these two markets determines the trend or market trend.

Market trend

Market trend – from the English "tendency" or "direction" – is the direction of an asset's price movement. This is a consistent alternation of movement toward a price high and low.

When traders sense an asset's price is about to rise, a bull market begins – demand for the asset increases and the price rises.

If traders, based on certain signs, believe that demand for an asset will fall, a bear market has arrived – traders, confident that the price will soon fall, begin selling the asset, thereby provoking an even further price decline.

These are trends. 

The two main market trends are bullish and bearish.

Bullish and bearish trend 

Bullish trendA bull market is characterized by stable growth in asset prices. The most common sign of a bullish trend is when asset prices rise by more than 20% over a given period without falling by the same amount. For example, if the market falls by 11% over this period, and then the price recovers and continues to rise, the bull market is considered to be continuing. A key factor in the formation of a bull market trend in the cryptocurrency market is trust in digital currency and its acceptance as a means of payment and investment, as well as the use of blockchain technology in various business sectors. Legislative and tax changes also influence the market trend. For example, some countries do not levy a tax on cryptocurrency income, such as Portugal, Singapore, Malta, Malaysia, Belarus, and Ukraine. However, in European countries, this tax is quite high: for example, in France it is 30%, in Sweden it is 32-57%, and in the UK it is 20-45%.

Signbearish trend– a sustained decline in asset prices of 20% or more without a corresponding increase. Falling prices unnerve investors, forcing them to make emotional decisions. At such times, investors may sell promising assets at low prices. Other investors consider a bearish trend a good time to start investing, since a rebound will sooner or later follow the decline.

Drops of 10% or less aren't considered a bear market. They're called "corrections" and occur in response to a specific event. However, they can still trigger panic.

In addition to bullish and bearish markets, there are also consolidating or sideways markets that do not have a clearly defined trend.Side Market– a zone of acceptable prices, when traders are satisfied with the current price level and there is no reason for them to change.

Typically, the precise direction of a trend can be determined in hindsight. The rest is the so-called hindsight bias, where people believe they knew about an event before it happened. But hindsight bias also influences market trend determination.

Market cycle

Market movements are always cyclical. Cycles are the periodic repetition of booms and busts, downward and upward trends. Depending on changing market conditions, some assets may rise in price today and fall tomorrow, while others rise. Cycles can last from a few days to years. Long-term market cycles are always more important than short-term ones.

Trying to predict the rise and fall of asset prices can be likened to trying to predict the weather. The exact timing of cycles is impossible to predict. A full market cycle is usually defined ex post facto as the period between two peaks. One thing is certain: a bull market will inevitably be followed by a bear market, and vice versa.

Historical trends show that asset prices are constantly rising. This means that a well-planned long-term strategy is essential for sound investments.

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