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Stop Thinking Like an Economist When Looking at a Chart

After graduating college many moons ago, one thing I learned in the “real” world as a trader/analyst is… financial markets do not function the same way as economic markets do.  I found these markets driven by different motivating factors. Economic markets are measuring goods and services and the financial markets are measuring social mood (talked about in last newsletter).  

For example, when the price of a television set goes up, demand for that product generally falls (and vice-versa).   However, when the price of a financial asset (stock, bonds, crypto, etc.) rises, demand generally increases.  This is not how the academic world teaches this subject.

There is a financial/economic dichotomy happening that many people just brush over as not existing.

Here are a couple charts to help explain what I am saying.

 
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There are differentiating factors between the two.  In financial markets, when prices go up, so does demand.  The complete opposite happens in economics, when prices go up, demand goes down.  While supply and demand are behind price movements in economic markets, non-rational herding is behind the price moves in financial markets.

Econ-based financial models assume markets are rational and operate through the forces of supply and demand.  These models fail to recognize bubbles or extended trends when they are under way, and they cannot predict them.  This is one of many reasons to apply Elliott wave theory to price charts.  It helps add context to the market to define bubbles and crashes, and to show the context of the market in fractal form.  

This is why so many people buy markets (like crypto) at the wrong time.  You would think as price gets higher people would be hesitant to buy and demand would drop, but history shows the opposite.  Most people buy on strong trend runs.  With the analysis we provide here at CCG and using the technical analysis and Elliott wave theory tools, we will provide a “financial” approach of when to attack a market.

Here is a chart of BTC/USD.  Can you guess where most people were buying?  You guessed it… near the top.  Smart money was not.


about the author

Brian Swan, CFTe is no stranger to technical analysis and the charting of stocks,  commodities, and now cryptocurrencies.  Having spent almost 20 years as an analyst and a price risk manager, Brian has been working within the sphere of technical analysis, Elliott Wave analysis, and Fibonacci analysis.  Brian is certified as a Financial Technician with a CFTe designation through the International Federation of Technical Analysts (IFTA).  He is a mentor and coach for anyone wanting to learn how to produce usable charts and how to use technical indicators as tools for trading, investing, and hedging.