Price a leading indicator / Price is King

BY Chris Andreou

|September 1, 2020

Investors seek to profit on future price expectations. Investors with a view that current prices are undervalued will seek to profit by buying an asset the investor believes will increase in value over a certain time frame, while investors who view that an asset is overvalued will sell an asset and seek to profit if prices fall in value over a certain time frame.

The common theme between buyers and sellers is future price expectations. Every buyer and every seller have either a positive or negative outlook on the future direction or value of what the price of an asset will be at some point in the future.

Price is a leading indicator since a simple look at a chart or table of historical prices will tell the investor if prices have been rising or falling over a specific period.

By looking at the price on the above table an investor can spot if prices have been rising or falling. As you can see in the above example current price as of 7/17/2020 is higher than the closing price on 7/1/2020, therefore the investor can assume that the market views the outlook as positive since prices are trading higher.

The basic principle behind the study of market price action is built around the idea that if prices are rising or falling this must indicate that the underlying fundamentals must be either positive or negative and that the current price direction is a reflection of those fundamentals.

Using Price as a leading indicator

  • Prices tend to move in trends
  • Market price action discounts everything, this must be accepted as a trader’s decision-making process.

What affects a stock, commodity, bond, or FX price?

  • Fundamentals, inflation, interest rates, supply demand, political stability, corporate earnings, and psychological issues are all reflected in the market price.

For example, the value of a currency includes balance of payments, productivity and natural resources, Interest rates, Inflation, Economic growth, Money Supply, Political Conditions, government, and central bank intervention, and purchasing power. All of the above factors are reflected into price, so once you can understand the basic principles behind price action you can move on to implementing other tools into your analysis such as measuring the strength of price trends, and what chart patterns can tell us about future price moves.

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