“Price moves not because of what should happen, but because of what traders make happen.”

Markets don’t move because of news or fundamentals—they move because traders react to them. Every price shift is the result of buying, selling, and liquidity dynamics rather than an objective reflection of value.

This post shifts the focus from market narratives to the actual mechanics of price movement, revealing how collective trader impact—not economic models—creates trends.

Markets Don’t React to News—Traders Do

The financial media loves narratives. Every market move is retroactively explained by a story:

• Stocks crashed? “Investors panicked over interest rate hikes.”
• Oil spiked? “Middle East tensions drive supply concerns.”
• Gold rallied? “Investors seek safety amid uncertainty.”

But these narratives are constructed after the fact and often fail to explain why price moved when it did.

The Market as a Collection of Trading Strategies

Jean-Philippe Bouchaud, a physicist turned quantitative finance researcher, argues that markets are not driven by external news but by internal trader interactions. His research on agent-based models found that:

• Market moves are the collective outcome of traders executing their strategies.
• News is often just a trigger, but the extent of the move depends on trader positioning before the event.
• Liquidity constraints and feedback loops amplify price trends beyond what fundamentals suggest.

This is why identical economic data can produce different market reactions depending on trader positioning at the time.

Example: Rate Hikes and Market Confusion

When the Federal Reserve raises interest rates, the fundamental expectation is that stocks should fall because higher rates make borrowing more expensive. Yet, in some cases, stocks rally instead.

Why? Because traders have already positioned for the news. If short positions are overcrowded, the event can trigger short-covering rallies, forcing price higher even when fundamentals suggest otherwise.

Albert S. Kyle’s Market Impact Model

Albert S. Kyle, a pioneer in market microstructure research, provides a crucial perspective:

• Prices don’t move in a vacuum—they adjust based on trade size.
• Larger trades exert a disproportionate impact on price, especially in illiquid markets.
• Market depth and liquidity dictate the extent of price changes, not just fundamental value.

Kyle’s research shows that price impact is nonlinear, meaning a few well-timed large orders can create trends before fundamental data is fully absorbed by the market.

Price Moves Because of Order Flow

At its core, market movement comes down to order flow—the buying and selling pressure at any given moment.

• If buyers outnumber sellers, prices go up.
• If sellers outnumber buyers, prices go down.
• If liquidity dries up, even a small order can cause a sharp move.

It’s not the news—it’s the positioning of traders that determines the magnitude and direction of market moves.

The Market’s Hidden Hand: Collective Trader Impact

Price trends don’t emerge because of economic models; they emerge because of self-reinforcing trader behavior.

Here’s how it works:

1. A catalyst (news, event, breakout) triggers initial buying or selling.
2. Momentum traders, algorithms, and funds pile in, reinforcing the move.
3. As price moves further, trend-followers join, creating a snowball effect.
4. More participants react to the price shift itself—not the original catalyst.
5. The trend sustains as long as there’s demand (or supply) to push it further.

Market Impact Functions and Feedback Loops

Bouchaud’s research on market impact functions demonstrates that:

• The impact of a trade is nonlinear—larger orders disproportionately shift price.
• Past price movements influence future behavior—traders react to price action, not just fundamentals.
• Feedback loops exist—traders responding to the same signals create self-reinforcing price trends.

This means trends persist not because of fundamental value, but because traders react to price movements themselves.

Example: The 2024 Cocoa Surge

• Fundamentals: Supply concerns and weather risks were cited as reasons for the rally.
• What actually happened:
  • Funds piled in, reinforcing the trend.
  • Momentum traders followed.
  • Shorts were forced to cover, pushing price even higher.

The result? A massive, prolonged trend—not because fundamentals dictated it, but because trader impact fueled the move.

The Role of Behavioral Finance in Market Trends

Nobel Laureate Richard Thaler, a pioneer in behavioral finance, demonstrated that:

• Investors are not rational decision-makers.
• Cognitive biases drive herd behavior and overreaction.
• Loss aversion and confirmation bias reinforce price trends.

Thaler’s research explains why:

• Traders chase trends rather than mean revert.
• Once a price move is in motion, it gains psychological reinforcement through narratives.
• Feedback loops amplify trends beyond what fundamentals justify.

When combined with Bouchaud’s market impact models and Kyle’s liquidity-driven price adjustments, it becomes clear that trends are not statistical anomalies—they are the natural outcome of human and algorithmic reactions to price changes.

The Outlier Hunting Perspective: Focus on Impact, Not Stories

If narratives don’t drive price action, how should traders approach markets?

1. Ignore news-driven narratives. Markets often move before a fundamental story is assigned. Trade the move, not the explanation.
2. Follow price action over opinion. The market’s direction matters more than economic forecasts.
3. Ride trends rather than predict reversals. The biggest returns come from sustained moves, not trying to call tops or bottoms.
4. Watch liquidity and positioning. These factors dictate how far a trend can extend.

The Market’s True Driving Force

Markets don’t move because of news or fundamentals—they move because traders react, reinforce, and amplify price action.

The price you see today is not the price dictated by fundamentals—it’s the equilibrium of competing biases, liquidity flows, and market structure.

• Trends emerge from self-reinforcing trader behavior.
• Momentum, positioning, and liquidity shifts dictate market moves—not fundamental fair value.
• Outlier Hunters don’t predict—they adapt to the actual forces shaping price action.

Markets aren’t ruled by fundamentals or valuation—they’re shaped by the invisible hand of trader impact. Adapt, or be left behind.