What is Reflexivity in Markets?
Quick Answer: Reflexivity describes feedback loops where market participants’ perceptions influence fundamentals, reinforcing trends until sentiment shifts.
Understanding Reflexivity
Reflexivity, popularized by George Soros, argues that market participants’ perceptions can influence fundamentals, creating self-reinforcing feedback loops. Prices don’t just reflect reality—they help shape it.
Real-World Examples
- Currency spirals: Rising FX attracts capital, which strengthens the currency further until expectations reverse.
- Asset bubbles: Higher prices fuel optimism, bringing in more buyers and easier financing.
- Debt crises: Falling asset values weaken balance sheets, prompting forced selling that accelerates declines.
Trading Reflexive Moves
Identify loops via momentum, expanding volume, and policy responses. Trade with the reflexive trend while monitoring catalysts that could reverse it.
Managing the Risks
Reflexive cycles end abruptly. Use trailing stops, scale-out plans, and scenario analysis to protect profits. Combine price action with macro evidence to determine whether expectations still reinforce reality.
Avoid Overfitting
Seeing reflexivity everywhere leads to overtrading. Demand clear evidence of feedback loops before committing capital.
Related Terms
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