By Sam Seiden, Online Trading Academy Instructor
At the core of any significant economic, political, scientific, social, medical, psychological or cultural theory lies a quest to understand and quantify the forces of change, action, or energy. The theories that attempt to quantify "force" that have stood the test of time date back centuries and are extremely simple. In 1686, noted physicist Isaac Newton suggested in his Laws of Motion that an object will remain in motion until it is met with an equal or greater force. Noted economist Adam Smith suggested hundreds of years ago that when supply exceeds demand at a price level in a given market, price will decline. Smith and Newton didn't create or invent the laws and principles for which they are famous. Supply, demand, motion, and the relationships therein existed long before Smith and Newton, long before humans walked the earth for that matter. What these two individuals did, however, is look mass conventional perception in the face and challenge it with a reality that had been there all along. They were able to discover what no one else had because of a belief system that allowed them to open doors others never knew existed. If you notice, Newton and Smith didn't figure out one specific issue. They had a belief system that allowed them to rather easily apply the core principles of their knowledge to a host of issues, producing answers the rest of the world still considers "ingenious" centuries later.
Throughout history, there are countless examples of individuals who looked mass conventional perception in the face and challenged it. Long ago, challenging conventional thought often meant a death sentence. Galileo was almost burned at the stake for suggesting that the earth was not the center of the universe. Certain minds throughout history such as Einstein, Newton, Galileo, Smith and others were made famous because of their discoveries. What I have always focused on is not the results of their work but the belief system that allowed them to realize what most other people have never even considered.
Are Newton's three Laws of Motion really any different than Adam Smith's laws of supply and demand? In my quest for truth, I have realized that whether you are talking about Newton's Laws of Motion, Smith's theories of supply and demand, or Maxwell's laws of electromagnetic force, the basic governing dynamic of these laws and principles are different manifestations of the exact same governing dynamic. What I did many years ago is apply this simple and straight-forward truth to financial markets. The result was a profound reality that opened up a door of endless low risk / high reward opportunities in any and all markets.
At any university across the country, Chemistry is taught in one building, History is taught at another location, and Mathematics is taught somewhere else. While these are three different subjects, at their core, there is one common governing dynamic that is responsible for answers. For example, the equation that allows us to understand how to split a cell is the same equation that allows us to figure out how and when an earthquake will occur. The cell will split and the earthquake will occur when a specific threshold of force is reached. Why bring all this up in an article typically dedicated to market speculation? When you realize that this one governing dynamic is solely responsible for the movement of price in any and all markets, you are able to discover the simplicities of market speculation.
The common thread in any quest for irrefutable answers is the search for truth. To obtain irrefutable answers, one must look truth straight in the face, void of any illusion. The presence of even the smallest amount of illusion in the quest for truth ensures truth will never be found. Our quest for truth is in financial markets, specifically addressing proper trading and investing. To ensure a proper beginning to your journey towards self-empowerment in market speculation, it is imperative that we begin with the proper question. The question is this: How do we derive consistent low risk and high reward profit buying and selling anything? As Albert Einstein pointed out, it is not possible to solve a problem with the same level of awareness with which the problem was created. Ironically, the natural human tendency is to dive deeper into issues and work harder at them when attempting to come to a conclusion. Let the people on the other side of your trades complicate things. If the answers to the most basic questions in life are so simple and right in front of us, why is it that most people never see them, or consider them for that matter? Before we explore that question, let's take a basic look at how people think. Instead of focusing on changing our actions, it's time to notice where those actions come from. Moving backward, one step at a time, actions stem from behavioral patterns, and behavioral patterns stem from beliefs. So, it's at the level of beliefs that decisions are made, and moreover, where your ability to differentiate reality from illusion lie. It's time to start considering where your beliefs about what works and what doesn't come from. In life, which includes trading and investing, most of us tend to repeat the same processes over and over, expecting a different result. The process that all humans operate under is a process whereby emotions are reflected from ingrained patterns of behavior. Patterns of behavior you likely don't even know exist. It's easy to see a two-year old child creating a pattern after touching a hot surface once or twice, because it's an observable phenomenon. What isn't so easy to notice is the child creating that internal pattern.
The way traders and investors derive profits from the markets is no different than the way corporations profit in their marketplace. Microsoft, for example, identifies demand for a type of software, estimates the cost of production and determines what price the consumer will pay for that software. If the company's projections are reasonably accurate and they are on target with supply and demand, they can estimate their price and profit. I use Microsoft as they have been very successful in this regard, enjoying large profit margins on many of their products. As in any other marketplace, the financial markets reflect human action in response to an ongoing supply and demand relationship. Unfortunately, when the average person enters the world of trading and investing, operating in these markets becomes some kind of "art" based on subjective indicators and oscillators, news-driven perceptions, and pictures of conventional price patterns that are more valuable with a frame around them on a person's wall than they are in his financial statement!
The markets are nothing more than pure supply and demand at work and human action creating and reacting to the ongoing supply and demand relationship within that market. This ultimately determines price, and opportunity emerges when this simple and straight-forward relationship is "out-of-balance." When we treat the markets for what they really are and look at them through the eyes of an ongoing supply and demand relationship, identifying where prices are most likely to turn is not that difficult.
Have a great day.
- Sam Seiden sseiden@tradingacademy.com
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