In the Seventeenth century English physicist and mathematician Sir Isaac Newton concluded that, “An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an outside force.” Objects tend to “keep on doing what they’re doing.” This also leads to the fact that it is the natural tendency of objects to resist changes in their state of motion. This tendency to resist changes in their state of motion is described as inertia.
These laws of physics are very important for traders to understand in various respects. First, if you think about the motion of price in the markets, it’s simply a function of inertia. In all markets (just like in physics), the only reason a market stops rising is because of the unbalanced force exerted on it. This is an abundance of new unfilled sell orders (supply) that prevents prices from going higher.
An example of these forces at work is displayed in the chart below. It shows a trade I took recently in the E-mini Russell 2000 futures contract.
As we can see, price rallied strongly into a level where there was evidence of sell orders that were still unfilled (supply). Price touched the level and immediately reversed, similar to a ball hitting a concrete wall and changing direction. The profit target was at the opposing level of demand because the same laws of inertia apply, as we would expect price to stop falling when it reaches that unbalanced force of “fresh” buy orders.
In regard to the psychology of trading, in a sense inertia plays a role as well. When Newton states that objects tend to keep doing what they’re doing he is referring to inanimate objects. But, what if we substitute the word objects for the word people. Do people tend to keep doing what they’re doing until forced to do otherwise? Yes. Don’t we know this to be true?
So, the point is that when it comes to trading, or any life changes for that matter, these come from a change in trajectory in the actions we take, how we think, and what we believe. This means being challenged to expand our boundaries, and conquer our inner most fears. What’s unfortunate is that most people won’t change until circumstances force them to change. They have to experience a great amount of pain in order to realize that change is a must. In the trading arena, this equates to blowing up two or three accounts before committing to doing things differently. That unbalanced force is what causes that change in life’s direction.
Luckily, we have many resources out there that will help us avoid this situation. First, understand that trading is a skill that has to be honed over time. Second, having an edge is a requirement for consistent profitability. This is done by understanding how the markets inertia (supply and demand) works in the market place. And third, having the right mindset and perseverance to propel you in the right direction. Doing all this will challenge you to nth degree, but then again being challenged is the only way to produce change. What if you’re not producing the desired results and you resist change? Then I hope you have a solid plan B for your financial future.
Until next time, I hope everyone has a great week.