Investment Consulting

Wednesday, January 9, 2013

The Path of Least Resistance

 The Path of Least Resistance

 Sir Isaac Newton was was born in England in 1642 and is considered one of the greatest scientists and mathematicians that ever lived. He lived for 85 years. In college, he had strong ideas about motion and broke them down into three laws which I will explain in simple terms below.

Law 1:  An object at rest remains at rest unless acted on by an unbalanced force. An object in motion continues in motion with the same speed and in the same direction unless acted upon by an unbalanced force.
Law 2:  Acceleration is produced when a force acts on a mass. The greater the mass, the greater the amount of force needed.
Law 3:  For every action, there is a equal and opposite reaction.

So often traders want to add more strategies to their trading tool kit, add more indicators, more information from the latest best selling trading book, and so on…it never ends. What most people fail to see is that there are a few basic principles that don’t change. Gravity is one that comes to mind and there are a few more. 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 in his book “The Wealth of Nations” 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, was 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.

Lets apply what Newton formulated a few hundred years ago to an opportunity in the market this week. Last Friday, the NASDAQ (QQQ) reached an area of supply (A). This was an area of supply because our “Odds Enhancers” told us so. Having a good idea of where price will turn is very important, but there is one more equally important question: where will it go after turning? Area (B) is an unfilled gap that is just below current price as of Monday morning. Meaning, there is little to no demand in area (B) or even just below area (B) for that matter. If we apply Newton’s thinking here, price should decline. The only thing that will stop a decline in price is if a new “force” enters the equation in the form of demand.

MG / Negocios e Inversiones

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