The 10 Laws of Market Dynamics (Part 1) Key Takeaways • Law #1: The markets are fractal in nature. That is, they display similar states and patterns in all degrees of time. Whether you’re looking at one day’s action on a 1-minute time-frame, or 3 year’s action on a daily time-frame, the same principles and types of patterns are at play. In fact, if we were to show you a chart without showing you the x-axis and y-axis and their labels, you wouldn’t be able to tell if the chart is of a time-frame spanning years, or one spanning minutes. • Law #2: In any given time-frame, the markets can either be trending or balancing. There’s one of two things the markets can do. They can facilitate trade at a given range of prices agreed to be value by the aggregate forces of buyers and sellers (balance), or they can move directionally in search of new value areas as one side overpowers the other for a sustained period of time (trend). • Law #3: Price moves in a series of thrusts and corrections. Prices don’t move straight up or down. They first make a directional move, then hit a stopping point, which forms a swing high (in the case of up moves). After the stopping point, price moves counter to the directional move in a corrective action. The correction can be vertical, in which case it is often called a ‘pullback’, or horizontal (correction in time instead of price), in which case it is a balance or trading range on the time-frame that is smaller than the directional move. • Law #4: Price discounts all information efficiently, but not perfectly. Any information that becomes known about a market gets factored into the price very quickly. That is why it’s a losing proposition to trade based on rumors, tips, analyst opinions, and otherwise. If it’s publicly available information, the price has already likely discounted it and there is no edge in trading based on it. On the other hand, since price is not perfect at discounting all information (because the market participants are emotional human beings who are not perfectly rational), the market can often overreact to information and go too far in one direction or the other. These inefficiencies often end up being great trading opportunities. • Law #5: Trends start from balance areas or after major climaxes. The majority of the time, trends start from balance areas. They breakout to one side or the other of the balance area, as either the buyers or the sellers overpower the other side. The other side often gets caught on the wrong side of the market and is forced to exit their losing positions quickly, which adds to the initial momentum of the new trending move. When trends start after major climaxes, one side (either the buyers or the sellers), gets too emotional and either buys out of hope and greed at prices that are too far above true value, or sells out of fear at prices that are too far below true value. In both cases, the other side aggressively responds to the price being too far from value and the price snaps back quickly the other way. Here too, the late buyers or sellers Copyright © 2012 OpenTrader Training, LLC. All rights reserved. who were acting on emotion get stuck in losing positions and are forced to exit quickly, further intensifying the price reversal and new trend. Copyright © 2012 OpenTrader Training, LLC. All rights reserved.
