Applying Newton's Law to Trading
Applying Newton's Law to Trading
To paraphrase Newton's first law of motion, "An object in motion will stay in motion unless acted upon by an outside force." We see this all the time in nature (try jumping and gravity pulls you down), but did you know that it can apply to the markets as well?
Price in motion is called a trend. As traders, we identify the trend as the dominant direction of price movement. The faster movements in the same direction of the trend are known as the impulses. The opposite movements against the trend are corrections. Most traders trade in the direction of the trend and attempt to enter into the impulses.
Traders should always identify their entry, exit, and stop loss prices prior to entering into the markets. The reason for doing so is that you will likely be more objective with your trading if you do not already have an emotional attachment to the position (i.e., money on the line). Additionally, knowing how much you stand to gain or lose in the position before taking it reduces the effect of emotions on your trading. Fear and greed control many people when they trade. If you do not have a price target planned before trading, you are more likely to cut your profits short when there is a small correction in the trend. Even if you do not identify the right target, you may be leaving money on the table when you are trading.
At Online Trading Academy, we teach our students how to trade properly using supply and demand zones to enter and exit the trend. So, how do we know which supply or demand zone is likely to end the trend? We can apply Newton's Law to our trading.
In a correction, the price movement is slower and candles are typically smaller since price is moving counter to the dominant trend. Trading the corrections should only be done by experienced traders as the risk is elevated on these trades. Watching the correction allows you to help time your entry into the next impulse of the trend. Since corrections are weaker, their movement is halted at supply or demand levels on the time frame of the chart you are trading.
Impulses, however, are much more powerful. They will continue to remain in motion until acted on by an outside force. So, what is that outside force? It is usually a supply or demand level of course. But unlike the corrections, it usually takes a supply or demand level from a larger time frame to halt the movement of an impulse. This is the outside force.
Figure 1
Figure 2
When looking for targets in an impulse, look to hold your position until you reach that larger time frame supply or demand level. You will allow your profits to grow much larger and also not be shaken out by small corrections. To learn more about how to identify the proper supply and demand levels and to incorporate multiple time frame analysis, join us at your local Online Trading Academy center and take the Professional Trader Course. It is a life-changing experience.
- Brandon Wendell
About Brandon Wendell
Brandon has appeared as a guest on CNBC, Bloomberg TV, and Fox Business Channel. He has conducted special seminars for CNBC staff on technical analysis of the financial markets. Brandon has published articles in The Trader's Journal, Forex Journal, Investor Magazine, and Investor’s Business Daily. Brandon has also appeared as an industry expert speaker at the Trader’s Expo, The Money Show, and Asia Traders and Investors Conference.
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