Principles that govern market movements

When some investors come to the capital market, at first sight, they simply desire to make some money. So, they read the financial news and rely on tips from friends and selected professionals. Some even guess as to the right times to buy or sell their favorite stocks, commodities, crypto currencies, futures contracts, or forex, to name a few of the vast universe of tradable instruments.

For those who become more interested, they buy a computer and get a free program that is loaded with technical indicators. Supposedly, these indicators are created to let you know when the market is high or low so that you can buy at the low price with the expectation of selling at higher prices. It all sounds good until you commit money only to discover that the indicator was looking backward while you wanted to move forward into the future with a potential profit. This is where the market principles come into play. The principles are expressed through the market actions, i.e., the range of the price bar -- its closing price relative to the amount of volume traded during the specific time interval. Sometimes, a single price bar is enough to give you adequate current information about the market as the market prepares to telegraph its future intentions. On other occasions, you might require two or three price bars in specific sequences to alert you to the market's future intentions. Since the principles help you develop your judgment about the market conditions, the principles are equally valuable relative to your ability to consistently benefit from the capital markets.

Let's explore some principles.

So what are principles?

Principles are a set or series of laws that never change. These laws govern the behaviour and movement of price changes in all publically traded stocks, bonds, mutual funds, forex, and cryptocurrency markets. The principles are akin to words in a language; the more words you learn and understand, the greater the meaning you derive from the various messages that are being communicated. As a result, it is necessary to learn the definition of each principle in its proper context, when the principle surfaces. This is important so that when you see the same principle in the future, you will remember and understand the message that the principle is communicating. Given the speed at which the markets move, you must know the principles very well because you have about two seconds to decode the message of the market and make a firm decision about what action or actions you will take. With this background, let's explore and define some basic principles such as demand, supply, cause & effect, effort vs results, buying climax, and the change & motion principle, to name a few.

Some of the basic principles:

More than 100 years ago, Mr. Rollo Tape said "...successful trading is the study of forces." Thus, if it takes a specific force to move the price, the price movement can be determined in foresight depending on the magnitude of the force acting on the price. For example, let's introduce two forces that you have heard of. The two forces are the force for demand and the force of supply. Rollo Tape went further to discuss the idea of the feather's weight. He said that a feather's weight on either side of the scales of the two forces will determine the future trend of that force. In short, the feather's weight is represented as the lack of supply or demand - also known as diminishing demand - a sign of weakness or diminishing supply -- a sign of strength. In some cases, the principle will usually be color-coded to denote strength or weakness. Example, demand and supply.

So what is demand?

Demand is expressed as an increased price spread on increased volume that closes on the high of the price bar. On the other hand, a lack of demand, or the feather's weight, also known as the diminishing demand principle is expressed as a narrow price spread occurring on an up bar where the price closes in the middle or low of the price range. Volume is usually low. This low volume suggests that the group or groups of professionals that influence the price action are not interested in the current advance. In some cases, the volume can be lower than the volume of the previous two price bars. As an example, in the real world, when a department store seeks to create demand to reduce inventory, they lower the prices to attract customers. Most shoppers will form lines before dawn to be the first in the store to buy these sale items. In the capital market, demand, strength, or buying occurs while prices fall. It is during the falling price that the transfer of wealth takes place. Ill-informed buyers or weak holders will usually panic after falling prices and show their hands so that the professionals can buy their shares or contracts at lower prices, provided supply has diminished.

Supply on the other hand is expressed as a widespread down bar on increased volume relative to the previous bars in the background. Supply is also expressed and a narrow spread down bar -- the feather's weight, on increased volume where the price closes in the middle or high of the price bar. The logic behind this action infers that the increased volume relative to the narrow spread that closes in the middle or high of the price bar suggests that professional buying has appeared during falling prices. The news is usually unfavourable. During this potentially beneficial time to buy, the small investor has already panicked, given up, and gone home. This has been an ongoing story dating as far back as the 1600s.

The Cause & Effect principle recognizes the only two causes during the professional campaigns. The two campaigns are buying and selling. Once the cause is complete, the effect follows. The effect can either be the mark-up or mark-down of the price. Buying or selling is professionally known as accumulation and distribution. As an example, during the accumulation phase, the professionals will buy while prices are low. The public is fearful during this phase and the news is usually bad and getting worse. The accumulation process can take some time to be completed before the effect follows. In some cases, the accumulation phase can take as long as six or seven years to complete. Following the accumulation phase, the effect is known as the mark-up phase. During the market up phase, the weak holders will still be fearful, sceptical, and hesitant to buy along with the professionals. The weak holders awaken when the news begins to discuss how prices have risen. Under normal conditions, if you heard it on the news, you could anticipate some embedded misinformation to follow. A good example is Bitcoin. The price of Bitcoin was ignored in many circles during its accumulation phase between \$10,000 and \$13,000 per coin. Most weak holders became enthusiastic when the news chimed in saying that Bitcoin was trending. By that time, the effect had pushed Bitcoin up to \$45,000. The buying frenzy and euphoria increased when Bitcoin was above \$50,000 per coin.

Once the professionals have maximized their profits, the news gets even better and bullish. Still using the Bitcoin example, Bitcoin is now at \$60,000. Many weak holders are scratching their heads and wondering if they have missed the Bitcoin train or if there is still upside potential left in the trade. They jump in, oblivious of the risk/reward relationships. During the buying climax phase, the phase during which professionals sell, the public becomes fully invested with their last dollar. The buying climax is the strongest sign of weakness when studying the various principles. As soon as the weak holder buys at \$60,000, the price moves to \$63,000. As the weak holders begin to celebrate their quick success while feeling invincible, the professionals prepare for the mark-down phase; Bitcoin quickly drops to \$48,000 in a few days. Heartbreak, tears, and sadness set in.

Another advance and critical principle is the Change and Motion principle. This principle monitors the current price changes and seeks to give you the future price range before the price bar prints. Since the market is constantly moving and changing its character as it moves every second, this principle seeks to incorporate the cycles indigenous to all living systems including the rate of change of velocity of the price. As a result, the change and motion principle tells you what to expect in the future and when to expect it. For example, the change and motion principle will predict what the market is expected to do in foresight. Another example reflects how the change and motion forecast will anticipate a cycle high or low at a certain price during a specific time window, i.e., in two, three days, or even years in advance. This knowledge empowers you to position your trades accordingly. The change and motion principle gives you the price spread for the future period. It even gives you the projected high and low. The benefit to you is as follows: if the actual price spread is greater than the forecasted price spread, you can infer that the measure of motion is positive or bullish and higher prices will follow. In addition, if the actual price spread contracts relative to the forecast, you can infer that the measure of motion negative or bearish and lower prices will follow.

The Effort vs Result principle: this principle explores how the price responds to a specific magnitude of force impacting the market at any given time. This principle is closely tied to the laws of motion. You will recall that the first law of motion tells you that an object in motion continues in motion, in a straight line, until an opposing force stops the object and reverses its direction. In this case, let the object represent price. As an example, if and when the price is advancing on an expanding effort or volume, you would expect the price spread to equally expand. However, the moment that the effort, or volume, expands and the price contracts, reflecting a divergence, you are alerted to a potential change in trend. This potential change in trend will depend on the market's confirmation. This action applies to either an up or down price action.

In conclusion, the overview about some of the basic principles such as demand, supply, cause & effect, effort vs results, buying climax, and the change & motion principle give you a flavour as to how you can confidently navigate all markets based on the actions of the very best indicator -- the market itself. As more principles appear, you will receive the full definition of that principle and how the principle influences future price action.