Saturday, January 30, 2010

The Laws of the Market

Headline news such as “Market moves up as Greenspan speaks”, or “Stocks down because of recession fear” are trying to give people the “reasons” why the market moves. These are superficial understanding of the market. We’d like to dig little deeper than this. We believe the market’s movement is governed by three laws articulated by Wyckoff.


The Law of Supply and Demand

The excess of demand (buyers) over supply (sellers) causes a stock’s price to go up. The excess of supply over demand causes a stock’s price to go down.

The price is determined by the law of supply and demand.

The price moves up and down to balance the supply and demand to the equilibrium.

“The stock is only worth the other people are willing to pay for it”---


Law of Cause and Effect

The balance of supply and demand can be shifted by a cause.
The cause could be a good fundamental news, or good news from the same sector, or strong overall market condition.

A good cause will generate excessive demand for the stock, thus a good effect (stock moves up).

The Law of Effort and Result

For a stock price to move (result), how much volume (effort) is associated with the move.
When the result (price) and effort (volume) are in harmony, the trend is likely to continue. However, if they are out of sync, for example, when volume is large, but price moves little, the current trend is in danger, and defensive measures must be taken.

"The "aha!" process lies at the heart of price change. For instance, consider the series: OTTFFSSE. What is the next letter? This puzzle creates tension - until you see the first letters of the ordinal numbers - one, two. "Aha!" you say. A lot happens during an "aha." The puzzle dies and the tension dissipates. A societal "aha!" drives price. Read the newspapers and the news magazines during a major move. At first, no one gets why the move is happening. There's a lot of confusion. Part of the move's way up, some people get it. At the end, everybody gets it. The tension is resolved and the move ends."- Ed Seykota


“I have two basic rules about winning in trading as well as in life: 1. If you don't bet, you can't win. 2. If you lose all your chips, you can't bet. Frankly, I don't see markets. I see risks, rewards, and money.” - Larry Hite
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