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Newton’s Laws of Stock Market Trading
This revelation had me surprised too. I was idly flipping through my old physicstextbooks yesterday when it suddenly struck me. I was amazed to see that Sir Issac Newton’s laws of physics pointed to so many profound and important rules in the stock markets today.So, here we are… the physics of the stock markets.
Newton's First Law of Trading
“A Stock at rest tends to stay at rest and a Trending Stock tends to stay in trend unlessacted upon by an equal and opposite reaction or an unbalanced force.”This law teaches us the same thing the old commodity traders will… that the trend is your friend. If a stock is trending sideways, it tends to stay sideways until a powerful enoughmarket force takes it out of its trend. If a stock is trending up or downwards, it will tendto stay moving up or downwards until drastic changes happen to the company or themarket at large creating an “equal and opposite reaction”. We should therefore alwaystrade in the direction of a trend and always be vigilant for signs of an”equal and opposite reaction” or the “unbalanced force”. Such a force may take the formof a drastic change in the market sentiment at large or drastic change in the performanceof the specific company in question.
Newton’s Second Law of Trading
“The acceleration of a stock as produced by a market consensus is directly proportional tothe magnitude of that consensus, in the same direction as the consensus, and inversely proportional to the mass of the stock.”This law teaches us that a stock moves up or down into a trend due to a force created bymarket consensus. How much a stock moves up or down that trend is determined by themagnitude of the market consensus and how “massive” a stock is. By “massive” we aretalking about the price of a stock. The more expensive a stock is, the more wellestablished the company has been and the lesser in percentage you will make out of thesame move in absolute dollar versus a smaller, less massive stock.The force of the market consensus is directly proportionate to the event that spurred it. If a company produces a breakthrough product on a worldwide patent, it creates anextremely strong market consensus that is likely to take a stock very far. If a companymerely scores a marginally higher earning this quarter, it is unlikely to produce a marketconsensus that will go very far. Newton teaches us to not only look at what the news is but also how well established thecompany is in order to determine how much momentum it will produce in a given trend.
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jasonnoguchi

Glad you enjoyed it Gerard! :)

reply03 / 21 / 2009
gerardlim

Great information here Jason. Thanks!

reply03 / 21 / 2009
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