T2W Trading Community

Newton's Third Law of Motion states that

"for every action, there is an equal and opposite reaction."

Such 'action' can be by direct contact, such as from friction, tension or applied forces. Then you have such 'actions' as a result of gravity, electrical and magnetic.

Forces come in pairs. For every action, there is opposite reaction. The size of the reaction is equal to the size of the action. Nature is filled with such evidences of this law. For example, when a bird flies it uses its wings to push air downwards. As a result, the air reacts by pushing the bird upwards. The size of the force on the air equals the size of the force on the bird. The direction of the force on the air is opposite the direction of the force on the bird (upwards).

Therefore, we must reason that when a futures, commodity or forex market moves up or down, it does so because an opposite action preceded it. The question is, what action or actions is responsible for causing the markets to 'react' in an opposite manner?

To find the answers, we must work our way backwards from the event. For example, if the event is rising prices in Soybeans, we must determine what chain of events may have led to that rise. The first thing that comes to mind is that buyers were willing to buy at higher and higher prices. Many make the mistake of assuming that there were more buyers than sellers. This would not be a correct statement. While you certainly can have one seller selling to multiple buyers, you can also have multiple sellers selling to one buyer that would cause rising prices. So it is not the number of buyers to sellers that cause price to rise. Rather, it is the willingness of buyers to accept higher and higher asking prices from the sellers.

Therefore, in stepping backwards to determine what leads to higher prices, we start with the "the willingness of buyers to pay higher asking prices." Now we must consider this understanding and ask our next question. Why would buyers be willing to pay higher asking prices?

The obvious answer here is: Buyer Perception.

Consider the example of buying a car. You go out to buy a car and you want the best deal you can find. There are others doing the same thing you are. You come upon a car that you feel is worth the asking price. This is because you perceive its value is in line with what the seller wants for it. Before you came upon this car, other buyers stopped to look at the car but did not buy it. Why not, if you feel that it is worth the money asked by the seller?

The reason is 'buyer perception'. The previous potential buyers did not buy the vehicle because they perceived it was not worth it for them at the asking price. Of course, they may feel that the asking price is fair, but they didn't like the color or the make. Yet, those potential buyers may have bought the car anyway had the price been much lower. For those potential buyers that did not buy, there may be a price that would turn them into buyers.

Suppose you had ten potential car buyers out looking at the same car. At the current asking price, perhaps only one of the ten feels it is worth buying at the asking price and would buy it. As you keep lowering the price, however, more and more may then consider it a good buy and want to buy it. As you get closer and closer to free, you get to a point where almost all the buyers are ready to purchase. It is all a matter of perception, the perception of value.

Okay, now let's work back from there and ask the next question. What may affect a buyers perception of price? Perception is a mental function. Therefore, we must address the 'mental', the 'psychological' angle of buying. When we consider the psychological aspect, we must consider the 'emotional' aspect as well.

A person buys a commodity contract or stock because that person perceives that it either has or will have greater value later on.. So the buyer, not wanting to miss the opportunity for gains, will immediately buy. This may be motivated by fear of losing out, or it can be motivated by greed for more. Also, it can motivated by an attachment for the product itself. Even if the person can address the purchase with all the control of emotions that is humanly possible, there will always be a 'desire' that the purchase will eventually reap rewards. 'Desire' is an emotion. So then, what may affect our emotions and desires that lead us to perceive that the market will move higher so that we should buy?

Our mental perception is mostly affected by information. This information can be recent, and it can also be accumulative over time, such as what we call our 'experiences'. Information comes to us from many directions. We may be reacting to what the weather is or will be if we want to trade grains, for example. Or the weather itself may simply affect how we 'feel' at the moment, affecting our buying decision. Just as if a drought in Florida or other major orange growing areas may cause us to feel that the price of orange juice is going to rise fast, resulting in a decision to buy now, sunny days can affect our mood and make us feel more optimistic about buying. There is plenty of scientific evidence to point out that weather does have a direct affect on how we feel about ourselves and other things.

The same can be said about various news reports. These can affect our mood as well as our perception, resulting in a desire to buy a particular market contract or stock. An interesting consideration is that much of the news we get is about something that is affected by either the weather or the mood of a person or persons. For example, weather is often part of the news with droughts, floods, storms and much more. But consider the reports on crime and war (psychological, mood, desire, greed, fear). If you remove weather and all aspects of emotion from the equation of news, you simply would have no news at all.