At the core of any significant economic, political, scientific, social, medical, psychological or cultural theory lies a quest to understand and quantify the forces of change, action, or energy. The theories that attempt to quantify "force" that have stood the test of time, date back centuries and are extremely simple. In 1686, noted physicist Isaac Newton suggested in his laws of motion that an object will remain in motion until it is met with an equal or greater force. Noted economist Adam Smith suggested hundreds of years ago that when supply exceeds demand at a price level in a given market, price will decline. Smith and Newton didn’t create or invent the laws and principles for which they are famous. Supply, demand, motion, and the relationships therein existed long before Smith and Newton, long before humans walked the earth for that matter. What these two individuals did, however, is look mass conventional perception in the face and challenge it with a reality that had been there all along. They were able to discover what no one else had because of a belief system that allowed them to open doors others never knew existed. If you notice, Newton and Smith didn’t figure out one specific issue. They had a belief system that allowed them to rather easily apply the core principles of their knowledge to a host of issues, producing answers the rest of the world still considers "ingenious", centuries later.
Throughout history, there are countless examples of individuals who looked mass conventional perception in the face and challenged it. Long ago, challenging conventional thought often meant a death sentence. Galileo was almost burned at the stake for suggesting that the earth was not the center of the universe. Certain minds throughout history such as Einstein, Newton, Galileo, Smith and others were made famous because of their discoveries. What I have always focused on is not the results of their work but the belief system that allowed them to realize what most other people have never even considered.
Are Newton’s three laws of motion really any different than Adam Smith’s laws of supply and demand? In my quest for truth, I have realized that whether you are talking about Newton’s laws of motion, Smith’s theories of supply and demand, or Maxwell’s laws of electromagnetic force, the basic governing dynamic of these laws and principles are different manifestations of the exact same governing dynamic. What I did many years ago is apply this simple and straight forward truth to financial markets. The result was a profound reality that opened up a door of extraordinary low risk / high reward opportunity in any and all markets.
At any university across the country, Chemistry is taught in one building, History is taught at another location, and Mathematics is taught somewhere else. While these are three different subjects, at their core, there is one common governing dynamic that is responsible for answers. For example, the equation that allows us to understand how to split a cell is the same equation that allows us to figure out how and when an earthquake will occur. The cell will split and the earthquake will occur when a specific threshold of force is reached. Why bring all this up in a piece dedicated to speculating in markets? When you realize that this one governing dynamic is solely responsible for the movement of price in any and all markets, you are able to discover the simplicities of market speculation.
I began my trading career on the floor of the Chicago Mercantile Exchange (CME), clerking for a firm in the currency futures. I will never forget my first day on the floor, it was very intimidating. Numbers flashing non-stop all around, people screaming words not appropriate for this piece, and huge money changing hands at lightning speed. My first thought was to spend the day and never come back but my friend got me the job so I stuck it out for the first week. That first weekend off, I evaluated this crazy job choice and thought that I had better get educated on all these markets and the basic world of trading if I was going to stay at the CME. I spent a little time in the education department after work and looked over bits and pieces of material but none of it made sense to me so I stopped seeking this education. Instead, I focused on what was happening around me each day. That choice is the most important choice I have ever made in my career and I only made it because I was not smart enough to understand the text book version of what was happening in front of me each day. As a phone clerk, I took orders from large funds, money managers, and big individual traders. I would take many buy and sell orders before the market opened. As the opening of trading would approach, I would organize the orders based on price and then I would split them into buys and sells. Obviously, the larger the stack of buy or sell orders at a specific price, the greater the supply and demand imbalance at that price level. The movement of price in any and all free markets is a function of the laws of pure supply and demand. Buying and selling opportunity emerges when this simple and straight-forward relationship is out of balance.
If the answers to the most basic questions in life are so simple and right in front of us, why is it that most people never see them, or consider them for that matter? Before we explore that question, let’s take a basic look at how people think. Instead of focusing on changing our actions, let’s look at where those actions come from. Moving backward one step at a time, actions stem from behavioral patterns, and behavioral patterns stem from beliefs. So, it’s at the level of beliefs that decisions are made, and moreover, where your ability to differentiate reality from illusion lies. It’s time to start considering where your beliefs about what works and what doesn’t come from. In life, which includes trading and investing, most of us tend to repeat the same processes over and over, expecting a different result.
The common thread in any quest for irrefutable answers is the search for truth. To obtain irrefutable answers, one must look truth straight in the face, void of any illusion. The presence of even the smallest amount of illusion in the quest for truth ensures truth will never be found. Our quest for truth is in financial markets, specifically addressing proper trading and investing. The question for market speculators needs to begin with this: How do we derive consistent low risk, high reward, and high probability profits buying and selling anything?
Recently, I instructed a Global Futures course in London and on day one of the class, the word "futures" was maybe mentioned once. It was only mentioned on day one to let people know that this was a futures course and that we would NOT be discussing futures specifically on day one. We spent day one learning how a market works, exactly how and why do prices move in any and all markets, and so on. New traders always skip or ignore this most important lesson in trading. Make sure you begin your trading education with the basic thought of how you make money buying and selling anything. This will not only empower you to see and act on what is real and not what you feel, but it will also have the same effect as getting a flu shot, making you immune to all the poisonous, complicated, and useless information that has nothing to do with trading. I tend to call this the "illusion creators."
It is well known that around 90% of people who attempt to speculate in markets lose money. If you take the same path as this group, don’t expect different results. As Albert Einstein pointed out, it is not possible to solve a problem with the same level of awareness with which the problem was created. Ironically, the natural human tendency is to dive deeper into issues and work harder at them when attempting to come to a conclusion. Keep it simple?
Let me revisit the question I never answered before. If the answers to the most basic questions in life are so simple and right in front of us, why is it that most people never see them, or even consider them for that matter? All the answers we need are incredibly simple yet, the vast majority miss the whole game being played out because of the illusions presented to them by those who have more to gain by obscuring reality.
In the Extended Learning Track (XLT) Futures and Forex classes, my goal for the traders under my guidance is to first instill awareness that ensures they don’t fall prey to the many illusion traps. Lastly, to make sure they are a part of the 10% of profitable traders/investors who know exactly how to set the trap.
As a final thought, never put too much of your hard earned money at risk until you have results that suggest you are part of the 10% of market speculators that know exactly how to get paid from the 90% who don’t.