Before starting my career at the Chicago Mercantile Exchange, I did two things and really two things only. I played ice hockey and I went to school where the focus of my studies was Biology and Genetics. I know what you’re thinking: how boring. Well, I actually was and am still fascinated by the study of life so I really enjoyed those days. Around every corner of Biology, Chemistry, Genetics, and so on is another mathematical equation. After diving into this field, I quickly realized that though there where so many equations, the underlying goal of most of these equations was to quantify the forces of “change,” “action,” or “energy.” So, one could argue that all these equations were really different variations of the same thing. For my simple mind, everything came down to Newton’s simple concept of “motion into mass.” Whether I was figuring out the concept of splitting a cell or how an earthquake happens, the underlying equation was quantifying motion into mass.
Knowing absolutely nothing about trading and economics when I started on the floor of the Chicago Mercantile Exchange, my first thought was that I now had to learn a whole new subject and that my prior schooling and experience had nothing to do with trading and economics. How wrong I was! Within a few weeks of working on the exchange floor facilitating institutional order flow, all I saw was “motion into mass” everywhere. The only difference was that quantifying it in the markets was easier than what I had learned in the science books. In the trading markets, the “Mass” is the buy and sell orders or what I prefer to call, Demand and Supply. At price levels where demand exceeded supply, price rises. At price levels where supply exceeded demand, price declines. “Motion” of price is the movement of price between the supply and demand levels. We enter and exit positions at these levels and get paid in between. My “edge” in trading is that I learned to see this on a price chart, long before I ever heard anything about conventional “technical analysis.” The focus of today’s piece is to share a recent trading opportunity with you and illustrate this concept of simple motion into mass. The goal is that this nugget of information can help you whether you are a short term trader for income or a long term trader for wealth.
Short Term Income Trade: S&P, 5/21/13
Last week was a very volatile week of trading which is great if you can quantify supply and demand in the markets. Specifically, where banks are buying and selling in markets, their demand and supply. When thinking in terms of motion into mass and supply and demand, the S&P chart above suggested that we had a high odds trading opportunity in front of us. The key element here is to identify where the mass (Bank Demand) is, then look at current price, and determine where supply is which allows us to determine where “motion” (price movement) is likely to take place. As you can see on this chart of the S&P futures above, the yellow shaded area is a demand level which scored out high on our Odds Enhancer scoring grid. I determined this because that was a price level where price could not stay at and had to rally from and because of the Odds Enhancers. The reason price initially rallied from this demand level is because demand exceeds supply at this level (mass, Bank buy orders). Keep in mind a VERY important point here: We are coming to all these conclusions BEFORE we enter the trade. You must perform your analysis in advance and make your decisions before its time to push the button or this will never work.
On Tuesday the 21st, price declined (price collapsed) back to that demand level. The speed of the decline was fast because there was no mass (bank buy orders) to stop the decline until price reached the demand level identified on the chart. As Newton suggested, once an object (price) reaches an equal or greater apposing force, it will stop and change direction. This is exactly what happened at our demand level. Knowing this information and being able to see all this happen in advance on a price chart allows us to buy at demand like the trading opportunity above. This offered us a very low risk, high reward, and high probability short term trading opportunity. Price then rallied because again, there was no mass (Bank sell orders) to stop it which allowed the trade to reach our profit target.
When trading, it is very difficult for most people to focus primarily on where the real and significant willing buyers and sellers are. Many people will include the news or some indicators in their primary analysis. This is because most people are taught to do this, I wasn’t. My focus was science, quantifying motion into mass and that sort of thing. Then, I happened to work at the CME. Once I saw that floor trading was going to go away, I figured out what all this looked like on a price chart.
The information in this piece may seem a bit elementary and repetitious but the purpose of that is to help you understand how the markets work and one way of attaining low risk, high reward, and high probability profits when speculating in markets.
Hope this was helpful, have a great day.