The Universal Laws of Trading

There are natural or ‘Universal Laws’ that govern us all. Life is so much easier if we accept these laws and harness their power to help us achieve our goals. Fighting these laws is, at best, like swimming against the tide. Damned hard work! A universal law must have an obvious underlying truth to it and that truth must be constant and eternal. It will never change. A well known universal law is that of 'Karma', the Sanskrit word used to describe cause and effect. The idea being that every action (cause) has a consequence or reaction (effect).

In his book ‘Trading Day by Day’, F.H. “Chick” Goslin suggests that it is wise to examine the universal laws (or 'natural' laws as he calls them) - that apply to traders. He is quite dogmatic in asserting that there just three such laws, regardless of time frames, instruments and markets traded etc. They are:
1. The future is unknown
2. Continuation is more likely than change
3. Prices fluctuate

Now, some folks might question my nerve to suggest that a consistently successful trader and respected author such as Mr. Goslin may be slightly wide of the mark with his three laws, but, here goes. . . I agree with laws 2 and 3, completely. However, law 1 is a little bit contentious, I think. There is a whole swathe of traders who believe that the markets conform to some sort of mathematical model. Elliott Wave theory and the Delta Phenomenon do, as I understand it, have forward projections or predictive values. The latest big name exponent of what could be termed ‘magic maths’ is Steve Copan with his ‘Market Matrix’ system. I don't use any of these methods, but I imagine that their devotees would challenge the idea that ‘the future is unknown’ and question its status as a universal or natural trading law?

In addition to the main universal or natural laws, maybe there are additional 'sub-laws'. For example, one sub-law might be: 'There is no Holy Grail'. If there was, then everyone would find out about it and the markets would, through necessity, have to destroy the grail in order to survive. So, the opportunities to profit in the markets are infinite and there is no 'one way' to trade. Two more sub-laws perhaps?

The purpose of this thread is to see if, collectively, we can agree as precisely as possible on the number and characteristics of the universal laws that govern our activities as traders. Additionally, maybe there are 'sub-laws' which, underpinned by the universal laws will provide a very solid foundation for our trading strategies. If so, how many of them are there and what are their characteristics?
Tim.

Heisenberg and other matters

timsk said:

There are natural or ‘Universal Laws’ that govern us all.

The idea being that every action (cause) has a consequence or reaction (effect).

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I agree with this statement. It may not always be clear when or how the reaction (effect) occurs, but occur it will do.

However many incorrectly assign a causal relationship between 2 events, when none really exists. This is especially so in trading strategies and methodologies.

timsk said:

In his book ‘Trading Day by Day’, F.H. “Chick” Goslin suggests that it is wise to examine the universal laws (or 'natural' laws as he calls them) - that apply to traders. He is quite dogmatic in asserting that there just three such laws, regardless of time frames, instruments and markets traded etc. They are:
1. The future is unknown

Click to expand...

This depends upon whether one believest that all futures co-exist in the so-called present. Even if you take the view that the future is in reality consecutive to the present then you can always talk in terms of probabilities. Does this event have a high degree of probability ? The highest degree of probability lies in events that you directly control. The market makers, for example, have a more certain degree of knowledge about the future than the ordinary private trader.

timsk said:

2. Continuation is more likely than change

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I would not agree with this at all. Taking the more philosophical view of Karma and, in particular, Buddhist teaching it is said that change is inevitable. Life requires change - old life gives way to new life. Taking the scientific view the theories of entropy point towards more chaos being the norm.

Continuation is merely a state between 2 changes. From a trading perspective most trends will eventually end.

timsk said:

3. Prices fluctuate

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This is clearly the easiest with which to agree

timsk said:

The purpose of this thread is to see if, collectively, we can agree as precisely as possible on the number and characteristics of the universal laws that govern our activities as traders. Additionally, maybe there are 'sub-laws' which, underpinned by the universal laws will provide a very solid foundation for our trading strategies? If so, how many of them are there and what are their characteristics?
Tim.

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Now this is a fascinating question. I will need time to think this through properly, but as a starter I would propose the following as a universal law:

We are all individual but at the same time we are all one

There are theories that the beating of a butterfly's wings in one part of the world will influence events in another part. Think of your body - at a microscopic level atoms and molecules are passing between your body and the environmet around it. Can one really distinguish at this level where the body ends and "outside the body" begins ? Delve a level deeper - subatomic particles act like probability curves. The exact energy, speed and position is unknown but fluctuates. This is the theory known as Heisenberg's uncertainty principle (http://en.wikipedia.org/wiki/Uncertainty_principle). Thus you cannot really state that this subatomic particle is distinct from that subatomic particle.

As traders then we can associate all the events of the market and all of the market participants. Again I have not fully thought through the consequences of this, except to say that it supports the cause of TA by stating that there is a causal relationship between events that we may be able to discern by evaluation of price and volume, but equally the process of doing this - the technical analysis itself- affects the very thing that it is measuring.

Charlton

Tim,

The future is very predictable and I will pm you with a prediction that I guarantee will happen


Paul

Trader333 said:

Tim,

The future is very predictable and I will pm you with a prediction that I guarantee will happen


Paul

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I bet I can guess what that is too!

Chris,

PM me and I will let you know if you are right


Paul

Hasn't this exact same thread occurred before?

And no PMs required... I'm there already

Tim, yes. Let's see how this one develops. I think I would have had a similar problem with deciding which forum to run this one in too.

My opening position on your query is that Universal Laws (if they exist ), by their very fundamental nature, are not easily observable - otherwise you wouldn't be asking the question. It's like looking inside your own eye with your own eye.

And if there were such a thing as Universal Law or Laws which 'govern' us as traders - it would have to be at a very basic level (see above) and apply to all equally - with the end result we'd all do the same. Clearly we are not all so governed. So if this Law or Laws exist, they must operate on us or we must employ them (Unconsciously) as a function of or via a process of some other variable or set of variables which produce the spectrum of behaviours we witness in the markets - and in every other area of life as well of course.

And in mentioning Delta, Market Matrix, Elliott, Gann, Ocean and so all. Look at all the systems and methods (commercial, free, personal and home-grown) individually and you'll find (I suspect) a normal distribution of individual traders who have (a) enormous success (b) average success and (c) no success at all. If there are any Universal Law(s) they appear to operate, in the realm of trading in any event, in a non-deterministic manner for any one specific trader. Over the group as a whole however, you may well be able to establish some basis for your query.

Not sure if this has helped, but as I said, my first thoughts on your query.

Good Luck

The Universe and all it's contents (again)

Who needs Universal laws when you've got
(a) A Holy Grail (http://www.music123.com/Electro-Harmonix-Holy-Grail-i60029.music)
(b) A crystal ball (http://www.imagi-nation.com/moonstruck/question.html)

or, if you're quick

Trading Magic.
http://www.rhythmofthemarkets.com/tradingmagic.html

It's a steal AND it landed free in my inbox this morning.

Another thing that occurs to me Tim (and I don't know why waiting to see if a re-test on Cable at 7396 should make me think of this thread, but there you go...) is that if you do go down the route of believing we are 'governed' by UL (not something I currently subscribe to, but willing to be convinced) then be careful what it is precisely you are looking for. And from whom.

There is a consensus that far more 'traders' fail than succeed. Which set do you wish to consider?

I'm making no value judgement here, as input from either/both sets would possibly yield an answer, either in direct response to your query or one which indicates the possibility of there ever being an answer - just as valuable IMHO.

But if you took as an initial hypothesis that we are deterministically governed, we are clearly all not governed equally nor in the same manner.

Or perhaps it is to the degree we resist such governing that we are more, or less, successful in trading - or any any sphere of life?

TheBramble said:

Another thing that occurs to me Tim (and I don't know why waiting to see if a re-test on Cable at 7396 should make me think of this thread, but there you go...) is that if you do go down the route of believing we are 'governed' by UL (not something I currently subscribe to, but willing to be convinced) then be careful what it is precisely you are looking for. And from whom.

There is a consensus that far more 'traders' fail than succeed. Which set do you wish to consider?

I'm making no value judgement here, as input from either/both sets would possibly yield an answer, either in direct response to your query or one which indicates the possibility of there ever being an answer - just as valuable IMHO.

But if you took as an initial hypothesis that we are deterministically governed, we are clearly all not governed equally nor in the same manner.

Or perhaps it is to the degree we resist such governing that we are more, or less, successful in trading - or any any sphere of life?

Click to expand...

The theory of Universal Law does not state that said UL governs us deterministically only that there is a framework of UL within which we must all operate. We all have free will and within the framework of UL can exercise that free will towards either our betterment or our detriment. The UL is neutral in this respect, governing all equally and in the same manner.

To paraphrase the law of aerodynamics a plane will lift off and fly because the air under the wing is of greater pressure than the air above the wing and this higher pressure basically "pushes" the plane into the air. This UL does not state where the plane must fly when it is in the air though.

As for UL in regards to trading, I freely admit I am far too new to the game to have any idea what the UL's would be. I'm hoping to find out real soon though!

Cheers,
PKFFW

PKFFW said:

The theory of Universal Law does not state that said UL governs us deterministically only that there is a framework of UL within which we must all operate.

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I hadn't realised there was any single specific theory of universal law relating to personal pre-determination or non-determination. I thought Timsk was using that phrase for want of anything better. There are many 'universal laws' each specific to the various subjects or topic matter they address (universal laws of gravity, electricity, momentum etc.), but are you saying there is a single, over-arching Universal Law for which a theory has been postulated? Or if not, which particular UL are you referring to?

PKFFW said:

To paraphrase the law of aerodynamics a plane will lift off and fly because the air under the wing is of greater pressure than the air above the wing and this higher pressure basically "pushes" the plane into the air. This UL does not state where the plane must fly when it is in the air though.

Click to expand...

Same phenomena, but totally different viewpoint and I have no idea if Tim will find this relevant to his original quest, but as an example, it may be of interest.

I've always taken the airflow around an airplane wing (or boat's sail for the matter - same thing) as the larger surface area of the top of the wing when compared with the underside, creating a reduction in air pressure over the top of the wing which effectively 'sucks' the plane upward - rather than it getting pushed up. Makes no difference to the aerodynamic design of the aerofoil or the airplane's subsequent flight dynamics in flight - just a subtle difference in view point. Both of which are correct of course.

TheBramble said:

I thought Timsk was using that phrase for want of anything better. There are many 'universal laws' each specific to the various subjects or topic matter they address (universal laws of gravity, electricity, momentum etc.), but are you saying there is a single, over-arching Universal Law for which a theory has been postulated?

Click to expand...

Tony,
Allow me to clarify - if I can! As you say, there are many universal laws (UL's)and they may - or may not - have any relevance to trading. For the purposes of this thread, let's try to focus on those that relate specifically to us as traders.

I completely agree with PKFFW that, as human beings, we have free will to do as we choose and we are not 'governed' by UL's. You mentioned momentum which, interestingly, lies at the heart of Goslin's trading law that 'continuation is more likely than change'. A hammer, when wielded with even minimum force, carries with it considerable momentum. If it hits the nail squarely on the head, the result is a desirable one. If, on the other hand, it lands there instead. . . ouch! As PKFFW suggests, momentum is neutral, it is not predisposed to hitting either the nail or the hand. Similarly, when the market is tanking, it doesn't care that there are traders buying into it in an attempt to pick the bottom. It is neutral.

Chick Goslin recommends identifying the prevailing trend and trading with it. An old mantra we've all heard many times, but his rationale for doing so is that the UL dictates that the trend - be it up, sideways or down - is more likely to continue in its current direction than it is to change it. Clearly, this is not a view shared by everyone. As Charlton said in his post: "Continuation is merely a state between 2 changes. From a trading perspective most trends will eventually end." Goslin utilises his three UL's to good effect, but perhaps they are not appropriate for everyone. Maybe, it's possible to personalise UL's or, to pick 'n' mix, to reflect each trader's unique approach to the markets?
Tim.

TheBramble said:

I hadn't realised there was any single specific theory of universal law relating to personal pre-determination or non-determination. I thought Timsk was using that phrase for want of anything better. There are many 'universal laws' each specific to the various subjects or topic matter they address (universal laws of gravity, electricity, momentum etc.), but are you saying there is a single, over-arching Universal Law for which a theory has been postulated? Or if not, which particular UL are you referring to?

Click to expand...

Sorry for the confusion, I was not referring to any one specific UL but rather the theory that there are a set of UL's that govern the natural world. Such laws would be the law of gravity, electricity, momentum etc. Some believe that all things, even that which appears to be influenced solely by human will are actually bound by UL's. Hence the idea that the financial markets are bound by a construct of UL's. However, within this theory or belief the UL's do not state how one must act. For example the law of gravity does not preclude one from jumping out of a plane. It only states that you will eventually hit the ground and you had better hope you have used another UL, such as the law of aerodynamics, to negate the negative consequences of the inevitable sudden stop at the end of your fall.

TheBramble said:

Same phenomena, but totally different viewpoint and I have no idea if Tim will find this relevant to his original quest, but as an example, it may be of interest.

I've always taken the airflow around an airplane wing (or boat's sail for the matter - same thing) as the larger surface area of the top of the wing when compared with the underside, creating a reduction in air pressure over the top of the wing which effectively 'sucks' the plane upward - rather than it getting pushed up. Makes no difference to the aerodynamic design of the aerofoil or the airplane's subsequent flight dynamics in flight - just a subtle difference in view point. Both of which are correct of course.

Click to expand...

I'm a fire fighter by trade and in my profession we have a saying....."nothing in nature sucks". This is because the flow of any liquid or gas is from the area of high pressure to the area of low pressure. Hence the flow of energy is in that direction as well. Hence, technically speaking the plane is pushed into the air and not sucked. Not that it really matters as not many people trade from an aeroplane so it's irrelevant to this topic. I was merely using it as an example.

Cheerio,
PKFFW

1. The future is unknown
2. Continuation is more likely than change
3. Prices fluctuate

I find Law 1 and law 2 contradictory.
Law 2 implies a bias, that in some ways negates law 1. You are effectively saying, that although we dont know the future, we can surmise its likely course from Law 2.

Anyway, pedantics aside...
Unlike gravity and electomagnetism, which are independant of humans, in that they existed, and will continue to exist, with or without people, the markets are a human construct, and exist only because people participate in them.
These laws can change if people change their political, social, religious perspectives.

Since the markets are a sum total of human endeavour, perhaps applying the laws of psychology are more appropriate, by treating the market as a psychiatric patient, and the price movements as manifestations of neuroses or psychoses.

trendie said:

1. The future is unknown
2. Continuation is more likely than change
3. Prices fluctuate

I find Law 1 and law 2 contradictory.
Law 2 implies a bias, that in some ways negates law 1. You are effectively saying, that although we dont know the future, we can surmise its likely course from Law 2.

Click to expand...

Bias yes, negate, no. 'More likely'. Higher probability not a definite.

trendie said:

Anyway, pedantics aside...

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Don't do that mate. If we left pedantics out of things there's be far fewer posts on these boards!

trendie said:

Unlike gravity and electomagnetism, which are independant of humans, that they existed, and will continue to exist, with or without people,

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I disagree with that. All 'Laws' are outputs and products of the human mind. Laws change over time in some instances. Hardly universally incontrovertible proofs are they? New ones 'disproving' old ones. Did Gravity 'exist' before Newton 'discovered' it? Sort of, but it's his definition. And it serves us, almost well enough, for now. I'm not sure any Laws that currently exist, 'exist' in reality (WTI).

trendie said:

in the markets are a human construct, and exist only because people participate in them.
These laws can change if people change their political, social, religious perspectives.

Since the markets are a sum total of human endeavour, perhaps applying the laws of psychology are more appropriate, by treating the market as a psychiatric patient, and the price movements as manifestations of neuroses or psychoses.

Click to expand...

Good place to start - especially on these boards.

Plus, add to 'political, social, religious' 'economic, financial, cultural, personal, agricultural, technological...

PKFFW said:

"nothing in nature sucks". This is because the flow of any liquid or gas is from the area of high pressure to the area of low pressure. Hence the flow of energy is in that direction as well. Hence, technically speaking the plane is pushed into the air and not sucked.
PKFFW

Click to expand...

:idea:
It strikes me that this could be another UL to add Goslin's list of three? In terms of supply and demand and the flow of buying pressure to selling pressure and back again, this seems very relevant.
PKFFW - what are the practical applications of this UL for firefighters and do you see any parallel applications in the markets?
Tim.

timsk said:

:idea:
It strikes me that this could be another UL to add Goslin's list of three? In terms of supply and demand and the flow of buying pressure to selling pressure and back again, this seems very relevant.
PKFFW - what are the practical applications of this UL for firefighters and do you see any parallel applications in the markets?
Tim.

Click to expand...

Often times, particularly when fighting bush fires we need to draught water from a river or pool etc. In order to do this we create a vacuum inside the pump and some would say "suck" water up into the pump. In actuality the weight of the atmosphere pushes the water up into the pump. That is one example. Another related example would be knowing the differing densities of various liquids to be able to know which will float on the surface of water and which will sink. For example petrol is less dense than water and so it floats and hence it's not a good idea to simply pour water on a petrol fire to put it out, you will simply end up spreading it.

As for parallels to trading, as I mentioned in my first post, I'm very new to trading so am just guessing at the basics really. Having said that, it does seem to me that there is a correlation to price action. With increased selling "pressure" the price would flow from where it is to a place of less pressure...ie down. The opposite would be true for increased buying pressure. When the buying and selling pressures have found an equilibrium the price would not change but stay steady. Of course that would be pretty obvious to everyone here I guess. The lesson would be "don't try to swim against the current". If all the pressure is flowing in one direction, why try to force yourself against it? Unless you are a strong swimmer and like a challenge! hahaha

Cheers,
PKFFW

I agree with Trendie's point re laws 1 and 2 in contradiction.

I would scrub law 1. This is because the future does not exist. There is just one continuous moment of now.

I agree with law 2 although continuation and change could do with defining. If not it could mislead.

Law 3 doesn't say much. Just a glance at a trading screen gives you law 3.

That leaves us with Law 2 which is the interesting one.

I disagree with Trendie re laws based on humans will have to change. If the law is based on human behaviour, as long as that behaviour is primeval then it won't change. However, the physical process of how people trade, the technology, the regulations, the laws and the platforms are always changing and influence certain market behaviour, but not the primeval behaviour.

The most useful universal law of the market is "The lazy trader gets screwed".

Best Regards

garethb said:

The most useful universal law of the market is "The lazy trader gets screwed".

Best Regards

Click to expand...

I agree.

http://www.fxstreet.com/nou/content/106410/content.asp?dia=242004

If the future is known...

If the future is known as some claim, will such discoveries be shared anyway? I think not so It is sensible to foresee markets where the future has a significant element of randomness.