Is Price Movement Linear
Hey Traders, Thiru Nagappan here, founder of Master the Markets, Elite Traders Conference and The Traders Open Day.
Today’s topic is basically one question that most traders ask: is price movement linear? Based on that I’d like to talk about three points to answer this question.
The first point is based on human behaviour. For example, think about this: you buy a property for £300,000. At the point that you buy it, your psychology is saying it’s reasonable according to your budget and at the same time you’re thinking there will be price appreciation on this property. So a buyer usually buys any product or any instrument at the time when they are thinking it is worth its value and it’s going to go up higher in price. Then when the property price goes up from £300,000 to £500,000 at any one point the buyer might start thinking that it’s going too far up and he doesn’t think it can go any further. At that point he thinks it’s reached a stop and what does he do? He starts to sell it. At that particular point it starts to peak and then it starts to drop off. Now if that is what is established by human behavior – the thinking that it is going to go up to a certain point and that it’s going to drop off – then we can understand and appreciate because human behavior fluctuates from cheap or reasonable to expensive, then selling it off then buying it back again. If that is general human behavior then it’s also going to affect price movement. If you agree on that logic, we can then establish the answer to the question about whether price movement linear is, the answer is no. Because if you look at any chart or if you were to plot any price of any instrument over time, you will never get a chart which just keeps going up in a straight line. Any company’s business growth as well, if you were to plot it, it will never ever be in a straight line. Usually it goes in a cyclical movement which goes up and down because of this human behavioral pattern that I just talked about.
That leads to the second point. Since human behavior is such, it leads to price moving in cycles. This is why we get cyclical movement of people collectively thinking that something is more expensive. Referring to the example of the property increasing to £500,000, then selling it off and it coming back to £400,000 and after that a collective amount of people think it’s cheap and it will go up higher and it reaches its next peak at £750,000. Of course when a collective amount of people start to think the same thing or some news comes in and panic strikes and massive selling starts to happen, it might take out the last £400,000 price point. After that if further good news comes in, it might start to go up again. Whatever it is we can understand and appreciate it because of the generic human behaviour that is in-built in all of us and we are conditioned to. We fluctuate between the psychological beliefs of expensive and cheap and because of that we then do our interactions of buying and selling and that is in opposition to another person who is also buying and selling back from the other person. So because of human behaviour we get price not moving in a linear fashion but in fact moving in a cyclical fashion. If you were to put any chart up you would be able to see that.
Finally that leads to the last thing about cycles, that is, phases. Let me explain. When you get a cycle you get two phases. The first phase we say is in line with the trend, for example, an up-trend. The second phase is in opposition to the trend, against the trend. Most traders, like ourselves, what we are looking at doing, especially swing traders, are looking to get into the sweet spot before the market starts to jump up and reach its next peak. That’s what we are looking to do as swing traders – catch about the retracement phase when it starts to come down and then to take it up to the next peak.
So I believe that from this you can understand the answer to the question about whether price movement is linear and those three points would definitely help you. One is that it is definitely not linear because of human behavioural patterns fluctuating between cheap, reasonable and expensive prices. The second is it moving in cycles and finally within the cycles there being two phases.
So I will let you think about that, contemplate on it and until the next time, as we always say, stay disciplined, follow your trading plan and keep Trading Like a Master.