The Market is Energy
Friday, December 9, 2011 at 11:38AMThe market is energy. On any particular day, think about the energy needed in order to move one unit of capital (a security) by a distance y (unit of stock price). Think about all the energy required to move all the capital market securities in the U.S market at any given point in time. The amount of energy required to accomplish this transition must be substantial, almost infinite. Think about the traders’ actions and reactions, the news, the liquid networks transporting market information, the value created or destroyed at each of the companies listed on the exchange over that unit of time, and so on. Astounding, isn’t it? Stock prices ebb and flow.
The trader or investor’s purpose is to harness market energy to his own advantage similar to Hydro Quebec’s purpose of harnessing the flowing energy of massive rivers in Quebec to the benefit of its population.
Hydro Quebec does not build its dams along marshes. Hydro Quebec has acquired engineering insights about the location of potential hydro energetic sources. They make money harnessing this energy and transporting it to where it is needed.
In my experience, most market participants have it upside down. They fall in love with a technique (technical analysis, value investing, day trading, pairs trading, and so on), and they try to apply their techniques to the most promising market situations. Market energy, which is fleeting, possesses this devilish ability to frustrate the application of most techniques developed for the pursuit of profit. However, by viewing the market as energy, you become less dismissive of other approaches. You use the most appropriate technique for the task at hand.
Does this make sense?
Written by Michael Bigger. Follow me on Twitter and StockTwits.
Reader Comments (4)
I took the liberty of reposting this journal entry on the DailySpeculations.com blog in response to this post:
http://www.dailyspeculations.com/wordpress/?p=7017
Energy in Markets, from Craig Mee
December 11, 2011
I believe in nature. I believe in earth, sun, fire and water. I believe in the circle of life. When a tree loses its leaves, you think it's dead. But the tree is only resting. It's born again, in the spring. I believe in energy. Positive energy.
Paolo Di Canio
How could we monitor energy in markets? What are the leading indicators, what is in control positive or negative energy? (This may not mean it is connected with a bullish or bearish overtone). What happens when a market loses its soul? Does this affect the length of time until the leaves return, if they return at all?
,
Very good R. Kumar.
I think one important thing to do is be aware of overvaluation has they show potential energy in the system. When a market rallies into overvaluation territory, often you see volatility decreasing. That is very strange because as the market gets away from fair value, its potential energy increases. That is how I look at it. I use potential energy as a metaphor.
Michael
Always love your blog posts and it helps to crystallize my thoughts along with being though provoking. I still haven't bought into the idea of writing (because I hate it and am a very poor writer). But don't doubt that this is probably also very worthwhile as you contend.
I recently finished reading Streetlights and Shadows: Searching for the Keys to Adaptive Decision Making. I thought it was great and very applicable to algorithmic trading. I thought you might enjoy it. I might have missed it but didn't know if you have a list of books you feel like you have read that are worth your time.
Thanks,
John
Thanks John. No, I haven't read this one. In my Amazon cart.