The 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.