Newton's Laws of Motion in forex trading

Newton's Laws of Motion have much support amongst currency traders, and most use it either intensively, or just loosely base their actions on it.

Newton's First Law of motion has four parts:

  • an object
  • stays at rest or
  • moves at a constant velocity in a straight line unless
  • a force acts upon it.

Constant velocity = Uniform motion

Uniform motion = cover the same distance at the same time intervals e.g. a car that moves for 60 seconds at 10m per second would travel 600 metres in 60 seconds (if my calculation is right). If the car changes speed, the motion becomes non-uniform.

Velocity = speed and direction

So, Newton observed that:

  • an object that is at rest will stay at rest unless a force acts upon it,
  • an object that moves at constant speed and direction will keep on moving at the same speed and direction unless some force changes its speed or direction.

Many traders use this law of nature as a premise of what could be expected will happen (or keep on happening) in the price action of a currency pair, stock or commodity.

Application in trading

A currency price that is ranging will tend to stay in range until some market force, such as news, forces it out of its range.

A currency price that is trending will tend to remain in the trend until some market force, forces it out of the trend.

The theory is that a trader should always trade in the range, or in the direction of the trend, while being vigilant for any changes in market sentiment, news or other factors that may affect the currency's price.

Newton's second law has three parts

  • a body
  • the force applied
  • direction

The rate of change of momentum of a body is directly proportional to the force applied and the change in momentum takes place in the same direction as the applied force. (Force is the result of an object's mass and its acceleration)

Application in trading

Traders use this law as a premise of what the effect of a force will be on the price action of a currency pair, stock or commodity.

The theory is that price movement is based upon influences (forces) created by what the majority of traders in a market believe to be true, how influential they deem it, and how intensely they act on it.

This force may be spurred by news, central bank actions, political decisions etc, and its importance to the market will dictate how strong the force is and how strong the effect will be.

Newton's Third Law has two parts

  • action
  • reaction

For every action (force) in nature, there is an equal and opposite reaction.

Application in trading

Some traders use this law as a premise of what the reaction might be when the price of a currency, stock or commodity are changed by market forces.

The theory is that price movement is decided upon what the situation was before the action took place and how influential the action (force) is.

The reaction could be expected to be equal to the action that preceded it, so the same intensity with which the bull trend moved, may indicate the intensity of the subsequent bear trend.

If you want to use Newton's Law of Motion in your trading:

  • Make sure you understand its application to price action. The best way in which to get to understand it, is to observe it on your charts (for which you need a proper trading journal)
  • You may, for instance, want to observe the behaviour and make-up of candles on your chart such as the colour, length, body and wicks, or where it is placed within the larger picture.
  • Trend lines and other technical resources may help and factors (forces) such as economic news, may result in trading opportunities.