The mechanics of the markets are so complicated that one must break it down into some foundational guidelines that encompass the whole, then build upon that foundation slowly and methodically until it makes sense and becomes a high probability, low risk undertaking. By now you should understand the advantages Smart Money has over the crowd and you should be looking at the market from their perspective. The rest of the lessons will focus on the methods Smart Money uses and the Market Dynamics those methods are based on.
The Law of Supply and Demand
This law states that when demand is greater than supply, prices will rise, and when supply is greater than demand, prices will fall. Here the analyst studies the relationship between supply vs. demand using price and volume over time.
The price of every equity moves up or down because there is an excess of demand over supply or supply over demand. 2. The Law of Effort vs. Results – divergencies and disharmonies between volume and price often presage a change in the direction of the price trend.
The Law of Effort versus Result
The law of effort vs. result states that the change in price [spread] of a trading vehicle is the result of an effort expressed by the level of volume and that harmony between effort and result promotes further price movement while lack of harmony promotes a change in direction.
The Law of Effort (volume) versus Result (price) in action. This law can be seen as working on one bar.
The Law of Cause and Effect
This law states that in order to have an effect you must first have a cause, and that effect will be in proportion to the cause. This law’s operation can be seen working as the force of accumulation or distribution within a trading range that works itself out in the subsequent move out of that trading range.
The idea is to measure this cause and project the extent of its effect. The excesses that develop in supply and demand are not random but are the result of key events in market action or the result of periods [candles] of preparation. Wyckoff teaches what these developments are and how to judge when they are unfolding in time to take advantage of the excesses in supply or demand that will follow.
This law is seen working over a group of bars.