9. THE 12 LAWS OF THE GLOBAL FINANCIAL MARKETS

There are 3 contexts of laws required in trading . The appropriate LAWS OF THINKING for trading, the appropriate LAWS OF FEELINGS for trading , and the appropriate LAWS OF ACTIONS for trading. 
The Successful trading is based according to these three laws on
1) POWER OF COLLECTIVE  SCIENTIFIC THINKING: A GREAT AND SIMPLE SCIENTIFIC PERCEPTION OF THE FUNCTION OF THE ECONOMY THROUGH SOME GLOBAL STATISTICAL LAW. E.g. The law of Universal attraction in economy: that big money attracts more big money in the capital markets, and this by the balance of demand and supply makes securities indexes of the companies , that are indeed the big money, to have mainly stable ascending trend, whenever one can observe such one. Valid statistical deductions can be obtained with simple statistical hypotheses tests about the existence or not of a trend, with sample size half the period of a dominating cycle). (STABLE GREAT SCIENTIFIC THOUGHT-FORM  OR BELIEF FACTOR IN TRADING. )

2) POWER OF COLLECTIVE PSYCHOLOGY: A LINK WITH THE POSITIVE COLLECTIVE PSYCHOLOGY.(E.g. that the growth of security indexes also represent the optimism of the growth and success of real business of the involved companies. And we bet or trade only on the ascension of the index, whenever  an ascending trend is observable). (STABLE GREAT POSITIVE COLLECTIVE   EMOTIONAL OR PSYCHOLOGICAL FACTOR IN TRADING. )


3) POWER OF INDIVIDUALS SIMPLE , CONSISTENT AND EASY TO CONDUCT PRACTICE. (e.g. a trading system with about 80% success  rate that utilizes essentially only one indicator in 3 time frames, simple risk management rules of stop loss, take profit, trailing and escalation, and time spent not more than 20 minutes per day. In this way there are not many opportunities of human errors in the conduction of the trading practice. Failed trades are attributed to the randomness and are not to blame the trader). (STABLE SIMPLE AND EASY PRACTICAL  FACTOR IN TRADING)

We may make the metaphor that successful trading is the ability to have successful resonance with the  activities of top minority of those who determine the markets.

In trading there are 3 components in the feelings that must be dealt with. 1) The feeling of MONEY itself, 2) The feeling of the UTILITY of the money 3) The feeling of the RISK of the money each time. What is called usually money management in trading is essentially RISK MANAGEMENT. 



VALID STATISTICS AND PREDICTABILITY
We must make here some remarks about the robust application of statistical predictions in the capital markets.

1) The theory that the efficient markets and in particular that they follow a pure random walk is easy to refute with better statistical experiments and hypotheses tests. The random walk would fit to a market where the sizes of the economic organizations are uniformly random. But the reality is that they follow a Pareto or power distribution, therefore this is inherited in the distribution of the volumes of transactions and also in the emerging trends or drifts. 

2) The statistical models of time series  are more robust , when they apply to the entity MARKET as a whole and are better as  non-parametric , and not when they apply to single stocks and are linear or parametric. The reasons is that  a time series as a stochastic process , requires data of a sample of paths, and for a single stock is available only a single path. While for all the market the path of each stock or security is considered one path from the sample of all paths of all the stocks. 

3) The less ambitious the statistical application the more valid the result. E.g. applying a statistical hypothesis test, or analysis of variance   to test if there is an up or a down trend (drift) or none, is a more valid statistical deduction , than applying a linear model of a time series and requiring prediction of the next step price. 

4) Multivariate statistics, like factor analysis, discriminant analysis , logistic regression,  cluster analysis , goal programming e.t.c.,  are possible to utilize for a more detailed theory of predictability and of portfolio analysis, and sector analysis of the market and not only H. Markowitz theory. 

5) In applying of the above applications of statistics, the researcher must have at first a very good "feeling" of the data, and should verify rather with statistics the result rather than discover it. 

6) The "Pareto rule of complexity-results" also holds here. In other words with less than 20% of the complexity of the calculations is derived more than 80% of the deduction. The rest of the 20% requires more than 80% more complexity in the calculations.





The next 12 laws have, I believe, originally an interpretation in the experience of living and creating in many physical and non-physical (consciousness) realities. But many people have already given to them a social interplay interpretation. E.g. see the 12 universal laws from Milanovich and McCunes book "The Light Shall Set You Free"(1998). Here, I elaborate a global markets financial activities interpretation.
Six of the laws 1,5,7,8,9,12 deal with the vertical interplay of the levels, and the other six 2,3,4,6,10,11 deal with horizontal interplay at each level.

1. Law of elimination of money in the household economics.

A successful application of the laws of financial activities and the conduction of a successful trading or investment or money saving, will have an effect on the Household Economics equivalent to elimination of the need to use money at all. All that matters is action not money. The equivalent of course is an unconditional survival subsidy, in all ages, either one works or not, that includes and covers money for food, health, transportation, shelter etc Our perspective here is reduction of economic inequalities, not through investments increase of the economic inequalities. To understand it we would require the power law of Pareto of the volume of transactions.  The psychological content of this is of course freedom in activities. Probably some of the main roles of money is to protect fairness in deals when individuals do not have adequate and equal development of consciousness and sense of self-responsibility and also to create motives for social developments. By advancing and becoming successful in creating an income directly from the global financial markets, it eliminates the need for household economics for survival and security. We do not need to pay to be able live in our own planet.



2. Law of rhythms

The content of this law of course is that the cosmic, galactic, solar system and planetary rotational and rhythmic phenomena, modulate and affect the activities of the financial markets, the volume of transactions and the volatility of the prices. This has not to be in a direct way through human consciousness , but also through the cycles of the global climate, seasons, ecology and biosphere, production of raw material and subsequent demand and supply of inputs of business. The previous post no 5 on the 12 rainbow frequencies is the detailed analysis of this law for the financial markets.

3. Law of polarity

This law states that the interplay of the financial activities that determine the prices is polarised to 3 sides, the Demand, or Buyers, or Bulls, the Supply, or Sellers, or Bears, and the undecided or those that hedge and both buy and sell. When it has to do with the growth of an enterprise (stocks or securities) the Buyers (Bulls) and Sellers (Bears) do not behave symmetrically. As Buying bets on the growth and on optimism, it is in the longer run more powerful. But Selling is conditioned on panic, fear, and bad news, and is more abrupt and strong in short term moves. For the currency pairs this is not the case. The polar financial populations are coupled and behave in a coupled way. The coupling in its deterministic dimension can be described with 2-dimensional linear systems of differential equations or with non-linear systems like Voltera's equations, equations of competition (lose-lose), domination (win-lose), and cooperation (win-win).

We may classify 1) demand, or buyers as three types 1.1) Those that buy when the market prices increase following compelling behavior and mimicking other buyers. We call the buyer-bulls. Then 1.2) those buyers, that buy when the market prices fall, we call them buyer-bears, 1.3) Those that simply want to buy whatever the prices are doing. We call them buyer-horses

2) Supply or Sellers are also of three types 2.1) Those that sell when the market prices fall, following compelling behavior and mimicking other sellers. We call them seller-bull. Then 2.2) those sellers that sell when the prices rise. We call them seller-bears. 2.3) Those that simply want to sell whatever the prices are doing. We call them seller-horses

The combination of those 3 cases in any situation in the markets, as populations of demand and supply create 3*3=9 cases , that lead to 3  types of coupling Domination (buyer-horses/seller-horses) Competition (buyer-bulls/seller-bulls or buyer-bears/seller-bears) , and Cooperation (buyer-bulls/seller-bears, or seller-bulls/buyer-bears),  as below. 

4. Law of relativity

The law of relativity states that there is not a global consensus of overbought or oversold, or that the market goes up or the market goes down without a specific reference to one of the layers mainly defined by the 12 rainbow frequencies or law of rhythms. The law of rhythms is also the resolution to the negative greediness and to the converse negative frugality. Not too little not too much. It is the law of rhythms that defines what is too little and what is too much. Another interpretation is that similar but not identical laws hold between different time-frame and money volume scales. 

5. Law of perpetual transfer of activities among layers
This law is the base of the self-similar behaviour of the markets among the rainbow layers or time-frames and capital and organisation scales. It states that any pattern that is developing in a rainbow time-frame and organisation scale, appears also statistically by perpetual inheritance of the activities to a shorter rainbow time-frame and smaller organisation scale. The transfer is from the larger time-frame and organisation scale to the shorter time-frame and organisation scale. In other words a behaviour on a large financial population is inherited as a behaviour too to a smaller financial sub-population of demand and supply. In the deterministic dynamic systems (that the theory of chaos prefers to study) this phenomenon of inheritance and self-similarity of dynamic patterns is quite common.  In addition the deterministic dynamics of the larger time-frame and organisation scale, although invisible to the shorter time-frame and smaller organisation scale, act as probabilistic propensities to the dynamics of the shorter time-frame and smaller organisation scale.

6. Law of attraction (or power law of the volumes) 

This law explains how the financial populations of demand and supply are shaped. (we mean here not so much population of individuals byt populations of assets, transactions, and money flow.They are shaped much like ecological populations are shaped in biosphere. "Birds of a feather flock together". The shaping of the financial population of the same opinion behavior and decision is also through the mass media news, through web-news, direct gossip, thinking etc. There are three types of financial populations, the money savers, the investors and the traders. These types go from less risk to higher risk in this order. By utilising statistics we may describe the growth and decay of a financial population as a discrete stochastic process. The same law also governs the way that business organisations are shaped. The distribution of the size of populations of demand-supply and of the size of assets of  enterprises follows the Pareto (or a Power) distribution. If we take the logarithm of such a distribution , it will become a straight line. More than 80% of the volume of transactions are made from less than 20% of the organizations (Chebyshev's_inequality , http://en.wikipedia.org/wiki/Chebyshev's_inequality). The freedom of the markets is  more than 80% in favor of the large palyers and less than 20% in favor of the small players. In other words, the FREE MARKETS are the kingdom of the large players, after this law of power of volumes.

7. Law of compensation or deeper causalities.

This laws states that the behaviour of the financial populations is not determined solely on short term news but also on the deeper and longer term growth patterns of macro-economic domestic economies (in currencies) and of micro-economic organisations (in stocks or securities). The information of the growth patterns of such macro and micro organisations is published on the balance sheets and macro-economic statistics. Obviously depend also on principles of management, values, on principles and policies in government politics etc. This is commonly known as fundamental analysis. Benjamin Graham is consider a father of the value analysis (fundamental analysis) and Warren Buffet a talented and successful investor and practitioner of it. It is known that due to evolutionary growth the assets size of micro-economic organizations follows the Pareto (or a Power) distribution. The same holds for the sizes of Internet sites, the sizes of rocks, and the sizes of galactic stars. It is a general law of evolution. The statistical distribution of the financial organisation sizes is inherited to the sizes of the transactions in the financial markets. It is also inherited to the distribution of acceleration and speed of the prices. The larger the organisation that executes transactions, the larger the transaction packets, the higher the Demand-Supply coupling force and acceleration and momentum. The higher also the element of determinism (versus randomness) and the higher the probability of anticipation. Within this law also, at massive trading with very small fractions of contracts or lots, it is optimal to follow with a statistical proportionality of the position sizes, the volumes sizes as distributed at the various price levels. Higher volumes are at support-resistance levels Therefore positions sizes would follow a Pareto distribution too. It may be that behind the observable events of the markets there may be a predator Darvinistic will of economic survival but in the observable markets it may not be obvious. 

8. Law of causality and randomness

Although all events are initiated in the determinism and from some cause, from the point of view of an absolute reality, it is not so from the point of view of a human observer. As some information are protected or classified and private or are totally inaccessible in the behavior and decisions of the financial populations, the events are separated to deterministic (we have full information of how and why they occur) and random (we do not have information of how and why they occur). Also randomness has many grades and patterns of it. One of the extreme types of randomness is the random walk. In such a randomness there is 50% chance of movement up and 50% chance of movement down. Often we can be fooled by randomness in the sense of classifying a movement or even as deterministic and predictable or as random and partly predictable, or random walk and absolute non-predictable. The markets are certainly not a random walk. There are mainly two types of fallacies or being fooled: 1) When we perceive a deterministic and predictable event as random (usual in academic researchers) 2) When we perceive a random and unpredictable event, as deterministic with some cause we imagine. (usual in mass media analysts). Mathematics has created the concepts of stochastic process to formulate the intermingling of determinism with various types of randomness, and econometricians have devised many such models. Nevertheless most of the models of econometricians are either very thin slices of the reality of the markets, or unnecessary complicated with intention not in applying them, but for the authors to make academic carrier.

9.Law of correspondence

This law states that although there is a statistical systematic self-similarity among rainbow time-frames or layers and organisation scales of financial activities, there is also a statistical systematic deviation of the self-similarity by the empirical rule of n^(1/2). The shorter term time-frames and smaller time scales have relatively higher noise or volatility, than the larger term time-frames or organisational scales and financial activities layers.

10. Law of action (momentum conservation or law of trend)

This law describes the observable activities of the markets. We can ramified it to the 3 deterministic Newtonian laws a) The law of momentum conservation b) the law of force and acceleration c) the law of action-reaction. The mass and inertia here corresponds to the volume of transactions, and is variable. The position, speed, acceleration to corresponding quantities that are (statistically and stochastically) measured from the prices. Although the Newtonian laws are stated as deterministic, in the markets, after the law 8, are in fact stochastic or statistical. Only the law of acceleration (through any type of indicator that measures it) can give leading (prior) signals at reversals of the path of prices. The momentum (in any indicator that measures it) gives always lagging signals at reversals. The law of action-reaction seems to give the highest probability of anticipation.

11. Law of information

All the relevant financial events are communicated though electromagnetic vibrations and can appear as stored information in the Internet. All economic organisation scales and financial activities time-frames, are connected with the exchange of information. In other words all the financial laws are stated over observable non-classified financial information which is almost immediately communicable. Nevertheless, the law also claims that the markets are not efficient. here is relative only efficiency, as this depends on the perception and intelligence abilities of the investors, as well as on the wealth capabilities and restrictions of the investors. 

12 Law of globalization

This law states that the financial markets all over the planet act and behave as one entity, without disconnected sub-components. Almost simultaneous communicable and observable non-classified information binds all financial activities. This is mainly the result of the business globalisation and Internet globalisation.

We must notice though that the general social action and behaviour laws as above that create the financial system, do not account for pathogeny like the over-debt banking and monetary system.

(To see how the irresponsible private interests of the central banks create the over-debt economy see the link below
 http://overdebtmonetarysystem.blogspot.com/2012/04/1-how-current-monetary-system-creates.html)