Law 1: Supply and Demand
Price rises when demand exceeds supply and falls when supply exceeds demand. When they are balanced, price moves sideways. This sounds obvious, but the skill is in judging the balance from the chart: the size of bars, where they close, and the volume that accompanies them.
- Wide bars closing near the high on rising volume suggest demand is in control.
- Wide bars closing near the low on rising volume suggest supply is in control.
- Narrow bars on low volume suggest indecision or a lack of interest.
Law 2: Cause and Effect
A trend needs preparation. The time and activity spent in a trading range is the cause; the trend that follows is the effect. A long, active range can fuel a larger move than a brief pause.
Traders use this to estimate targets. By measuring the width of the range (often with a point-and-figure count or simple range projection), you obtain a reasonable expectation for how far the move may travel.
Law 3: Effort vs Result
Volume is the effort; price change is the result. When they agree, the move is healthy. When they disagree, something is being absorbed.
For example, a surge in volume with almost no price progress suggests the opposite side is absorbing the effort. Low volume with a big price move suggests a lack of opposition and often a move that can be faded or that lacks follow-through.
Harmony between effort and result confirms a trend. Divergence warns of a change.
Putting the Laws Together
Use the laws as a checklist. Who is in control (supply and demand)? Has the market built enough cause for a meaningful move (cause and effect)? Does volume confirm the price action (effort versus result)? If all three agree, your trade has a solid foundation.