Flying in the Markets
Flying in the Markets
There are a lot of parallels we can draw from things we see in our everyday lives and trading. I am writing this article as I am flying over North America on a commercial flight. I looked out the window and was reminded of something that one of my instructors mentioned to me in order to understand price movement better.
An airplane flies not because the air under the wing pushes it higher. In fact, the top of an airplaneís wing is curved so that the air passing over it must travel further and move faster than the air moving below the wing. This faster airflow creates what is called lift and allows big pieces of metal to fly.
In order to go higher, a pilot must increase the force of lift on the plane. This is done by increasing the angle of attack. The angle of attack is the angle the wing of the plane is making compared to the air. If we point the wing higher, then the air must move faster and there is more liftÖ the plane will rise. Lower the angle of attack and the plane drops in altitude.
This is similar to price movement in a stock or the markets themselves. When there is a large imbalance between buyers and sellers, price will move steeper in the trend. With more and more volume accelerating this movement, the angle of attack is increased and the price trend strengthens.
There is a limit to the angle of attack that a plane can use. If the pilot increases the angle too much, the wind will not be able to flow over the top of the wing and the plane will stall. In a stall the plane will drop from the sky uncontrollably. To regain control and flight, the pilot must bring down the angle of attack and also increase power to the plane engines.
We see the same occurrence in the markets. When a stock has been moving well in a trend but all of a sudden has its angle of attack increased too much by a jump in the number of buyers or sellers, it too will stall in the trend. In a bullish move, this is a result of a lack of buying pressure due to the fact that everyone who wanted to buy already being in and others realizing prices have gone up too far and they are waiting for a pullback in order to buy.
Figure 1
The same thing happens for price stalling on fast moving drops. The panic selling allows for many traders to exit shares but once they are out, there arenít any new sellers to continue the move.
Figure 2
Large candles and high volume can often mark areas where price will stall. Emotionally, it is easy to try and jump into trades just before the stalling, but this is a sure route to loss. Just as a plane can recover from a stall so can a trend in price. Price must first correct and find more buyers or sellers depending on the direction before continuing.
About Brandon Wendell
Brandon has appeared as a guest on CNBC, Bloomberg TV, and Fox Business Channel. He has conducted special seminars for CNBC staff on technical analysis of the financial markets. Brandon has published articles in The Trader's Journal, Forex Journal, Investor Magazine, and Investor’s Business Daily. Brandon has also appeared as an industry expert speaker at the Trader’s Expo, The Money Show, and Asia Traders and Investors Conference.
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