# E=mc2 and Trading, from David Lamb

May 8, 2007 |

Einstein's groundbreaking theory has been proven in so many instances that I thought it would be interesting, in my very limited way, to try to adapt the theory to trading in the markets. It is my intent to change the name of the variables in the famous equation, E=mc2, into known trading variables and see if there is any possibility to there being constants in the world of trading. And I feel this would allow me to understand how to manipulate my collected data in order to achieve better results.

If E = energy (the amount of work a physical system can do on another), m = mass (the invariant mass is an observer-independent quantity that is synonymous with mass), and c = speed of light, where c is the constant. Speed of light is the absolute in this formula, and nothing that I am aware of can reach this speed.

A consequence of the theory of relativity is the inevitable relation between energy and mass. Mass and energy are equivalent, or one will affect the other (although a relatively small amount of mass is equivalent to a large amount of energy, I do not say that they are equal in volume, only in affect).

As energy is exuded to increase the speed of anything, the mass of that object is increased, making it more difficult for further speed increases, or a continuation of the same speed. This, in turn, disables any further mass/energy accumulation and, in all probability, the very essence of this state is that the event will lose energy/mass. It is my understanding that everything in the measured universe, from the macro to the micro levels, is in a constant state of progression or regression, never stagnation. Therefore, as regression is experienced the ability to attract more mass/energy is enhanced and the cycle starts all over again.

As my goal is to draw comparisons of the energy/mass equation to the trading world, with what variables can I substitute E=mc2? Perhaps trading volume and forward propulsion of price is equal in influence, or one propagates the other. For instance, as forward propulsion of a particular price direction increases, trading volume should increase. And this should make it harder for the market to experience an increase in perpetual forward propulsion.

If this is true then the market should experience exhaustion phases which, in turn, should lose some trading volume and forward propulsion. The expected weeding out the weak is now experienced. These exhaustion phases should immediately (time is relative, however) attract trading volume from the more astute traders, which then sets in motion the forward propulsion again. This would offer an explanation of how it is possible that the stock market has experienced overwhelming bullish forward propulsion coupled with momentary exhaustion phases throughout the last century.

If trading volume and forward propulsion of price can be equaled to the "e" and the "m" of the Einstein equation, then what can I use for the absolute, or the constant, in the trading equation? Some possibilities are as follows:

1. Time values are always the same (i.e. seconds, minutes, hours, days, etc.) Depending on what type of trader one is, the time value needs to remain constant to see continuities. Hence, different values of time series analysis. 2. Price increments or values. For instance, the minimum tick move for t-bonds is 1/32 and this never changes. For some futures contracts there are limits to how much that market is allowed to move in one day, three. For every seller there is a buyer, and the slew of possible definitions of this statement, just as long as it remains constant.

The most important absolute variable that any trader can plug into this formula totally depends on the type of data that they collect. The three examples I offer above are very elementary and subject to manipulation. There are, I am most sure, a high amount of possible "absolutes" that other traders will find more important to them, which is to be expected.

Although this idea is far from complete, I look forward to testing this hypothesis and I thank the readers for allowing me to use them as a sounding board in my never-ending search for understanding of how the markets work.

(E)motion in trading = (m)argin calls X number of (c)ontracts squared.

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