Today, we are going to discuss the law of Physics mentioned in the title of this article and look at a simple application of it in trading. And, let me say at the outset that what I’m about to talk about is a simple application of this law as it relates to trading rather than the “be all end all” of trading (sometimes referred to as the “Holy Grail of Trading”). However, when this law is applied properly to trading, it yields some pretty good results.

Okay, let’s get started.

Shown below is a daily chart of the FX Eurodollar market.

As you know, the law of action and reaction has been around since the beginning of time I certainly make no claim to its discovery nor do I lay any claim to a method of using it in trading. I’m sure I’m probably not the first person to see the application of this law in a chart.

Nevertheless, a number of years ago, while I was experimenting with different trend line techniques, I discovered it quite by accident and thought it had potential.

It does, and has many possible applications, but I will only focus on a few examples here.

The first application is probably the most obvious, and that is to use this concept for future time and price projection points in the market.

I wish to point out here that, although this concept can be used for future time and price projection, it does not always work perfectly or 100 percent of the time. The chart shown above is a good example of a situation where it did work well, and that is why I chose it (using a daily time frame).

The first point I used is the swing low on April 22, 2009. I drew a trend line from April 22 to the first significant swing high on May 13, 2009. This first trend line can be considered the action line.

Next, I drew a trend line connecting the swing high of May 13 with the swing low of May 18, 2009. This trend line can be considered the reaction line.

Then, I simply copied the first action line and attached it to the low of May 18 to get our future action line.

As you can see in the daily chart, the future action line supplies a wealth of potential information. First and foremost, it can act as a trend line for price action.

Secondly, the end point of the future action line can act as a possible future price level projection.

Thirdly, the end point of the future action line can act as a time projection for when the possible high in the market will come in or point to a future swing point or reversal.

Also, you can copy the first reaction line and connect that to the end point of the future action line to get yet another future swing point and / or possible reversal point in the market, as well as a possible projected market retracement level.

I have only shown you a few possibilities of what kind of information can be gleaned from this simple technique. It can also be used in any time frame you choose.

How do you trade it you ask?

I will leave that up to you.

*Reprinted (and modified) with permission from Vincent Troncone. http://www.livefuturestrading.com | info@livefuturestrading.com

Futures and options trading involve high risk, and you can lose a lot of money. When investing in futures, you may lose more than your original investment. When purchasing options, you may lose all of the money you invested. According to many experts, most individual investors who trade commodity futures or options lose money. There is a substantial risk of loss in trading futures and options. Do not risk money you cannot afford to lose. Past results are not necessarily indicative of future results. There is no guarantee that the information in this article will generate profits for the reader. All charts are provided by FutureSource, a product of eSignal.