Time Compression Trading: Exploiting Multiple Time Frames in Zero Sum Markets (Wiley Trading)

212 Pages·2010·3.07 MB·English

by  Jason Alan Jankovsky

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Time
Compression
Trading
Exploiting Multiple Time
Frames in Zero-Sum Markets
JASON ALAN JANKOVSKY
JohnWiley&Sons,Inc.
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Copyright(cid:2)C 2010byJasonAlanJankovsky.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
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LibraryofCongressCataloging-in-PublicationData
Jankovsky,JasonAlan,1961-
Timecompressiontrading:exploitingmultipletimeframesinzerosum
markets/JasonAlanJankovsky.
p.cm.–(Wileytradingseries;460)
Includesindex.
ISBN978-0-470-56494-3;ISBN978-0-470-89248-0(ebk);
ISBN978-0-470-89249-7(ebk);ISBN978-0-470-89250-3(ebk)
1.Investmentanalysis–Psychologicalaspects. 2.Speculation–Psychological
aspects. 3.Competition. 4.Timeperspective. I.Title.
HG4529.J362010
332.6401(cid:3)9–dc22
2010014482
PrintedintheUnitedStatesofAmerica.
10 9 8 7 6 5 4 3 2 1
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Contents
Preface v
Acknowledgments xi
Introduction xiii
PART I The Uniqueness of Zero-Sum Markets 1
CHAPTER 1 Basics of Zero-Sum Markets 3
CHAPTER 2 Who Is the Market? 13
CHAPTER 3 The Four Components of
Market Structure 23
CHAPTER 4 The Illusion of Technical Analysis 33
CHAPTER 5 The Psychology of Initiating
and Liquidating a Position 41
PART II The Theory of Time Compression 49
CHAPTER 6 The Development of the Theory 51
CHAPTER 7 Time Compression and
Technical Analysis 59
CHAPTER 8 Forced Liquidation and Order
Flow 67
iii
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iv CONTENTS
CHAPTER 9 How Leverage Increases the
Potential for Forced Liquidation 75
CHAPTER 10 How Traders Lose Perspective 81
PART III Exploiting Multiple Time Frames 89
CHAPTER 11 Basics of Multiple Time Frames 91
CHAPTER 12 Three Market Potentials:
Uptrend, Downtrend, and Range 105
CHAPTER 13 The 12 Choices in Executing
Trades 113
CHAPTER 14 Thinking in Probabilities 119
CHAPTER 15 Using Multiple Time Frames 127
PART IV The Five Basic Market Structures 137
CHAPTER 16 Topping Market 141
CHAPTER 17 Bottoming Market 151
CHAPTER 18 Secure Uptrend and Downtrend 163
CHAPTER 19 Secure Range 171
CHAPTER 20 Conclusion 183
About the Author 185
Index 187
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Preface
I n my second book, The Art of the Trade (John Wiley & Sons,
2008), I tell the story of my experience trading crude oil during
the first Persian Gulf War. Because the book was a narrative of
mytraderdevelopment,itwasn’tnecessarytogointotheuniquede-
tails that led me to vastly rethink my understanding of the markets
excepttodiscusstheendresult.TheendresultwasthatIfinallygot
thepictureofwhattradingisreallyallabout.Themoment-to-moment
experienceandwhatwentthroughmymindasthisawakeningtran-
spired would be a bit lengthy to include here, but I want you to see
the crux of the process. That process developed into the theory of
timecompression.
Time compression is all around us and is a direct result of how
we see the world and how we see our place inside of it. It is the in-
evitabledevelopmentofourmethodofmakingactions.Inthecoming
chapters, I break what I feel are the most basic parts of the theory
intopiecessothatyoucanbegintounderstandsomethingthatisnot
normallypartofyourregularstreamoftradingthought.
Part of what you have to do is refocus your mind away from
seeing the markets as a place where something happens into a pro-
cess that is happening. The markets are not a place in the regular
sense that they are “in” Chicago, for example, but a process that
is happening in Chicago. If we pick just one market to explain,
most traders don’t really understand that when the price of corn
changeshere(inChicago),itchangestheentireworld’sviewofwhat
grain might cost moving forward, which affects the entire world-
view of the price of food moving forward, which changes the en-
tireworldviewonsomethingelsemovingforwarduntilallourheads
are spinning trying to answer the questions What does this mean,
and what do I do to profit? The market is alive and functioning
v
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vi PREFACE
as a process that involves a very complex set of group dynamics.
What happens here in Chicago is not the market “in Chicago”; it is
the process of thought/actions playing out in the mind of everyone
participating everywhere in the world. What creates time compres-
sionistheprocessitselfplayingoutwhilealltheparticipantswatch
Chicago.
When the answer to the questions What does this mean, and
what do I do to profit? becomes an urge to take action from any-
where,yougetanewtradedprice.Whentradersanswerthatquestion
for themselves, the answer becomes an order to buy or sell—which
becomestheprocessofthemarket,whichmakespricesmove.How
does that urge to take action play out as prices are moving? Where
doesthaturgetoactioncomefrom?
Inmycrudeoilexperience,Iwasnotincontrolofmyplaceinthis
processanymorethanmosttradersareincontroloftheirplaceinthe
process.Mosttradersurgetoactionis reactionarybasedmostlyon
trying to answer the questions What does this mean, and what do
I do to profit? In the case of time compression, the “taking action”
partisonestepfurtherremoved intoaplacewheretradershave no
choice in the matter.Formosttraders,theirurgetoactionistiedto
how prices move. Because they can’t control price action either for
themselvesoragainstthemselves,itfollowsthattheyusuallydecide
todosomethingbasedlargelyonwhattheythinkpricesmeantothem
personally, not what the process is showing. That means they feel a
senseofpowerlessnessorthattradingisaformofgambling(which
is patently untrue). In effect, most traders preordain how they will
moveforwardduetohowtheyseethemarketsandtheirownplace
withinthem,notbecausetheyunderstandtheunderlyingprocessof
the market. When they have no choice in the matter, the process is
acute and theend resultischaos totheequity. But whenthischaos
happens, somebody was on the right side. How did that particular
tradergetthere?Wasitjust“luck”?
OnceIunderstoodthatthingswerenotwhatIthoughttheywere
andneitherwasI,Icouldformabetterwayoflookingatpriceaction
andwhatitmostlikelymeantmovingforward.Icouldbettercontrol
myactionstoparticipatebecauseIbetterunderstoodhowthegame
isactuallyplayedandhowbesttoplayit.Icomparetraditionaltech-
nicalanalysis(TA)tothetheoryoftimecompressioninawaywhere
traders can see that TA is trying to provide the same benefit that a
complete understanding of time compression can give you. You can
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Preface vii
thinkofTAaslookingatapicturewhiletimecompressionasbeingin
thepicture.Imaginelookingatapictureofafamousmodelandthen
comparingthattoactuallybeingonadatewithhimorher.Ithinkyou
would see a vast difference in the two experiences. In other words,
understanding how time becomes compressed willcomplete the un-
derstandingthatTAbeginstogiveyou.Timecompressiongivesyoua
sharperedgetobeginwith,therebyhelpingyouuseyourtoolsbetter,
whichgivesthebenefitwearealllookingfor:areasonableanswerto
thequestionHow do you know when a market price is too high or
toolow?
To outline and define the material for you, I make an assump-
tion.Iassumemosttradershaveabsolutelynoideawhatazero-sum
market is really all about or how it functions. When I do speaking
engagementsorteachmypsychologyoftradingcourse,Ialwaysask
ifanyoneparticipatinghasnever heardtheterm“zero-summarket.”
There are always a few hands raised from traders who have never
heard the term. Some of these traders have been trading for several
years yet have no idea that they are trading in a zero-sum market.
From my point of view, that is like trying to build a house without
knowinghowtoreadablueprintorswingahammer.
InPartI:TheUniquenessofZero-SumMarkets,Igointosomede-
tailaboutwhatazero-summarketreallyisandwhythoserulesofen-
gagementdifferfromotherkindsofactivity.Thetradersthemselves
arepartofcreatingtheenvironmentofazero-summarket,andtheir
choicescreatethepriceactioneveryoneiswatching.Otherpeople’s
choicescreatethepriceactionyouaretryingtoexploit.Ilookathow
themarketiscreatedbytheactionsoftheparticipantsandhowthe
participants are making their choices. I want to show you how this
processplaysoutinmosttradersandhowthatcreatestherealstruc-
ture of the market, not the intended or expected structure. Traders
function as individuals first, but the exact same process is going on
insideeveryindividualmarketparticipant;therefore,theappearance
ofthemarketisidenticaltoanyoneperson.Thisiswhycrowdsbe-
haveinthesamepredictableway.Thisiswhyalllosersbehaveinthe
samewayandexpresssimilarresponsestohowtheirequitychanges.
Once we know this to be the case, it is vastly easier to see where a
changeinunderlyingmarketstructureislikelytohappen,providing
aplacetobuyloworsellhigh.
In Part II: The Theory of Time Compression, I begin breaking
downthebigpictureintosmallerpiecesthatmightbededucedfrom