Table of Contents

Title Page

Copyright Page

Preface

Acknowledgments

Introduction

PART I - The Uniqueness of Zero-Sum Markets

CHAPTER 1 - Basics of Zero-Sum Markets

WHAT IS A ZERO-SUM MARKET?

WINNERS AND LOSERS

A MARKET OF PEOPLE, NOT PRICES

CHAPTER 2 - Who Is the Market?

THE CONCLUSION-MAKING PROCESS

A GLOBAL CONSTRUCT

CHAPTER 3 - The Four Components of Market Structure

TIME

VOLUME

OPEN INTEREST

PRICE

SYMBIOTIC MARKET STRUCTURE

CHAPTER 4 - The Illusion of Technical Analysis

A PROBLEM OF SHARED DATA

REMEMBER THE PROCESS

CHAPTER 5 - The Psychology of Initiating and Liquidating a Position

THE BASIC TRADER CONFLICT

SUMMARY OF PART I

PART II - The Theory of Time Compression

CHAPTER 6 - The Development of the Theory

THE COMMON THREAD

IT ALL STARTS WITH THE INDIVIDUAL

CHAPTER 7 - Time Compression and Technical Analysis

PRICE CHANGES STIMULATE URGE TO ACTION

URGE TO ACTION CREATES ORDER FLOW

CHAPTER 8 - Forced Liquidation and Order Flow

THE REASON BEHIND RISK TAKING

THE BREAKING POINT

CHAPTER 9 - How Leverage Increases the Potential for Forced Liquidation

“RIGHT NOW” THINKING

CHAPTER 10 - How Traders Lose Perspective

WHEN PERSPECTIVE MEETS MISDIRECTION

THE LOSING TRADERS’ WORLD

HOW WINNERS DIFFER

PREDICTION VERSUS OBSERVATION

SUMMARY OF PART II

PART III - Exploiting Multiple Time Frames

CHAPTER 11 - Basics of Multiple Time Frames

INWARD OR OUTWARD BIAS

TIME WORKS AGAINST LEVERAGE AND URGE TO ACTION

RANDOM NOISE AND ORDER FLOW

CHAPTER 12 - Three Market Potentials: Uptrend, Downtrend, and Range

ORDER-FLOW POTENTIAL IN EACH MARKET STRUCTURE

TWO PREVAILING REALITIES OF THE ORDER FLOW

CHAPTER 13 - The 12 Choices in Executing Trades

BEYOND LONG AND SHORT

THE BENEFIT OF MORE CHOICES

CHAPTER 14 - Thinking in Probabilities

ASKING BETTER QUESTIONS

DEVELOPING A PROBABILITY MIND-SET

CHAPTER 15 - Using Multiple Time Frames

MARKET QUALITY AND POTENTIAL ORDER FLOW

FUNDAMENTALS AND THE URGE TO ACTION

SUMMARY OF PART III

PART IV - The Five Basic Market Structures

CHAPTER 16 - Topping Market

WHEN IS A MARKET PRICE “TOO HIGH”?

THE PERCEPTION OF PRICE

WHAT SMALLER TRADERS SEE IN A TOPPING MARKET

CHAPTER 17 - Bottoming Market

CHARACTERISTICS OF A BOTTOMING MARKET

CHAPTER 18 - Secure Uptrend and Downtrend

HOW SECURE IS THE TREND?

SECURE TRENDS ARE NOT TIME COMPRESSED

CHAPTER 19 - Secure Range

PSYCHOLOGY OF RANGE

SUMMARY OF PART IV

CHAPTER 20 - Conclusion

About the Author

Index

Copyright © 2010 by Jason Alan Jankovsky. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data

Jankovsky, Jason Alan, 1961-

Time compression trading : exploiting multiple time frames in zero sum markets / Jason Alan Jankovsky.

p. cm. - (Wiley trading series; 460)

Includes index.

ISBN 978-0-470-56494-3; ISBN 978-0-470-89248-0 (ebk);
ISBN 978-0-470-89249-7 (ebk); ISBN 978-0-470-89250-3 (ebk)

1. Investment analysis-Psychological aspects. 2. Speculation-Psychological aspects. 3. Competition. 4. Time perspective. I. Title.

HG4529.J36 2010

332.6401’9-dc22

2010014482

Preface

In 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 my trader development, it wasn’t necessary to go into the unique details that led me to vastly rethink my understanding of the markets except to discuss the end result. The end result was that I finally got the picture of what trading is really all about. The moment-to-moment experience and what went through my mind as this awakening transpired 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 time compression.

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 inevitable development of our method of making actions. In the coming chapters, I break what I feel are the most basic parts of the theory into pieces so that you can begin to understand something that is not normally part of your regular stream of trading thought.

Part of what you have to do is refocus your mind away from seeing the markets as a place where something happens into a process 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 changes here (in Chicago), it changes the entire world’s view of what grain might cost moving forward, which affects the entire worldview of the price of food moving forward, which changes the entire worldview on something else moving forward until all our heads are spinning trying to answer the questions What does this mean, and what do I do to profit? The market is alive and functioning 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 compression is the process itself playing out while all the participants watch 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 anywhere , you get a new traded price. When traders answer that question for themselves, the answer becomes an order to buy or sell—which becomes the process of the market, which makes prices move. How does that urge to take action play out as prices are moving? Where does that urge to action come from?

In my crude oil experience, I was not in control of my place in this process any more than most traders are in control of their place in the process. Most traders urge to action is reactionary based mostly on 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” part is one step further removed into a place where traders have no choice in the matter. For most traders, their urge to action is tied to how prices move. Because they can’t control price action either for themselves or against themselves, it follows that they usually decide to do something based largely on what they think prices mean to them personally, not what the process is showing. That means they feel a sense of powerlessness or that trading is a form of gambling (which is patently untrue). In effect, most traders preordain how they will move forward due to how they see the markets and their own place within them, not because they understand the underlying process of the market. When they have no choice in the matter, the process is acute and the end result is chaos to the equity. But when this chaos happens, somebody was on the right side. How did that particular trader get there? Was it just “luck”?

Once I understood that things were not what I thought they were and neither was I, I could form a better way of looking at price action and what it most likely meant moving forward. I could better control my actions to participate because I better understood how the game is actually played and how best to play it. I compare traditional technical analysis (TA) to the theory of time compression in a way where traders can see that TA is trying to provide the same benefit that a complete understanding of time compression can give you. You can think of TA as looking at a picture while time compression as being in the picture. Imagine looking at a picture of a famous model and then comparing that to actually being on a date with him or her. I think you would see a vast difference in the two experiences. In other words, understanding how time becomes compressed will complete the understanding that TA begins to give you. Time compression gives you a sharper edge to begin with, thereby helping you use your tools better, which gives the benefit we are all looking for: a reasonable answer to the question How do you know when a market price is too high or too low?

To outline and define the material for you, I make an assumption. I assume most traders have absolutely no idea what a zero-sum market is really all about or how it functions. When I do speaking engagements or teach my psychology of trading course, I always ask if anyone participating has never heard the term “zero-sum market.” 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 knowing how to read a blueprint or swing a hammer.

In Part I: The Uniqueness of Zero-Sum Markets, I go into some detail about what a zero-sum market really is and why those rules of engagement differ from other kinds of activity. The traders themselves are part of creating the environment of a zero-sum market, and their choices create the price action everyone is watching. Other people’s choices create the price action you are trying to exploit. I look at how the market is created by the actions of the participants and how the participants are making their choices. I want to show you how this process plays out in most traders and how that creates the real structure of the market, not the intended or expected structure. Traders function as individuals first, but the exact same process is going on inside every individual market participant; therefore, the appearance of the market is identical to any one person. This is why crowds behave in the same predictable way. This is why all losers behave in the same way and express similar responses to how their equity changes. Once we know this to be the case, it is vastly easier to see where a change in underlying market structure is likely to happen, providing a place to buy low or sell high.

In Part II: The Theory of Time Compression, I begin breaking down the big picture into smaller pieces that might be deduced from traded prices and price action in the markets. It is important to note that a solid grasp of zero-sum markets is essential in order for you to understand the crowd thinking that is the process of the markets and the creator of time compression. The theory itself is not complex and is more of a social engineering idea, but because we are discussing the markets as the place where this process happens, you need a firm grasp on what makes the zero-sum marketplace unique and different from other things that create time compression. Time compression in the markets creates a flow of money to someone and a flow of money away from someone. This changes the dynamic of the markets moving forward because the market losers are different from the winners after the event unfolds.

In Part III: Exploiting Multiple Time Frames, we begin seeing how time compression is disclosed in the market by using multiple time frames. Most traders are unaware that competing time frames are why the markets suffer big moves unexpectedly or why trends develop the way they do. After you can see how larger numbers of people all coming to the same conclusion will tip the balance of the order flow through the markets, you can begin to try to exploit time compression to answer that big question: Is the market price too high or too low?

Part IV: The Five Basic Market Structures includes a few examples of studies I personally have made using the theory and how you can better understand what to look for. The idea with the illustrations is to get a real-time feel for what is happening and how that likely will create a tipping point. The important thing is to see the theory in context so that you can try to develop a better edge than just chance. It is my view that when you can get an edge that is better than chance, you can exploit the market participant with absolute certainty because no one individual you are trading against has an edge better than you. Your trade results can approach 100 percent winners under certain conditions.

Each chapter ends with a brief note called “The Trader’s Life.” In these sections, I include a few thoughts from my personal trading that I think will help you better understand how the various parts of this book interrelate with each other and how to see the whole concept in the context of your daily trading. I believe that trading is really an art form that requires a deeper focus than just getting information and applying it. Traders need to see that successful speculation involves a lot more than simply analyzing markets or applying a trading system. Successful speculation involves an understanding of how people behave under certain conditions. Sometimes, we can see that in the price movement; sometimes, we have to discern that from other sources. Regardless, successful trading is more than just charts and statistics.

So let’s get started on the theory of time compression.

Acknowledgments

I want to say thank you to all those friends and family members who supported me after I missed all those pool parties, barbecues, and get-togethers when my weekends filled up with writing this book. Special thanks to my editor, Kevin Commins, for keeping me on track with the manuscript, thanks to the staff at Wiley for providing the technical help to complete a working manuscript on time, and thank you to all my subscribers who encouraged me to keep at it when it seemed like a big bite to chew.

Introduction

This is my third publication for John Wiley & Sons, and I thought it might be important for the reader to know that this has been by far the most challenging for me to write. The content is more advanced, and it will likely take more than one read to really grasp the material. Sometimes, writing about something you know is harder because it is personal enough that you can’t quite say it as you feel it. In my view, traders who have a bit more experience with the markets might intuitively sense what I am getting at with the concept of time compression, but that term has never been used by authors working in the field of trading education or analysis. In my personal trading, I have faced every single situation ever faced by any reader, and I can say with complete confidence that I understand this idea completely and know how to use it. The issue was how to communicate it to I intentionally tried to keep things simple, and I hope that the reader doesn’t feel like I have left anything out.

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!

Lesen Sie weiter in der vollständigen Ausgabe!