The Finance Book Club

Chapter 4 - The Illusion of TA
Reading this chapter, it brought to mind the scene in every courtroom drama, where the audience knows the facts of the case already so every time counsel brings up something that both parties agree on they shout ‘stipulated!’ and it just moves the proceedings along.

Here, JJ comes out against TA, calling it ‘clairvoyance for profit’ and discrediting its consistent use to make profits. I’ve talked about this at length, and if you don’t already know, I’ve decided to no longer review books about TA, and I don’t use TA (in the usual formats) for any of my trading, so this whole chapter is ‘stipulated’.

TA is mumbo-jumbo/voodoo. However, JJ is careful not to offend too many true believers. If you believe in it, that’s fine, he says. He doesn’t want to open up the Pandora’s box of a heated debate about TA, and neither do I!

What we need to keep in mind, says JJ, is that all traders use some form of analysis, and this generates trust which is the necessary ingredient to induce a trader to take a risk.

A Problem of Shared Data
Everyone’s using the same tools and charts, basically. And as I’ve said before, even if you had a magic bullet (AI?) once you started making too much money the whole market would change to adjust to this imbalance.

Any interpretation of TA could be interpreted a few different ways by different parties. This is why you still get buyers and sellers for any given technical situation.

TA forecasts are no better than chance. They are wishful thinking.

We can’t use price as the starting point for any analysis meant to forecast price because, “Any serious engineer, mathematician, or statistician will tell you it is against the laws of mathematics, calculus, or logic to use variable A to predict variable A. The whole point of prediction in any mathematical formula is to take a set of known constants to predict an unknown variable; and you can’t predict a variable using the same starting variable no matter what you do with the intervening formulas.”

TA is just a belief structure. Like religion for traders?

Remember the Process
One useful way to find turning points in the market is to watch other traders’ ‘black boxes’ (opaque/mysterious algo traders, of which I’m guilty of building a few) and when those systems advise taking a trade, adopt the opposite position. Copper the public’s bets!

JJ says he’s not calling black boxes ‘bad’ or ‘useless’ but he is. They are only possibly useful for the inventor.

“There are a huge number of market participants who come to conclusions based on things that can’t possibly be accurate.” Almost all of which are very complex.

JJ says TA can help us find the losers in the market. But then the chapter ends just as this tantalizing notion is dangled. I hope he comes back to this.

Trader’s Life
JJ points out that he considers himself intelligent and highly analytical, technical, and despite this, or maybe because of this, he struggled with trying to get TA to work. He didn’t want to believe that the markets could be random or that they couldn’t be ‘solved’ somehow.

“If you had spent your whole life learning and even teaching something that later you found out to be a lie, wouldn’t you be faced with an existential crisis?”

What if that thing isn’t TA, but the ‘art’ of trading itself? I suspect this is where most people quit, after having this thought. Only someone very foolish, desperate or lucky would keep going, possibly some combination of all three.

JJ keeps walking back his conclusions about TA, saying it’s not entirely useless, just that it promises more than it can deliver, and I suppose that is a safer position, because who knows what the future might bring.

Next - the psychology of initiating and liquidating a position

Hopefully, they don't follow him to start arguments here like they do in the other threads lol.

Here I am just going to be a quiet speaking mouse. Knowledge and skill go hand in hand. Raw skill tends to be more about instinctive "XYZ" that is undisciplined. Raw Knowledge alone is just intellectual information set in categories. My query re: opportunism has been answered by clemmo FOR clemmo's view on it all. Of course I hope this view will mature through time. I started out doing things that many only read about in books now. Floor trading, pit work etc. I learned through the repetitive use of a top down bottom up view on money, society and trading and investing, not tooting my horn just noting it here. The books I offered are to introduce different or new dynamics to one's thinking re: markets, people and society. While many always try to maintain a 'black and white' perception and knowledge base with their trading, it's important to note that there's this grey area where the real work occurs. I see most people on these sites will do almost anything to deny this grey area exists. Why? Well I could posit some ideas why, but I am a mouse right now, so I will just whisper a few ....... people are afraid of what they do not understand because it is in conflict with living and breathing as a consumer ......... people believe they are a degenerate type of casted mold of "a human" so they have put themselves in the basement and are scared to look outside ........... people do not want anymore responsibility in their lives, even if Life is begging for their input. It's the same in trading. I will need to go through the thread more closely at some point to make proper notes, but understand that for me it's not about nitpicking, merely to bridge real with written. As to market beliefs, I don't work that way and do not operate as someone who overuses a philosophy of any type, despite what many around may believe. This is why I always suggest to people to create a blueprint of the world markets etc. There's simply too much information and this is why I mentioned about the erroneous points. Playing leap frog with perceptions is a great way to burn out or worse. The people who understand the grey area are the ones who do better because they're not playing catch up and being constantly behind the eight ball. There are indeed "things" that do not change. For me, once people learn how the debt element fits into everything, hopefully people can transition from pure opportunist to something more/better. As I said, I'm a mouse here and now, so that'll do I think.

Peter

Well said, Kefada.
It often amazes me why folks wish to do that.

I remember as a kid (long time ago lol) I was watching a USA based TV show about debating teams.
I assumed lol at the time it meant folks just argued from 'their point of view'.

Until I found out those particular debating teams had to argue the point from the OTHER SIDE, the alternate or opposite side to their "own belief views'.
Now that is Lateral.

Now we are moving. imho.

And if I remember, it's not just taking the simplistic opposite side to a trader TA, which has also been suggested elsewhere and which, again just imo,
would likely still only bring the same 50/50 outcome for a trader.

Indeed. I've tried one form of that, (trading against sentiment) not very successfully.

Chapter 5 - The Psychology of Initiating and Liquidating a Position
In time-honoured trading book fashion, before he can get to the main course (time-compression) JJ needs to talk about something else first.

JJ proposes that the psychology surrounding an active position is different than the usual conclusion-making process.

“Time compression results from the ‘how and when’ those (entry and exit) orders are placed.”

The Basic Trader Conflict
Every trader processes info according to personal preferences, which is why two traders can look at the exact same information and reach opposite conclusions.

At the moment a trader places an entry they must believe something that ‘works against them’. They must believe the time/price is just right for making a profit. Then if the trade goes against them they face a building conflict regarding when to exit. The same conflict exists if the trade goes in their favour.

“At the moment of entry into the market, regardless of the actual outcome of the trade, traders are beginning a conflict/resolution cycle in their minds that operates completely independently of the underlying structure of the market or the order flow.”
This conflict/resolution cycle takes place entirely in the mind. Only the trader himself can resolve this conflict. Regardless of what I think about this statement, I think the next idea is what JJ is really getting at.

“It is when traders have no choice in the resolution of the conflict that we get time compression, and that is where the most significant changes in order flow happen. When I say “no choice,” I mean that traders feel they have no choice.”
Now this is a definite statement, and it’s something we’ve talked about before. The maximum pain threshold. However, does this not also include margin calls and stop-outs? There is no choice involved in those and they are assuredly excellent reversal points, because who among us who have had the misfortune of blowing an account haven’t seen the market reverse exactly after that event? The market loves to grind down counter-trend traders and then reverse once there is nothing left to grind.

“The market never sees what the price changes do to the particular account that completes the cycle of getting into and then out of the market.” At least in retail forex, this is simply not true. The winning/losing sides account balances and the volume of open orders is of keen interest to every dealer and market maker. I assume this is true even in equities, but definitely in CFDs.

“How traders (as a group) are resolving this self-created conflict cycle becomes the order flow.” I guess the debate now becomes, how big of a group, a ‘group’ must be to initiate system-wide changes. In my experience, not very big.

All price action is a threat to someone at any time. The underlying psychology of market structure is conflict resolution. The methods of resolving the conflict have been thoroughly covered in this thread.

1. Using mental stops
2. Wait 3 bars and take a profit
3. Don’t let winners turn into losers
4. You can’t go broke taking a profit
5. Quit for the day after 3 losers
6. Etc.

“When orders all pile up at one particular time/price relationship, we have time compression, and a large change to the order flow is inevitable.”

Trader’s Life
Understanding how order flow develops through the market, can be gained by understanding your own reactions to perceived conflict.

JJ finds that holding his positions for longer becomes easier the longer he allows for a trade to work.

“It is important to know that most traders put their exit orders inside the range for the time frames they are trading. For the most part, that means most of the exit orders (stop-loss orders) are within the range of the last day or so.” He places his exit orders outside the daily range of the past day or two. As long as the trade is working, he keeps his exit orders outside that range, even if it means giving back a large amount of open trade gains.

“Your winning approach will involve thinking about where losing traders will have to liquidate their loss to resolve their conflict.”

Now imagine how easy this is for a broker who has access to all your records, including your age, your income, your gender, and automated algos who know your trading history, and past trading behaviour patterns. They know when you’ll place your next trade almost as well as you do. And they know where price needs to go to ensure they get as much of your account as they need to. This is where I differ with JJ, because none of that process is really happening in the minds of individual traders. It’s done by computers, and the point of it isn’t to make a market as much as it is to ensure the system is fleecing as many of its users as much as can be tolerated as often as possible.

Next - Part 2, the Theory of Time Compression, which I assume is the best part.

Nice work again clemmo.

We're sorta on a similar page I reckon (re computers not individuals).
I had quite some differences of acceptance to some of the word-narratives JJ uses, while I tried to keep myself open to the process rather than any of the individual trader references.

I'm comfortable enough trading down the path where I could look at what JJ alludes to 'individual' behaviour, to what I call,
NOT so much group behaviour like in a pod of sardines swimming in unison etc,
but how the aggregate of all trades (certainly retail) might look to the next level up from our brokers (ie the LPs).

The Broker and especially in my mind the Liquidity Provider aint gonna spend too much time on individual accounts imo. I broke off in a different tangent here from JJ, just in my own mind I mean, so I am not saying I am right but it is how I conceptualise those 'events".

By that I'm thinking only, as I know NO ONE in the industry, that this aggregate of load-buys vs load-sells might be the most important figure at this suggested
time compression area rather than what any individual might actually be doing at the time.

Maybe the next chapter, yes, I can't remember, it's been a while since I (sped) read this book of JJs opinions & ideas of what the drivers of price are at certain areas.

Cheers again

New generation of traders do not understand how to use an all inclusive approach to their trading. (Some) Old style traders know that "the market" refers to EVERYTHING not a "if / but" process of thinking or acknowledgement of "participants" or tools/resources. There's no reason why a person cannot setup to imitate what an algo does to "fleece accounts". The problems come, when the person has little understanding of the real world and isn't paying attention to anything beyond trying to "make money". So I'd be veeeeeeeeeeery careful how you perceive "what's important". Most I see have a "the world revolves around me" mindset re: their trading. AND to add here, brokers generally know that it's harder to trap a manual trader than a "system/methodical" trader. As you noted, entities need patterns in living data to assess what a person is doing. And this is easily sidestepped by a manual trader. We have many ways to circumvent authority overreach. Watching several dozen instruments for example and having a 'random-like' approach to how we do things. This is why tech addicts are in trouble from the open bell. Anyway just a word or two there about that.

Peter

Manual execution and random behaviour?
Trade like a local, commercial, retail, or a bank?
Mix it up for some randomness as conditions permit?

Thanks.

I could probably write a book on all of them, but let's try something simpler here .... (And this is not about being a know it all or smart ass) ...

?1 - yes.
?2 - yes.
?3 - yes.

Instead of obsessing over charts and setups and confluence biases etc, try it this way ....



It's a matter of seeing orderly and freestyle thinking. At first, separately, then after some time, seeing them together side by side or on top of each other. Take a close look at each and make the distinction between the 2. In trading I will always choose to see both. This is why I said yes to all you queries.

This is why I have spoken about perceived strike rates and probabilities vs a truer more objective perception of what we all try to do and deal with, where it's really more like 50-55% when at the first stage of observable analysis.

I like using "bluffs". That's my word for it. We used to just call it splits.... you place a trade with broker A worth X amount in Asian session meanwhile actually desiring to place larger portion through New York. If your broker is playing spazz games with the situation then you will see them try to use their tricks to either get rid of your position, or squeeze you out somehow. So when people say " 'they' can't affect the chart much", you must consider the small moves inside the larger moves. So yes they can indeed affect the chart on larger levels. With this you can use multiple accounts as I have in the past, but you must keep an eye on floating/changing margin levels throughout the session and day.

Remember your main focus is to protect what you have and make gains based on what you understand and can track. Tracking is more valuable than structure assumptions and stories. If you're too 'systematic' you become too predictable. And unless you understand THEIR game, you will get into a 'phase shift' which occurs when a trader stops following what they know and understand and begins to react more heavily to what the broker's put in front of you. In the past, my main problems came when I would get distracted eg. go to the bathroom or get a tea or coffee, come back and not reset my space. Yes I'm a little OCD that way. But in a good way hihihihihi. It's good to break the routine of watching screens but discipline comes not from stressful focus but knowing your space. Anyone great always know their space and how to work with it.

I'd like to say "it's as easy as learning say .... 10 different setups and mastering the step-in process that precedes each setup" but saying that won't help. BUT ... BUT .... that really IS what we're talking about here. Don't be a one trick pony. YES I know some people do it but I wouldn't suggest it. But that's just me. I still have my favorites though.

I've always said that generic must come before specific.

And so, I say keep "them" guessing.

The areas I like to mix it up - instrument, lot size, position, timing, volume of orders i.e. number of orders injected and then varying the duration of open position, time phase - start or meat of or end of session, overlap of assets, trading backwards - equalized paths of time and price. For this last one a person needs more experience to know what a market is capable of while still being in 'normal conditions' to then invert it to catch "larger more unexpected moves. You COULD use ADR but it must be in the range of the month. Going beyond is statistical speculation IF one wants returns on a monthly basis. What else? Hmmm? Highest vs lowest price points is always a fun one. I see people around who offer or talk about Highs and/vs Lows but if you're speculating more than decisive then you need to filter out basic small movements as you'll cop too many broken lots at end of month. (A broken lot is basically when your activity plan has forced you to downsize your lot size because of too many sequential losses. Eg. When "people" are suggesting to use 2% of account as stop loss on an order. It might seem like a good idea but to me it's ludicrous. Structurally you'll get shredded).

Getting creative with what you know and understand is the name of the game.

Hope that helps

Peter

I wager you'd be surprised. Especially if they are making money. Your broker's margins are narrower than they want you to know. Sounds like order flow to me.

Where have you been hiding on this website, Peter Caleb?! Yes, you should write that book. I'll take a signed copy. However, I now realize, no amount of reading will make up for the experience that you speak of. One usually must evaluate every situation on its own merits, much like a chess position. And be able to retreat, feint, retreat, and then charge when the time is right to make up for losses. It's a skill.

Anyway, does any of this sound like the material that will come up in the Time Compression book, TimeTells? I hope you will not be offended if the central promise of the book - 'how to tell when a price is too high or low' is not found, by me at least.

I'm thinking, in the short-term, it's against the retail order flow. Till the aggregation suits .

I would ask myself clemmo, too high or low, for whom !

"Getting creative with what you know and understand is the name of the game."

Yes it did help, thanks Peter. The quote above, perhaps, says it all minus any detail. You raised some points I'll take some time to think about.
Thanks.

Part 2 - The Theory of Time Compression
At last! The good stuff?

The motivating factor for people is pleasure-seeking or pain avoidance. When people are stimulated a certain way, they act (pathetically) predictably.

Chapter 6 - Development of the Theory
“Time compression is what happens when everyone wants to do the same thing at about the same time for roughly the same reasons.” It is all around us.

1. Lunch rush at the restaurant
   1. A lot of work and prep happens before the rush
   2. The restaurant makes most of its money between 11-2pm
   3. The whole operation has to adjust to the compressed time of the rush period no matter how long the restaurant is actually open
   4. The very nature of the restaurant business is to be open when people want to eat

2. Rush hour traffic
3. Income tax season
4. Grocery stores between 5-7pm

The Common Thread
1. A precipitating event
2. Stimulation of greed, fear, or hope
3. A timeline that requires something be done quickly
4. A sense of certainty by the individual

JJ uses the example of a shoe store coupon to illustrate these points, but I think we get it. Let’s just skip ahead to the market-specific examples, shall we? Hey, did I just do a time-compression?!

Corn market example once again

1. Headline news - Congress passes a bill to allow corn farmers to sell old corn as animal feed to Asia
2. China needs 200% more corn in the next four months
3. Corn is $3 per bushel
4. High demand = rising prices
5. Corn sellers have their greed stimulated
6. They don’t want to sell now because they anticipate a higher price later
7. There will be a rush to buy the market
8. The market trades limit up fast and stays there for 3-4 days
9. Time compression has driven price higher
10. When all the buyers have their orders filled and there is no one left to buy corn - that becomes the top in price
11. The market moves equally and dramatically lower to its starting price
12. In the end, China pays a price that isn’t much higher for its corn. The whole event was mostly in the minds of traders.

“In most markets, time compression happens more subtly and usually creates solid highs and lows that can be exploited quite regularly.”

Trader’s Life
When time compression is happening some signals regularly occur

1. If the market is rising, the public seems to want to be involved. When there is information or marketing being done in public areas, that usually signals that a bull market is going to find a top soon. Too ubiquitous these days to be of any use.
2. The shoeshine market story. JP Morgan was getting his shoes shined by some kids who asked if they can buy stock for $40, a lot of money in those days. Morgan rushes back to his office to liquidate all his holdings. ““If the shoe shine boys are buying stocks, who else is left?” The 1929 crash happens a few days later.
3. “A great clue for a time-compressed market is a public fascination with it, and that fascination is usually from the long side.” These days it seems the fascination is on the short side (banks are going to fail again!) and equities just keep going up.

Chapter 7 - Time Compression and Technical Analysis
I didn’t expect this chapter at all and I’m not sure I like it. We’ve already stipulated that TA is not worth spending time on. Why compare TC to TA? Well, one reason is to add chapters to a book. If JJ has shot his wad, and now he’s forced to pad the rest of this book to get it in around 300 pages, that will be annoying.

The chapter begins with JJ once again explaining why TA doesn’t work. Yes, we know. It can’t predict anything because it can’t tell us who is behind the price moves. It can only guess where price will end up.

Price Changes Stimulate Urge to Action
Once the market has moved enough to create an urge to action, we know that there must have been an order-flow imbalance; otherwise, the price wouldn’t have moved much. TA cannot tell us who the buyers or sellers were that caused this.

As winning traders, our goal is to uncover who lost money and who made money on that price move.

Once price moves, there can only be 2 results really, only one result.

1. The winning party has a gain, and the larger this gain gets, the greater the conflict becomes to find a liquidation point
2. The losing party has a loss, and the larger this loss gets, the greater the conflict becomes to find a liquidation point

When someone (or enough someones) decides to do something at the max conflict level, the order flow changes.

“Time compression attempts to understand where the order-flow imbalance is developing, whereas TA attempts to analyze price to predict another price.”

Urge to Action Creates Order Flow
“Because the majority of traders trust TA (whether bullish or bearish), they are all operating and executing in such a way that they create the order flow that works against them.”

“Most losing traders operate with a high degree of fear that they will lose. Because they won’t make a trade unless they feel very secure and confident in their analysis, they often wait for confirmation before doing any trade.” So a bullish trader won’t buy at the low price but will wait for the market to move higher. When the risk is lowest and the profit potential greatest, they do nothing.

Using pullbacks, the market scares the losing trader so that they continually encounter the paradox of being right about the market direction, but losing money anyway.

Time Compression (TC) using multiple time frames will show you how this process plays out daily, and show you where to sell against the losing longs or ‘join the party’ once the losing traders have liquidated their positions.

“TA won’t show the price at which a change in the order flow is going to occur, but it will show you how to see time compression developing enough to suspect at what time it will happen.”

“Losing traders want to analyze the market. Winning traders want to exploit the losers.” You can only profit when you are on the right side of the order flow. TC is how you find the loser, and knowing how losers liquidate their losses is central to understanding TC.

Trader’s Life
JJ tells the story that is in a lot of other trading books, about the 1991 Crude Oil market. He had a massive loss from that trade. Digging into the CoT reports, he finds that the longs were mostly public traders until the end of 1990, just before Saddam’s deadline to withdraw from Kuwait. The pro traders were liquidating longs and holding modest short positions. The market crashed in January 1991 and took a decade to recover. It was a time-compressed topping market.

All the TA from that period was bullish, of course. ‘You could not find a crude oil bear anywhere’.

“I see the markets as a never-ending conflict between the net winner and the net loser.”

I see this chapter as an extension of chapter 4. What new material did we really learn here? This is a big red flag, as we’ve seen this tactic in other time-wasting books. What we really want to know is how to use common TA strategies to pinpoint where there’s likely to be a massive one-sided buildup of retail orders. Why delay offering up the goods if you have them, JJ?

Chapter 8 - Forced Liquidation and Order Flow
Nobody wants to lose, but someone has to lose. Zero sum market. Why do people take the risk?

The Reason Behind Risk Taking.
Because they think they will win.
The traders who don’t protect themselves make time compression inevitable.
The market is a dance between opening and closing positions.

The issue of forced liquidation, losers who have no choice, is critical to exploiting TC. This could either be because they feel forced, or they are literally forced, due to a margin call. Since this usually happens after a sharp unexpected move in the market (often not a natural event) a lot of forced liquidations after that event signals a change in order flow, and a turning point in the market.

The Breaking Point
The most important factor in forced liquidations isn’t the price, it’s the speed of the event. There was too little time to come to terms with it and that overwhelms the decision-making process of the trader.

Note this can happen with winning trades too. If a profit happens faster than the trader expected, they’ll bank the gain quickly, ‘just in case’.

All traders have this breaking point inside them.

At this point JJ devotes several paragraphs to these simple ideas and literally repeats himself a few times. More red flags.

Trader’s Life
The way to avoid forced liquidation is discipline. Preserve capital. Define your risk. Risk no more than 1.5% on every trade. You’ve heard this all before.