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.Downtrend is often more secure and less subject tovolatile swings in price because the overall psychology is less aggres-sive.Downtrend generates less fear that the losing traders will misssomething.Range is where the fun begins.Range is what makes the wholeissue of multiple time frames and time compression so important togetting positioned against a sizable change in the order flow.Let stake a few minutes to look at the nature of market structure for rangeversus uptrend or downtrend.TWO PREVAILING REALITIESOF THE ORDER FLOWDespite the three potentials that the market has at any given point,the underlying issue is really a factor of two prevailing realities.Thoserealities are:1.Uptrend or downtrend is an order-flow imbalance.This is the nat-ural state of the market.P1: OTAJWBT329-c12 JWBT329-Jankovsky July 9, 2010 11:55 Printer: Yet to come108 EXPLOITING MULTIPLE TIME FRAMES2.Range is an order-flow balance.This is a temporary state and isphysically impossible to continue.What makes range so important to traders is the fact that all or-der flow cannot remain balanced.Range is a temporary state that willalways give way to either uptrend or downtrend at some point.Thisis why using multiple time frames can be so beneficial for traders.No matter what the prevailing trend is in the market, up to a certainprice/time relationship, there will be a temporary place where the or-der flow balances for a period of time before resuming or changingtrend.When this range is established, it signals that a change in the or-der flow is apparent, and it is only a matter of time before that changehappens.Range is a temporary state, because once the market reaches asignificant price area, both bulls and bears have to make a choice.Inthe case of uptrend reaching a high point, bulls have to decide if themove in their favor is exhausted and thus they should liquidate byusing a sell order.Bears will be attracted to a high point as a sellingopportunity.If they decide it is time to get positioned, they will entera sell order.If both those sell orders are entered at roughly the sametime, it would naturally represent a large amount of orders on the sellside.The market would have an order-flow imbalance to the sell side,creating a price decline.But if the price did not decline, that can onlymean that additional buyers were willing to enter the market at thatprice level.If the market now goes into range at that significant high, that canonly mean that more buyers were willing to get positioned as theirbids absorb the selling from both the old longs and the new shorts.If you think through this scenario carefully, you will see exactly howthe market is setting up for a price decline.The more time the marketspends in range at the high price level, the more committed the addi-tional buyers must be.As the new shorts are not at risk yet becausethe market has not advanced against their position, they likely willfeel no pressure to liquidate, no urge to action.As the new longs seeno advance for their position, they also will feel no threat, no urge toaction.Both sides continue to wait until the market makes a movefor or against them.But the market is composed of new longs andnew shorts.Old longs are out.A price decline is a threat to only oneside: the late long expecting higher prices.How did the late long cometo the conclusion that new highs were coming? Most likely throughP1: OTAJWBT329-c12 JWBT329-Jankovsky July 9, 2010 11:55 Printer: Yet to comeThree Market Potentials: Uptrend, Downtrend, and Range 109analysis of some kind on a shorter time frame.Why? Because the oldlong was on a longer time frame and therefore more likely to knowwhen the trend was over.When old longs decide it is over, they arenot adding to the bid order flow anymore.Someone must have ab-sorbed their offers.And that someone must have absorbed the of-fers from the new shorts otherwise the market would not have anorder-flow balance.This is why when a range is established, there is often a verysharp move out of range in one direction or the other when the orderflow goes from balance to imbalance.Both sides are in agreement atthat point.In the case of an uptrend ending in range, the shorts havethe advantage when the bulls bail on their positions.Additionally, thepullback in price represents a deeper threat to the bulls as no newhigh is coming at that point.More bulls quit.Hence, a top is in place.In the case of a downtrend ending in range, more time is needed be-fore the bulls take a stand.Range is usually longer after downtrendis over.Range is the critical point before time compression is released.Range represents a point where both sides agree that the price is sig-nificant enough to do something.Orders from each side are beingoffset by the other side for a temporary period of time.The orderflow is balanced temporarily.Once all market participants have donewhat they needed to do from their point of view, the market is vul-nerable.Volumes should drop dramatically as both sides sit and waitfor the other side to do something.In the case of uptrend ending inrange, unless a completely new group of buyers comes to the table,a reversal is going to happen.The late buyers are at risk.Why? Theywant to make money right now.Their analysis suggested more highswere coming right now.They won t wait very long for it to happen.The late longs liquidate, and the market crashes.The new shorts arehappy with the lead; they do nothing.Range gave way to a reversal asthe psychology of late buyers was in conflict with that of long-termsellers.Before we move on to the 12 choices present in execution, I wantto wrap up this chapter with an observation.Learning to see timecompression is about knowing who late buyers or late sellers are inthe market you are trading.There will always be late buyers or sell-ers.Multiple time frames can tell you when they are most likely toput themselves at risk.The important thing to remember when look-ing for late buyers or sellers is when the market has moved fromP1: OTAJWBT329-c12 JWBT329-Jankovsky July 9, 2010 11:55 Printer: Yet to come110 EXPLOITING MULTIPLE TIME FRAMESorder-flow imbalance to order-flow balance.In other words, themarket has paused in the trend.You want to watch for range asyour first clue.Once range is securely established, time compressionis inevitable.T HE T RA DER S L I FEIn my view, the only important variable to time compression is watchingfor range to form.It is only a matter of time before range gives way to asharp move in one direction or the other.The natural state of the marketis to liquidate losing positions.That means price action in one directionas the market seeks to balance the inequality in the order flow.But thisimbalance will be exhausted at some point because the universe of po-tential participants is a finite number of actual people; sooner or later themarket will find a place where the imbalance is temporarily balanced.Thatplace becomes range.Range will provide the best clues that time compression is developingbecause the market cannot physically stay at one price level for very long.The losers on both sides eventually must close their positions.The really interesting thing about understanding this psychology iswhat happens to most traders when the market is in a range.Losingtraders continue to evaluate the market as they always do and continue torely on technical indicators for the buy/sell points.However, overboughtand oversold indicators are less reliable in a range.The fact is, there isnothing you need indicators for in a range [ Pobierz całość w formacie PDF ]