Range Relativity and Time Rotation
In this article I will look at two proprietary Trading Safely indicators used by our institutional clients that in combination provide very powerful concepts in relation to understanding how markets ebb and flow through time and how markets reach points of over-extension or cycle inversion. The key driver of these studies is time. Time is the single most important factor in markets and generally overlooked by both inexperienced and experienced traders. Conceptually, time provides the door through which markets can move, price is the key to unlock the door. The final concept then in this analogy is the idea of having the space to move where the space is created by time as you will see in several examples I will provide. Initially I will explore the Range Relativity study followed by our Time Rotation study and then consider the implications of using the two in combination. (Click on Charts to enlarge and backspace to return to article)
Firstly let’s consider the Range Relativity study. Each colour represents a different time frame – pink is monthly, brown is quarterly and orange is annual. This study is non-linear in its calculation and uses volatility as a driver to expand or contract the bullish and bearish range from each time frame. In addition there is an inbuilt skew such that in a down trend the bullish level contracts above and the bearish level expands below and vice versa. There are three key concepts here:
- If we close above the upper bullish level at the END of each time frame then we are bullish in that time frame and bearish if we close under it. If we close in the middle then we are neutral. This applies to each and every time frame and therefore we understand the trend of each time frame.
- Markets are in equilibrium when each time frame’s bullish bearish levels sit within each other in order such that the weekly levels are inside the monthly, the monthly inside the quarterly, the quarterly inside the annual. Where the relationship is disturbed we create energy that creates what we call a “Slingshot” move or a “Cycle inversion”. This leads to a powerful reversal OR a breakout extension trend move depending on the close of the time frame causing the disequilibrium
- The bullish and bearish levels from each time frame act as support (the bearish lower level) or resistance (the bullish upper level). This is why the close of the time frame is important and determines the overall trend of the time frame. Where the time frames form a confluence then powerful support and resistance forms and equally powerful, the breakout move where we close above or below the confluence.
By using all time frames one can ride a trend for years moving from time frame to time frame as the trend extends. In the case of an uptrend as the market closes above the bullish from the immediate time frame (say weekly), the stop loss becomes a close below the weekly bearish the following week. As the market closes above the monthly bullish end of month, the market has then evolved to a monthly trend and the stop loss becomes a monthly close below the stop loss from the next month’s bearish.
Rotation Across Time
The next step in understanding market behaviour is to understand the concept of rotation across time. The key idea here is to consider each time frame as offering up a space defined by upper and lower levels in which a market can move in and out of. Where the market is above the time space the market is immediately bullish and where it is below the market is immediately bearish in that time frame. Where the market enters into the space defined by the bullish upper and bearish lower levels the following becomes a critical point to understand – the market will tend to seek out the equal and opposite level in time.
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