chapter03 JWBK129-Dalton metrics January 4, 2007 14:37 Char Count= 0

Timeframes 35

O- 11216
H- 11306 11800
L- 11216
L- 11302
A- -24
11716

11700

11616

11600

4. End of swing trade 11516

11500
2. Nine-day auction

11416

1. Day time frame 11400

auction
11316

11300

11216

11200

3. Start of swing
trade 11116

11100

17 feb 06 11016
O- 11216
H- 11306
L- 11216
C- 11002
Aug Sep Oct Nov Dec 2006 Feb Mar Apr May Jun
6 11 16 25 01 06 15 22 01 12 19 20 04 11 17 24 01 07 14 21 01 12 19 27 03 09 17 23 01 13 21 01 13 20 27 03 10 17 24 01 05 15 22 01 12 19 26

FIGURE 3.3 Day-timeframe auction, shorter-term timeframe and a swing trade:

Daily bar chart, 30-year U.S. treasury bonds.

in this case) held for eight months to a year. The shorter-term trading
ranges within well-defined, intermediate-term brackets are the focus of the
shorter-term traders we discussed earlier. In the last several chapters of
this book, we offer tactical trading guidance for day traders, short-term
traders, intermediate-term traders, and longer-term investors.
Figure 3.3 shows: (1) a day-timeframe auction; (2) a nine-day, shorter-
term auction; and (3) and (4) the start and end of a swing trade occurring
in the U.S. Treasury bond market. With the exception of the day timeframe,
it is important to understand that the remaining classifications are defined
in general terms and vary depending on both market activity and how each
individual trader/investor visualizes the market. For example, while some
investors see long-term trades in terms of years, others in the money man-
agement industry consider “long term” to be a much shorter duration.

Long-Term Investors
Long-term investors are far more attached to the securities they own. They
have a stronger tendency to buy securities and put them away for some
chapter03 JWBK129-Dalton metrics January 4, 2007 14:37 Char Count= 0

36 MARKETS IN PROFILE

0= 129120
H= 129140 100000
L= 120620 128890
C= 120000
∆= −250 127500
126950

125000

122500

120000

117500

115000

112500

111000

107500

105000

All timeframes are acting in concert 102500

Those timeframes that haven't figured 100000
this out don't survive.
97500
Trend 95000

92500

90000

87500

85000

82500

13 Feb 06 80000
0= 129710
H= 129250
L= 120000
C= 128890 77500
∆= 155610.00 2003 2004 2005 2006
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul

FIGURE 3.4 All timeframes active to produce a strong upward trend: S&P 500
weekly bar chart, January 2002 through February 2006.
Source: Copyright ľ 2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.

time, with holding periods from months up to several years. When they are
active, they tend to deal in large positions that are very visible to the mar-
ket. Intuitive shorter timeframe participants understand that when the long
timeframe enters the market, their purchases are likely to be large and pos-
sibly ongoing. With the size of money management firms these days, indi-
vidual trades—even partial trades—can result in huge orders. In fact, some
shorter-timeframe traders research what the long-term investors already
hold, so that when they sense them selling they can take advantage of the
resulting price movement. When the longest timeframe becomes active, it
is not uncommon for all other timeframes to join in a large movement that
can result in a major trend. Figure 3.4 shows just such a movement occur-
ring in the S&P 500 during the latter half of 2003. Those traders who fail to
grasp transitions of that magnitude will not survive.
When we take an even longer-term perspective, we can more clearly
see how the various timeframes coexist, act in concert, and merge over
time. Figure 3.5 shows:

1. All timeframes are acting in unison, resulting in a longer-term upward

trend.
chapter03 JWBK129-Dalton metrics January 4, 2007 14:37 Char Count= 0

Timeframes 37

0= 129120 100000
H= 129140
L= 120620 128890
C= 120000
∆= −240 127500
126950

125000

122500

120000

2. Trading range high 117500

115000

112500

111000
4. Long-term remains up
Swing and intermediate-term 107500
are sometimes trading counter
to long-term and sometimes 105000
to each other as well.
102500
3 Trading range low
100000

97500

95000

92500

90000

87500

85000

82500

13 Feb 06 80000
0= 129710
H= 129250
L= 120000 77500
C= 128890
∆= 122172.191 2003 2004 2005 2006
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul

FIGURE 3.5 Coexistence of multiple timeframes: S&P 500 weekly bar chart, Jan-
uary 2002 through February 2006.
Source: Copyright ľ 2006 CQG, Inc. All rights reserved worldwide. www.cqg.com.

2. The longer-term trend tops out (temporarily) when the market begins
a series of intermediate timeframe auctions as it balances and seeks
equilibrium. Here, longer timeframe buyers provide support to the mar-
ket, while the day, shorter-term, and intermediate timeframes facilitate
the auction process from both sides of the market. As a result of this
auction process, long-term value is established at higher price levels.
3. After the period of balance, the longer-timeframe buyer auctions price
above the balance area and the longer-term trend continues.

Long-term investors, as we’re defining them here, are responsible for

breaking new ground, starting trends, upsetting the status quo. While this
investor timeframe doesn’t necessarily account for a large portion of mar-
ket volume, it is generally responsible for large directional moves in the
market. Why? Because the shorter timeframes primarily exist to facilitate
liquidity, while the long-term investor is placing substantial orders in one
direction. In other words, long-term money is much “stickier.”
Long-term investors tend to look at the fundamentals of a company,
the quality of their earnings, cash flow to book value, P/E multiples, talent,
chapter03 JWBK129-Dalton metrics January 4, 2007 14:37 Char Count= 0

38 MARKETS IN PROFILE

new ideas, pricing power, industry strength, and so on. They might not even
consider the technical information that drives many shorter timeframe de-
cisions.
What is important about the preceding discussion is the idea that mar-
ket activity is influenced by a wide variety of participants operating under
a wide variety of timeframes and motivations. The way each of these par-
ticipants combines and employs information is different:

Ĺ Scalpers are aware of key market reference points, but rely primarily
on intuition and order flow.
Ĺ Day traders depend almost exclusively on market-generated informa-
tion, because fundamental information is usually too cumbersome and
can actually be counterintuitive for the process of day trading.
Ĺ Short-term traders supplement market-generated information with an
awareness of recent fundamental information and the effects it can
have on market movement.
Ĺ Intermediate-term traders rely on a balanced mix of fundamental and
market-generated information.
Ĺ Long-term investors tend to follow fundamental information first, fol-
lowed by market valuation, finally looking to market-generated infor-
mation to supplement their understanding of market activity and indi-
vidual securities. They also keep an eye out for trims and adds, and
inflow and outflow of funds requirement.

It’s not easy to comprehend the nature and interaction of the different
timeframes. And it’s extremely challenging to detect their everchanging in-
fluence to implement a successful trading strategy. That’s why it’s essen-
tial that you understand the fundamental nature of each timeframe before
we build on that knowledge with new concepts—concepts that may ini-
tially appear contradictory. We structured Mind over Markets around the
five steps of learning (the path from novice to expert), and it is worth not-
ing here that in order to take your market insight to the next level, you’ll
have to unlearn some of the rules that got you where you were before. But
once you have jettisoned concepts that may be limiting the breadth of your
knowledge, you’ll be better able to comprehend and integrate the myriad
relevant pieces necessary to understanding the broader paradigm of mar-
ket activity.
In real-time trading and investing, the timeframes are far more diffi-
cult to distinguish than the neat descriptions above might suggest. While
we have identified them separately, all timeframes coexist, intersect, and
interact with one another in a constantly shifting tapestry. It is the study of
this coexistence, intersection, and interaction that will comprise your real
chapter03 JWBK129-Dalton metrics January 4, 2007 14:37 Char Count= 0

Timeframes 39

learning. And, in one way or another, it is largely the topic of the balance
of this book.
As you continue to observe market activity, you will begin to recognize
combinations of timeframe patterns over time. Trading requires a great
deal of mental flexibility, because once you have learned to recognize a cer-
tain pattern, it may soon be supplanted by another, more-relevant pattern,
which itself will eventually perish. The point being that traders who inte-
grate discipline, emotional control, and an agile market understanding are
generally able to let go of prior patterns and habits that are no longer work-
ing. To be successful, investors must recognize the confluence of evolving
factors that will eventually lead to a changing market atmosphere.

YOUR TIMEFRAME IS YOUR STRATEGY

CORNERSTONE

If you can correctly identify which timeframe is in control of market activ-

ity, and you have a good understanding of how the individual timeframes
generally behave, then you are in a stronger position to trade, invest, and
effectively control risk.
Throughout the course of this book, you will not only learn how to
identify which timeframes are active and in control at any given moment,
but you will also begin to learn to identify your own timeframe; that is, the
timeframe that suits your investment personality best. This is vital, for if
you don’t have an accurate idea of your timeframe and how it behaves in
the context of all other timeframes, you are setting yourself up to be con-
fused and misled by conflicting information. For example, it’s easy to be
right in the short term but wrong in the long term—a position which can be
extraordinarily costly. Once you have clearly defined your timeframe—and
how it coexists, intersects, and interacts with the others—you will be more
confident and better disciplined, and therefore less likely to break strategy
when the market acts contrary to your expectations. You’ll also be more
cognizant of the larger context, which will enable you to improve your
trade location—and good trade location is the key to managing risk, in ev-
ery timeframe.