The Finance Book Club

Review
A fascinating little book. Very quick read. I trimmed more than I usually do because it's a chatty, narrative type of book and we've really had our fill of those, I hope you agree. However if you want to know more about the whole thing it's easy to find copies for free online.

I can't find out very much about Arthur Simpson. One forum author claims that POP is George Lane, but I think it's never been settled.

I think most of this is golden advice, but for myself I've had little luck trading this way as I tend to die from a thousand cuts. The market immediately moves against my positions and so hardly any trades ever get 'confirmed', but then again, it's quite likely I didn't 'press my winners' as I should have.

The next book is 'Machine Trading' by Ernest P. Chan, but it's a doozy. You thought Kaufmann was an esoteric quantitative type? You haven't seen anything yet. I'm not sure how to handle it. Do you prefer drinking straight from the firehose or do you like having your hand held a bit to guide you through the mine field?

Straight from the firehose

And, then Jankovsky ?
no maths, no quants
just YOU and the market

You are probably in the minority, but it makes sense!

You know what? I've never had so much audience participation, TimeTells, so for you, I'm going to jump the queue and go straight to your book. Just to be sure, is it this one?
Amazon.com: Time Compression Trading: Exploiting Multiple Time Frames in Zero Sum Markets: 9780470564943: Jankovsky, Jason Alan: Books

Anyone has pdf version of this as i can't open it on my pc.

The pdf as I remember it, well its important parts (imho), are not technical OR related to anything time-specific but an understanding of how markets operate at
a Point In Time (not by Clock) and where a Trader can be best positoned after that.

(edit)
Oh yes, on your desktop, W, right-click the downloaded, then choose "rename", and add ".pdf" to the end of the current name, it should open then hopefully .

Thanks Timetells...it worked.

Just wanted to say this is a great thread, I will be reading my way through the A-graded content before joining in on the discussions taking place

Time Compression Trading
Exploiting Multiple Time Frames in Zero Sum Markets
by Jason Jankovsky (JJ from now on) ca. 2010

Preface

1. The market is a process more than a place. One price change in one market can influence all the others. Time compression is the process of thoughts/actions playing out among participants.
2. Time compression attempts to answer the same question that TA does (when to act, when is price too high/too low) but it completes the understanding of TA.
3. Zero sum markets: are made up of the traders choices, and this creates price action that you are trying to exploit.
4. Time compression creates a flow of money away from losers and towards winners and leaves both parties changed after the event.
5. Competing time frames (trading horizons?) create the big unexpected moves and explain how trends develop.

“Successful speculation involves an understanding of how people behave under certain conditions.”

“Successful trading is more than just charts and statistics.”

Introduction
The most challenging to write, of his three books, says JJ.

JJ, immodestly claims that he’s faced every situation ever encountered by any reader.

Since the material is advanced, and it’s difficult to communicate a concept that he knows so intimately, he is (wisely) leaving out MM, TA, pyramiding, risk management.

The purpose of the book is to answer, ‘how do we know when a market price is too high or too low?’

Most trading approaches have < 52 % cumulative success rate and some are < 45%. They can still win because of good trade and money management. However mathematically these ratios are not much better than chance. (though the vast majority of traders are unwilling to acknowledge this)
You might as well flip a coin on most trades, but you might be thought insane for trying it.

This means most effort put into systems development is wasted. (the truth hurts) Analysis is appealing because our nature is designed to ‘figure things out’.

Most of the great fortunes, like Livermore's, were made before computers and the advent of quant analysis.

Markets are made up of people, not prices. The market should be viewed as people doing things, not prices moving.

Focusing exclusively on numbers ignores the real nature of the ‘multipart structure’. Time compression theory provides a clearer picture of this structure.

Part 1 - The uniqueness of zero-sum markets

1. Trading well is a study in self-awareness.
2. Zero-sum markets are different. (from what?)
3. We must change to exploit them.
4. Zero sum markets are not what we think they are.

Chapter 1 - Basics of Zero-Sum Markets
What is a zero-sum market?
“A zero-sum market is one where no transaction results in an exchange of money between the buyer and seller. Transactions are done by either buying or selling the current price in the market. Both the buyer and the seller must be present at a traded price, and both assume the risk of price action for or against the current price in the market. Money actually changes hands when the buyer/seller liquidates the open long/short position by doing an opposite transaction at some later time. No money is ever made or lost in the market; it changes hands based on the difference between the traded prices to the individual’s personal account.”

JJ describes an imaginary market with 100 accounts and $100,000 in total liquidity. After some trades take place, and the market price has changed, the total amount of money in those 100 accounts remains the same. For illustration purposes he doesn’t consider fees/commissions but I think that’s a critical detail.

1. Futures,
2. Option futures
3. Spot FX
4. FX options
5. Are all zero-sum.

Equities are NOT zero sum. (?)

For any transaction there cannot be a sale if there isn’t an equivalent buyer on the other side, and vice versa.

Winners and Losers
If you buy one lot of corn and the price rises, you win and the seller, on the other side of the transaction, pays you. The money to pay you comes from the counterparty, not the market itself or the exchange. It is the loser of the transaction who pays.

Winners get paid by the losers. No money is made on the transaction itself.

A Market of People Not Prices
The market itself is only a machine.

The only way we can get paid as traders is if someone else loses. That can only happen if the orders after we have placed our order are larger from the same side (direction) we’re trading from.

This means that other traders decide if you win or lose. Not you.

“As the price changes (as a result of buyer and seller incoming orders), it affects all traders’ equity, no matter which side they started on or from which price they started. The order flow is never balanced, and there are always some orders left over at each traded price, which is why the market fluctuates in price all the time.”

There is no other reason for the rise or fall in prices. It is just the result of processing incoming orders (order flow). If there is an imbalance in buy or sell orders, the market ‘goes looking’ for matching buyers or sellers at higher or lower prices.

If price went up it was a result of larger order flow on the buy side, not because of analysis, last week’s prices, or who said what on television. However, the reasoning is tautological because those causes affect the buy orders (in theory) and cause the order flow to be larger on the buy side.

JJ claims, somewhat naively, that order flow only comes from individuals trying to answer the question of whether price is too high or too low.

Time compression attempts to answer - what will cause a significant change in the order flow? But this is just the same as asking - ‘what will make price go up or down’, surely? I guess I should reserve judgement.

Price analysis cannot predict human behaviour, and that is what creates order flow.

The Trader’s Life
Trading is a lifestyle more than an activity. It’s a way of behaving and thinking, rather than being bullish or bearish and buying or selling based on those whims.

1. Zero sum markets are a tug of war.
2. Equities are a game of musical chairs.

Now this, this I like.

In musical chairs, the loser is the last buyer. In a tug-of-war, everybody on the wrong side of the market loses.

Who is the force in the tug-of-war markets? Long story short, it’s the smart money who can trade size (big orders).
That means there are two big groups in markets - smart money (pro) and retail.

A pro trader who wants to buy 100 lots, must ‘draw in’ 99 other lots (one-lot sellers), and cause a price decline until the one-lot traders see a declining price trend. The pro keeps buying one lot at a time as the market falls until all the small traders are committed to the short side.

Now the pro trader has an open loss as the average position was bought in a declining market. A few of the small traders will have a gain (from selling in a declining market).

However the large trader has the advantage for a simple reason. They will not sell and they intend to out-wait the smaller trader. Trader nature being what it is, this is very easy for them to do.

In a zero-sum market, trading is not about the price but about who controls the size. This is why volume and pro activity are important.

Next - Who is the Market?

Chapter 2 - Who is the Market?
The market is everyone who intends to participate in trading.

Choosing to enter and choosing to exit, creates the market, and that is a process, not a place.

All traders are using similar tools and thought processes. However only by creating losers can the market create a few winners.

The Conclusion-Making Process
When JJ asks how does the market come to a conclusion about price it’s the same as asking you personally, how you come to a conclusion, because you (and people like you) are the market.

JJ reduces decision-making to the process in figure 2.1



Most people are not in control of this process and they react emotionally to trading because they don’t realize this script is editable.

1. Sensory data stream: raw data coming into awareness. The 5 senses. Has no meaning by itself.
2. Value Filter: we ‘choose’ to allow some data to become apparent to us and then put it into context based on what we believe is important. Most of this is ignored, subconsciously.
3. Comparison to needs or wants: in trading this is usually compared to an expected profit opportunity.
4. Control Mechanism: sometimes known as a conscience, it has 4 ‘congruencies’
   1. Should, Should not, Must, Cannot.
   2. This stops us from reaching conclusions that would not be in our rational interest. JJ makes a distinction between this and behaviour control. This doesn’t control behaviour, just conclusions. Behaviour is the last step.

5. Justification: this is more important in non-trading decisions, says JJ, because once your order is in the market, there’s nothing you can do but reverse it.
6. Urge to action: an urge to do something or do nothing. Once we’ve done something we have an emotional response to our action.
7. Emotional response: If our emotional response is negative we might feel we made a poor choice, and vice versa. Sometimes the negative emotion is a response to a subconsciously perceived conflict, such as guilt about having done something you shouldn’t do or not doing something you should have done.

JJ covers his posterior by disclaiming that he is not a psychologist, just sharing what he’s discovered about how people make decisions.

A Global Construct
JJ runs through an example of how this all works using a couch on fire. I think it’s fairly intuitive though, you don't really need this to get his meaning.

“When you consider that everyone participating is thinking along the same lines for the most part, and you are not thinking any differently, wouldn’t you all come to the same conclusion at about the same time?”

This is what time-compression is, says JJ, but I don’t get it yet. What does it have to do with time?

The Trader’s Life
“I studied my own conclusion-making process for years because I found myself on the wrong side of the order flow so often it was uncanny. I would put on sometimes 30 trades in a row that were all losers.” Yes, because the market is reacting to your reliably bad flow.

JJ concludes that he needs confirmation to make a trade, and that this waiting for confirmation is causing him to make the wrong choices. His real motivation is fear of loss. The desire to reduce fear is the problem, not the desire to reduce risk.

Recognizing order flow changes seems to be the key here. Easy if you have a good data source?
“The best confirmation that you are on the right side of the order-flow imbalance is an open trade gain, nothing else.”

Next - The four components of market structure

Good to see you back in action clemmo.
I enjoy your thought provoking additions in green. Your question above was also mine, as I worked through this sometimes hard-to-read book at times.
All the best, sir, wishing you well on yet another bold project you have undertaken.

Chapter 3 - The 4 Components of Market Structure
“There are four components to the structure of a zero-sum market.

In order of importance, they are:
1. Time
2. Volume
3. Open interest
4. Price”

Market structure is dynamic. It ebbs and flows over time. JJ refers to ‘waves’ which makes me immediately think of cycles but that doesn’t seem to be important for now.

Each component is dependent on the others.

Time
The most critical. Time must pass for a market to exist and create an urge to action. It takes time to make choices and take actions.

JJ revisits the example of the corn market to demonstrate the importance of time.

1. The crop must be planted at a certain time
2. We don’t know how much to plant until a survey is done
3. It takes time to compile the data from the survey
4. It takes time to plant and then grow to maturity
5. It takes time to gather data on rainfall, etc.
6. It takes time harvest, measure the yield, compare it to forecasts
7. Etc.

It takes time for all the variables to be known and then decide what they mean.

Each trader has their own conclusion-making process and that means they each have a different time horizon. Some are day traders, position traders, etc.

Time must pass for traders to get the data they want and then run it through their decision process. (wise) Traders often make forecasts by saying they need time to reach their conclusions.

The machine (market) doesn’t care what the orders are, only that they will come in over time.

Volume
“Volume is a measure of how much activity a particular market is seeing at a given point in time.”
The more activity in a market, the more volume there will be. Volume measures how much of something is happening.

Open Interest
Open Interest answers “Who is getting in or who is getting out?”
If OI is rising, a group of traders have got into the market and intended to stay for a time. If it’s falling, that means traders aren’t interested in staying.
OI is usually calculated at the daily close, and that means anyone represented by it is willing to risk more than a day trade. This group is usually better educated, capitalized, and experienced. In other words, the pro money.

Price
Least important. It’s more important to know how price got to where it is then to know where it is. Wayne Gretzky: Don’t go where the puck is, but where it will be.
Price is a reflection of the net order flow. You want to answer the question - is the price too high or too low?

Symbiotic Market Structure
Now JJ wants to show us one example of seeing a change in the order flow by using a big picture of the market structure.

Again, using the corn market:

1. Bulls and bears need time to decide if the market is overpriced relative to the info coming in, and to answer ‘what does this mean and what do I do to profit?’
2. In the spring, price is steadily rising
   1. Buy orders must be larger than sell orders
   2. Open interest is also rising, so pros are involved
   3. Volumes are increasing, more traders are participating
   4. Sellers are losing money, short sellers are covering and this adds to buying pressure

   
   

3. At a critical juncture, bulls will decide that the opportunity for price rise is fading
   1. They take profits
   2. Sell orders start coming in faster
   3. Price reaches the past year’s high
   4. Volume rises again, but open interest drops
   5. Winning bulls must be leaving the market
   6. The bulls are out, the shorts are broken, and the price stays high but lingers, with volume and open interest low
   7. The latest buyers have no future buyers to help them lift the price higher, because potential buyers are now on the sidelines

   
   

4. The market is now vulnerable to a price decline
   1. If bears conclude that price is too high, they’ll try to sell but there will be few matching buy orders to fill those shorts
   2. The order flow has changed from net bid to net offer
   3. The price declines until it finds willing buyers

   
   

5. The net result is:
   1. Late buyers have a loss
   2. Early buyers have a gain
   3. Early shorts paid the early winners
   4. Late buyers will pay the new shorts

   
   

Traders Life
Time is the most critical element, JJ learned, because larger more experienced traders make the most money by simply holding their positions longer than other people would (or are able to).

Although experienced traders were telling him to get flat at the end of the day, he learned they were really misleading him, and using him as ‘free money’. Beware anything you learn about trading from your broker, or even this website, or this thread!

“The older traders are exploiting the younger ones and take great delight in draining their accounts by being on the other side of their orders and/or waiting them out.” Liquidity providers take a similar delight in your orders, unless you're quite special.

By taking profits daily all JJ was doing was providing liquidity to the bigger players. JJ learns to wait out the other traders.

Next - the Illusion of Technical Analysis
----
This ends chapter 3, but I have many thoughts about this.

I’m reminded of Humphrey Neill where he focuses on trading volume, but in the end, price and volume are so closely linked that you hardly need to know much about the volume to know which way the wind’s blowing.

I’m also reminded of this game.

Where the big worms easily compete against the smaller worms, and so all they really need to do is wander around mostly aimlessly, expending little effort or thought, eating up the smaller worms as they get bumped into.

Time might be the greatest advantage in trading, but the ability to hold positions against fees, interest, inflation, natural impatience, and daily living costs, is a luxury afforded (and affordable) to the largest accounts, so if you really want to master this game, by this logic, simply having more money is worth all the knowledge in a dozen books like this one.

However, once again I should probably ‘empty my cup’ and wait before passing judgement.

I'm sure I'm going to get slammed here for saying this but here it is .....

Apart from LOTS of information, what are people actually learning ?? No judgment just curious because for me, a lot of this is just common sense based on my background.

Are people just trying to be purely opportunistic here or are you all really considering other things about it all?

There's A LOT of info here.

It's satisfying to see some old reads or maybe just seeing people engaging in something other than "the newest indicator" etc. I think it's a tie !

I can recommend a couple of books that (I sense need to be priority reading for people) are not in your list re: post 1 .....

1.
https://www.amazon.com/Debt-Delusion.../dp/1599429950

2.
https://www.goodreads.com/en/book/show/6617037

I have no incentive to speak of these. Merely to point to the obvious and enormous gap in most people's general knowledge and understanding.

As I read (past tense) through each page of this thread, I saw there are many erroneous understandings written but I don't know if anyone cares, or wants to discuss at all. I'll leave it to the thread starter and other people.

Anyway .... interesting.

Peter

All statements are welcome imho if we each then consider them from a point inside us where we put on hold any "hard, locked in" ideas on our heads.
And folks do slam comments, on FF for sure lol hahaaa, I reckon when they can’t or won’t offer any viable alternative.
Not patronising, but you generally offer viable considerations for readers to ponder imo cheers.

clemmo is having a good shot here imo at a book that moves away from purely statistical interpretations or common belief systems of Trading that are usually sold to us by such “vendors of ideas”

(which may also be our author here too lol, each to their own conclusions hahaa).

We have yet to get to the Compression part so I am enjoying clemmo’s green additions of his own thoughts along the way as he reads.

This was a long arduous book for me to read ages ago until it got around to the compression concept. Another viewpoint in the end of course.

And all comments welcome imo, I enjoy reading them.

Not by me.
Well, you're asking the right question. Keep in mind when I started this thread I still believed that trading was a knowledge-based activity, not a skill-based one. Reading these books has actually changed my mind about a few things. I no longer think I'm learning as much as I did at the start, but that's the point of gaining knowledge, isn't it? If I hadn't started this journey I'd still be talking about fib ratios and moving averages with the punters in the popular forum threads. There are diminishing returns with each new book I read, I think, unless we come across something quite radical, but I have a much better understanding of the 'common sense' needed to understand the market (I think). I'm curious what is the background that gave you a head start? I'm not sure what you mean. Do you want to ask it another way? If there is any opportunism here, it's just the faint hope of learning how to trade better than everyone else. Thanks, I've added those to the reading list for next time. Yes, I'm very interested in correcting any misunderstandings. Less ignorance is always better than more. However, you know what they say about market beliefs (and religion, politics). If you don't change any minds, you should not be astonished. Thanks!