Have you ever felt “lost” amongst the wide selection of Time Frames that our charting platforms allow us to utilize? Don’t worry: it’s a common issue and you’re not alone. One of the most common issues that I face with coaching students is this very concept of time frames and more in general, TIME in trading.

So today we shall explore the dimension of time and how it is really inseparable from the other two dimensions of market movement: price (which everyone is familiar with) and volatility (which we have spoken about at length, here, here & here).

Lost in Time

Most traders, as they explore the web searching for answers, usually adhere to these seemingly opposing beliefs:

  • the “larger” time frames are more robust and you should always trade in line with the “larger” time frame trend
  • price reacts in the same way on all time frames

So questions like these naturally arise:

  • I want to trend trade but what trend? The Daily? The weekly? The monthly?
  • Is Bigger really better?
  • What about the reactions? Is a retracement on the 1H significant? What about the 4H?

To which I answer: the market is the same beast, you’re just deciding the size of the bins within which to summarize it’s movement. Obviously TIME is important because it takes TIME for strong moves to develop, it takes TIME for the market to work through orders, and TIME is the key ingredient of some quality setups.

However, the response is usually something like this:

Source: Google Images

Getting Practical

This week we spoke a fair amount about USDCAD, as it fell from it’s recent consolidation and tested 1.3600. Now upon approach to 1.3600 for the first time, on May 15th, we need to analyze the 3 dimensions of market movement:

  • price
  • volatility
  • time

  • Price: 1.3600 is a strong level since it’s both a round number, and a prior resistance.
  • Volatility: the market had pushed very hard to get down to 1.3600 from the opening print of the day. This influences the odds of 1.3600 holding or breaking today because today the market has moved quite a bit and today the odds favour a bounce more than a break.
  • Time: it tool almost the whole day to reach 1.3600 from 1.3710-20. But it took only a couple of hours to bounce from 1.3600 to 1.3670. Time regulates the sustainability of a move.

Price had exhausted it’s daily directional volatility upon approach to 1.3600 and ran quickly to 1.3670. The ascent’s sustainability was suspect (too far, too fast) and started to reverse just as fast. The fact that price could not hold 1.3670 and instead started to rotate lower revealed that 1.3600 was not as strong as expected.

Price can only move so far in a limited period of time before it becomes too stretched. Volatility can only sustain itself for limited periods of time before it becomes excessive and has to revert to the mean. So time links the two variables together and regulates them, even during tier 1 events like  NFP, Fed announcements or ECB announcements. Price can’t move 10% intraday…it’s not sustainable and will revert. But in a matter of days? That’s a whole different story.

GBP’s miniature flash crash this week was another good example of an unsustainable move. Because of a lack of liquidity along with stops from late longs, GBP fell approximately 90 pips in 1 minute, from 1.3000 to 1.2900. 90 pips are sustainable within several hours of movement, but not in 1 minute. What prices were encountered on the descent? No influential level until the round number 1.2900. So attempting to purchase GBP at/around 1.2900 at least for a temporary bounce, was a good idea based on the price/volatility/time equation: too much movements in too little time, reaching significant prices.

Over To You

Time and movement are inextricably linked and their relationship is expressed via volatility. Intraday volatility is constrained by maximum sustainable movement over a set timeframe. In other words, price candles are “time boxes” and their form summarizes market movement. But it’s not the shape of the candles that dictates their significance. By only watching the “shape” of the candles you’re merely thinking in terms of flat price. You need, instead, to think:

“I see a small daily candle/large daily candle/outsized daily candle” or “I see a large/outsized intraday candle” hence connecting volatility to price behaviour within a given time frame (1 day or 1 hour). This tells you whether the move is sustainable. But you also have to understand where, on the price map, we are. A big move through a significant level gives you much more relevant information than a big move in the middle of nowhere. Vice versa, price consolidating ahead of a key sup/res gives you much more relevant information compared to price consolidating in the middle of nowhere.

If you can start to view market movements within this 3-dimensional framework, your trading will never be the same, for the better.

About the Author

Justin Paolini is a Forex trader and member of the team at  www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.