This is Jason Alan Jankovsky’s third book. Last year I wrote about Trading Rules That Work and The Art of the Trade. In Time Compression Trading: Exploiting Multiple Time Frames in Zero-Sum Markets (Wiley, 2010) Jankovsky expands on his overarching premise that the winning trader sits on a trade as long as there is a secure uptrend or downtrend and then exploits changes in order flow.
Zero-sum markets such as futures, options, and FOREX are a tug-of-war between buyers and sellers (as opposed to equities which are more like a game of musical chairs). Individuals win or lose depending on the actions of other traders.
The structure of these markets can be dissected into four components which are, in order of importance, time, volume, open interest, and price. Price is the least important; much more important is how the market got to that price. As Jankovsky writes, “If you knew the order flow was about to change, and it was about to go heavy on the buy side, and that would likely be in the next 10 minutes, would you buy the current price no matter what it was? Absolutely you would. It doesn’t matter what the price is when the order flow changes; it only matters that you are on the right side and slightly ahead of that change.” (p. 28)
Time is the most important element of market structure, and this includes both holding time and time compression. As to holding time, Jankovsky recalls that as a young trader he thought it was wise to be flat at the end of the day. He came to realize that all he was really doing was “providing liquidity to the larger professionals on the other side” and that his liquidation orders and the liquidation orders of all those other traders who wanted to reduce risk by being flat every day “were a large reason why the market continued to advance in trend for the professionals day after day.” (p. 31)
Time compression “is what happens when everyone wants to do the same thing at about the same time for roughly the same reasons.” (p. 51) Understanding time compression in the markets enables the trader to see when an order-flow imbalance is likely to occur. Changes in volume and open interest are tipoffs, and using multiple time frames (and not those lower time frames that losing traders tend to focus on) to discern market structure is critical.
Jankovsky analyzes in some detail five basic market structures—topping and bottoming markets and secure uptrends, downtrends, and ranges—and the time/price relationships that obtain in each of them.
Although time compression is the main thread of this book, Jankovsky is not a single-strand thinker. He writes about the illusion of technical analysis (though it can be useful in identifying the losers in the market and, when used with market structure and time compression, can help confirm the presence of an opportunity). He has a chapter on the psychology of initiating and liquidating a position—a conflict/resolution cycle that “happens only in the mind of traders and nowhere else.” (p. 44) He writes about how traders lose perspective and how “losing traders are attempting to predict where the market will go whereas winning traders are attempting to participate with what is happening.” (p. 85) He looks at the problem of leverage and suggests trading smaller while running a wider stop. And he exhorts the trader to think about who’s on the other side of his trade—is it someone trading size or a little fish he can swallow up?
Time Compression Trading offers a refreshing perspective on the markets. It’s an easy, if sometimes repetitive, read. And although there is no magic formula for transforming a losing trader into a winner, it challenges some patterns of thinking and acting that can put a trader squarely in the losers’ camp.