Price-Time Correlation: Through Waves

18 mar

Price reflection through Waves

We all know that price does not moves in a straight line, it moves in waves. A graphical representation of price with respect to time always gives us a wavy structure. If you notice carefully, on any chart, these waves reflect different characteristics. Some will be longer and quicker than the others while some will be smaller and slow. The behavior of these waves could help us in identifying strength and weakness in price and hence rational decision making.


Waves Reflect Momentum

The quick or slow action of a wave with respect to time indicates its momentum. A longer wave in a small duration of time is said to have more momentum than a wave of same length in a larger time duration. It should be noted that in trading, momentum of a wave is a relative term. It means that momentum of one wave doesn't make much sense unless it is compared with the momentum of another wave(s). It is through this comparison that we can discover strength and weakness in price action.


Momentum or Human Behavior?

Please do remember that when I say strength and weakness, that means the strength and weakness of market participants. Ultimately it is the human action and psychology that is playing in the background. In the foreground what we see are the waves on Price and Time axis. So, a weaker up wave would mean that buyers were not very strong in that up move. Or a stronger down wave would mean that sellers were stronger in that wave and so on. This contrasting behavior may help us in understanding the market behavior more accurately and taking prudent trading decisions.


Also remember that Price-Time correlation does not focus on bottom picking but it provides additional confirmation that the correction/consolidation has been terminated and the larger trend has resumed. Secondly, while the market may behave differently in different geo-political environments, one should not expect identical outcomes all the time.


Let's go through the Example

Normally after a strong trend we see a correction/consolidation. A correction can be of any type but for the sake of simplicity I have taken the more popular 'abc' type structure.

Wave A
Very strong momentum up wave. Generally, very strong moves lead to consolidations.

Wave B
Strong momentum corrective wave

Wave C
🚀Momentum is weaker than both waves A and B.
🚀From A to B, the price corrected in one go whereas C is a 3-wave sub structure in itself.
🚀Also, C took more time compared to B but could not reach the high of A.
Inference- Buyers are not very strong at this stage so not a very good place for fresh buyers.

Wave D
🚀Momentum is even weaker than C.
🚀5-wave sub structure and huge time taken by the wave to reach the low of B reflects that sellers were not strong enough to push the market down.
Inference- Buyers could try for a low-risk trade.

Wave E
🚀Price breached the high of C and A in a smaller duration of time. So huge momentum.
Inference- Good to keep holding long positions and for fresh entry into small pullbacks.

SPX500 Example:
https://www.tradingview.com/x/x2xZAHWE/

For measuring time one can count the number of candles in a wave with the help of DateRange tool provided in ForecastingandMeasurementTools Tab on the left pane of Tradingview chart page OR sometimes simply eyeballing a chart would serve the purpose.

Disclaimer: This is a very simple but strong concept, and I am not the sole follower or proponent of it.

Hope it added to your knowledge. Do hit the 🚀 button and share your experiences regarding momentum trading in the comment 💬 section below.
Thanks for bearing with me.

18 mar

Nota

The concept works well near important levels of Support and Resistance.
Shift in momentum at these levels may provide excellent low risk opportunities.

20 mar

Nota

Another recent example of Bank Nifty Index that shows shift in momentum near an important level of support on an intraday timeframe. It actually led to reversal. Sometimes it's not just the shift in momentum but what happens after that, gives additional confirmation about what we have been trying to anticipate through the chart.