The Science of Technical Analysis L03
L03: The Effect of Time - Time plays a critical, but complex role in how we analyze price action.
This is the third installment in the TA literacy series that will be available exclusively to paid subscribers.
The Fractal Nature of Timeframes
Timeframes are one of the most complex concepts to understand while learning the science of TA. They play a large role in how we look at cycles, how we determine when a trend will break or continue to compress price, level strength relativity, and when a reversal or pivot is likely to occur.
In both traditional and crypto markets, everything works from the highest time frame down. It’s how you execute your level and trend identification. You will identify these levels starting from the Monthly timeframe, working your way down as far as you need for the type of trade you are looking to take. How low into timeframes you can go is dependent on whether you pay for premium features through Trading View, although, by default you should be able to go down to a one minute time frame without paying. Any additional timeframes outside the ones listed here are a paid feature, and include down to a one second timeframe.
Here are the key timeframes you will use most. Notice the gold star next to the ones you need to use:
There is a fractal relationship between timeframes. For example, there would be four weekly candles within a monthly candle, seven daily candles within a weekly candle, six 4 hour candles within a daily candle, and so on.
As we move down into lower timeframes, you are effectively breaking down each higher timeframe candle into smaller segments, giving you a deeper insight into the structures held within. It’s done this way so that it becomes possible to identify data points that would otherwise be nonexistent in the higher timeframe. This allows for more accurate levels, trends, and buy/sell targets, and gives you a better grasp on the current state of a move.
Here are three charts of the same move highlighted by this white box, which gives a visual representation of how you can see more detail within a set a candles the further down through timeframes you go:
Level and Trend Strength Relativity.
The effect of time dictates the amount of data points we can draw from, but it also factors into the relative strength of levels and trends. As you work down from the monthly to the 1 minute timeframe, the strength of the level or trend progressively gets weaker.
Intrinsically, a daily level will be stronger than a 4 hour, while a weekly level would be stronger than a daily. When trying to identify which levels have the highest relevance to the current trajectory, understanding that the strength of a level relative to timeframes is key. Price will have an easier time overcoming a 15 minute level than it would a 4 hour.
This is precisely why we color code all our levels and trends by timeframe. The visual aid helps to identify high timeframe levels in a low timeframe context. The way price will interact with a weekly level on a 1 hour timeframe will be vastly different than a weekly representation.
For example, see how the 1 hour candles seemingly close overtop of this weekly, yet there is no reaction in line with the strength of a weekly level.
Now see this same zone from a weekly perspective.
In the weekly chart, there is no point in which an accumulation candle manages to close overtop of the weekly level, which indicates the level will still be a distribution zone for the time being. However, on the 1 hour chart, you could see how many candles closed over top, forming their own cycles on the topside of it, which could mislead you if you do not maintain the color code set in the first lesson.
The complex relationship between trends, levels, and time
It’s equally important to do this for trends, as they are essentially levels as well. What makes them different from horizontal levels?
Trends:
Trends, unlike levels, act as a confining force over time across the ‘X’ axis, where. The longer it does so, the stronger the reaction will be when it either fails or succeeds to break.
Trends give us insight into the cyclical nature of price action, allowing for impeccable timing, yielding predictable and reproducible results, and dictating the moments of injection or closure of positions.
Levels:
Levels in this context are described as points of interest, or data points. These data points exist solely on the ‘Y’ axis, despite the name of the tool being horizontal ray.
They differ from trends in that they act as a range that dictates the vertical confines of price action, but specifically within the parameters set by trends.
Consider that levels need only be tested to be broken because that point of interest, which acts as a point of distribution or accumulation, generally will be exhausted once it’s been tested, which is followed by the re-test and subsequent break. This is not always the case, but the variance is more-so tied to strength relativity or trend intersections, rather than some rare occurrence with no explanation. Be weary of anyone who cannot site reasoning for why something happens.
Levels can become stronger over time as more data is gathered, and as price interacts with it. The amount of time that level successfully rejects price, preventing a ‘hard close’—which will be covered in a later lesson—dictates that it will eventually allow for a higher timeframe candle to print that respects that level. This is exhibited in the assortment of photos below, going from top to bottom.
Chart 1: 5 minute
Chart 2: 15 minute
Chart 3: 1 hour
Chart 4: 4 hour
This is a complex concept. It’s one that takes exposure and experience to fully understand. Just know that despite the above statement, levels also become weaker the more times they are tested, as there is only so much capital on one side of the “bull vs bear” dynamic that’s readily available at the time price reached it.
It sounds contradictory, but the specific time sequencing behind the opening and closure of candles creates a fractal relationship between lower timeframes and higher timeframes, where holding that level until a higher timeframe candle is printed may actually increase its strength relative to the higher timeframe.
Chronological-Decycling
In a previous lesson you learned that working from the highest timeframe down is the proper method for level and trend identification. This is actually a representation of the concept covered in this section.
As time passes, and as newly formed levels and trends continue to be respected by price, you will eventually work your way down to the lowest possible timeframe within that cycle. This will eventually creating a pivot point or a polarizing point.
In these two charts you will see the daily trend as the original trend, where the 4 hour follows it, then followed by the 1 hour. You can see as time goes on, the relative strength of each trend decreases until the point in which the distribution cycle eventually breaks.
This rule sets the foundation for more advanced concepts down the road. A failure to abide by this rule, usually onset by NOT starting at the highest timeframe possible when identifying levels and trends, results in them being misidentified which can skew your analysis of strength relativity.
It’s very important you spend time developing your understandings of this concept as you progress in your journey.
The effect of time is all encompassing and constantly evolving your chart. It plays a role in dictating where key levels and trends are, and will have an impact in timing your execution of trades.
There will likely be lessons later on that will expand on these concepts to show how it’s applied in an appropriate context. So don’t feel discouraged if you are not fully grasping its complexities, as there will be more opportunities for continued development of your understanding.
My goal with this collection is to breakdown the things I’ve learned over the past 4.5 years in a consumable manner using visuals paired with detailed explanations on how to identify, understand, and apply the science behind trading.
These techniques are not my own, and this iteration of them is a condensed image and text based version of what is offered by C0TT0NC4NDYTA on YouTube.