Good Morning Traders,
I get a lot of smart observations from readers and followers. Hereunder a recent comment and question with relation to the Bandwagon Theory allegory:
“Really nice allegory to describe the financial markets. One question about it, is this also something that you use in trading? So, if for example it takes the E/U 3 hours to climb 100 pips, and it takes it 9 hours to retrace only 50% of the recent upmove, would this be something that shows bullishness in your opinion? I´d say that it does because there has to be buying into the retracement (or it´d fall faster). Looking forward to hear what you think about it. ”
Following is my answer:
Yes in a certain measure I use this concept in my trading. I try to find an edge by modelling how Program Trading acts on price in different timeframes, which I like a lot because it works and it is so different from what the majority of other traders attempts to do (not saying it is the only way to be right more often about the market, of course). The way I do it is by using the Fibonacci retrace study in a different way (see examples in this and other threads in FF), learned and perfected with other traders.
The 50% level is important but you also need to understand how the market is moving on the target timeframe (is it in traditional moves or is price extended?) and in the larger timeframe too.
Based on my experience I do not think there is time symmetry and or proportion in the markets with relation to time. Corrections happen much faster or, when they are flags can take days, in a total unrelated manner compared to the initial move. In fact, I only try to model areas of support(entry), resistance (exit) and profit targets, not the amount of time price will take to react to these areas.
To answer your last question, it depends. Price is the combination of what traders do on different timeframes. So what happens when, let us say, you get a nice retrace on the daily to the 50% and anticipate a continuation higher, but you did not realize that the relative high (before the correction started) was at targets in the weekly (higher) timeframe?
It happens that we are toasted. Unfortunately profit taking coming from the participants (or programs) on the weekly timeframe has the potential to push prices well below your entry area at 50% and we end up holding the bag .
When I analyze price I try to take into account what happens in the lower and higher timeframes of the target chart.
Hope this helps
Have a great day.