Time and Price Squared

Time and Price Squared: A Deep Dive for Beginner Traders

Time and Price Squared (TPS) is a powerful, yet often overlooked, technical analysis methodology developed by Howard Bandy. It’s a method for identifying potential turning points in the market by combining the dimensions of time and price. Unlike many indicators that rely solely on price action, TPS incorporates the element of time, recognizing that significant market moves often occur at specific intervals. This article aims to provide a comprehensive understanding of TPS for beginner traders, covering its core principles, calculations, applications, and limitations.

Core Principles of Time and Price Squared

At the heart of TPS lies the belief that markets are cyclical and that these cycles can be quantified. Bandy observed that significant market highs and lows often coincide not only with specific price levels but also with specific *time* intervals from previous highs and lows. The method isn’t about predicting the future with certainty, but rather about identifying areas where the probability of a reversal increases based on historical patterns.

The central concept revolves around squaring the price movement and comparing it to the time elapsed since the previous significant high or low. This squaring process is crucial because it attempts to account for the non-linear relationship between price and time. A larger price move requires a longer time to complete, and vice versa.

Here are the fundamental principles:

Time is a Dimension: TPS treats time as a critical dimension alongside price. Ignoring time can lead to inaccurate analysis and missed opportunities.
Price Squares: Price movements are evaluated in terms of their square root. This helps normalize price fluctuations across different assets and timeframes.
Horizontal Lines as Potential Support/Resistance: TPS utilizes horizontal lines projected from significant highs and lows, based on time and price squared calculations, to identify potential support and resistance levels.
Time Zones: TPS identifies specific time zones where reversals are more likely to occur. These zones are derived from the time elapsed since previous highs or lows.
Confirmation is Key: TPS is most effective when combined with other Technical Analysis tools and patterns, such as Candlestick Patterns and Trend Lines.

Calculating Time and Price Squared

The calculations involved in TPS can seem daunting at first, but they become more manageable with practice. Here's a breakdown of the key steps:

1. Identify Significant Highs and Lows: The first step is to identify significant swing highs and swing lows on the chart. These are points where the price has demonstrably changed direction. Consider using Support and Resistance levels to help identify these points. 2. Measure Price Movement: Determine the price difference between the current price and the significant high or low. This is simply the absolute value of the difference. 3. Calculate Price Squared: Square the price movement calculated in step 2. For example, if the price moved $5 from a previous low, the price squared is 25. This is often expressed as a percentage of the initial price. 4. Measure Time Elapsed: Determine the number of bars or periods that have elapsed since the significant high or low. 5. Calculate Time Squared: Square the time elapsed. For example, if 10 bars have elapsed, the time squared is 100. 6. Project Horizontal Lines: Project horizontal lines from the significant high or low, extending both in time and price, using the calculated price squared and time squared values. These lines represent potential support and resistance zones.

Formulae:

Price Squared = (Current Price – Significant Price)²
Time Squared = (Number of Bars/Periods)²

Example:

Let’s say a stock made a low of $100 ten bars ago, and the current price is $105.

Price Movement = |$105 - $100| = $5
Price Squared = $5² = 25
Time Elapsed = 10 bars
Time Squared = 10² = 100

This means you would project a horizontal line 25 units *above* the $100 low (reaching $125) and another horizontal line 100 bars *from* the original low in time. The intersection of these lines represents a potential area of support or resistance.

Applications of Time and Price Squared

TPS can be applied in various trading scenarios. Here are some common applications:

Identifying Potential Reversals: The primary application of TPS is to identify potential turning points in the market. When the price approaches a TPS line, it suggests a higher probability of a reversal.
Setting Profit Targets: TPS lines can be used as potential profit targets. If you enter a trade anticipating a move towards a TPS line, you can set your profit target at or near that line.
Placing Stop-Loss Orders: Similarly, TPS lines can be used to set stop-loss orders. A stop-loss placed slightly beyond a TPS line can help protect your capital if the trade moves against you.
Determining Entry Points: TPS can help identify optimal entry points. Waiting for a pullback to a TPS line before entering a trade can improve your risk-reward ratio.
Confirming Breakouts: TPS can be used to confirm breakouts. If the price breaks through a TPS line with strong momentum, it suggests a higher probability of a sustained breakout. Combine this with Volume Analysis for increased confidence.
Analyzing Multiple Timeframes: TPS can be applied on multiple timeframes to gain a more comprehensive understanding of the market. Higher timeframes provide broader context, while lower timeframes offer more precise entry and exit points. Multi-Timeframe Analysis is key here.
Trading Ranges: Within a trading range, TPS lines can identify potential support and resistance levels, helping traders navigate the range effectively. Range Trading strategies integrate well with TPS.

Advanced Concepts and Considerations

While the basic principles of TPS are relatively straightforward, there are several advanced concepts and considerations to keep in mind:

Multiple Confluences: The more TPS lines that converge at a particular price and time level, the stronger the potential support or resistance zone.
Geometric Angles: Bandy also incorporated geometric angles into his TPS methodology, but these are more complex and require advanced study.
Time Zones vs. Specific Dates: TPS emphasizes "time zones" rather than specific dates. This is because market cycles are rarely exact.
Adjusting for Gaps: Gaps in price can disrupt the TPS calculations. Traders need to adjust their analysis to account for these gaps.
Subjectivity in Identifying Significant Highs and Lows: Identifying significant highs and lows can be subjective. Different traders may identify different points, leading to variations in TPS lines.
Psychological Levels: TPS lines often coincide with important psychological levels (e.g., round numbers), which can amplify their impact.
Combining with Fibonacci: Some traders combine TPS with Fibonacci Retracements and Fibonacci Extensions to refine their analysis.
Using Moving Averages: Integrating Moving Averages can help smooth out price fluctuations and confirm TPS signals.
Considering Market Context: Always consider the broader market context, including overall Market Trend, economic news, and sentiment, when applying TPS.
The Importance of Volume: Volume can provide valuable confirmation of TPS signals. A breakout through a TPS line accompanied by high volume is more likely to be sustained. On Balance Volume (OBV) is useful here.
Understanding Elliott Wave Theory: While distinct, TPS can complement Elliott Wave analysis by identifying potential wave targets and retracement levels.
Applying Ichimoku Cloud: The Ichimoku Cloud can give additional confirmation and context to TPS levels, particularly regarding the strength of a trend.
Using Bollinger Bands: Bollinger Bands can help identify volatility and potential breakouts in relation to TPS levels.
Recognizing Head and Shoulders Patterns: TPS can help pinpoint potential neckline breaks and target levels within Head and Shoulders patterns.
Analyzing Double Top/Bottom Patterns: TPS lines can confirm the validity of Double Top or Bottom patterns and assist in setting profit targets.
Employing Divergence with RSI: If the Relative Strength Index (RSI) shows divergence while price approaches a TPS level, it could signal a weakening trend and a potential reversal.
Applying MACD Crossovers: MACD crossovers near TPS levels can provide additional confirmation of potential turning points.
Utilizing Average True Range (ATR): ATR can help assess the volatility of the market and adjust stop-loss levels accordingly when using TPS.
Considering Parabolic SAR: Parabolic SAR can show potential trend reversals in conjunction with TPS levels.
Examining Stochastic Oscillator: Stochastic Oscillator signals near TPS lines can indicate overbought or oversold conditions and potential reversals.
Using Williams %R: Williams %R can provide similar overbought/oversold signals alongside TPS levels.
Analyzing Chaikin Money Flow: Chaikin Money Flow can confirm the strength of a trend as price approaches TPS levels.
Applying Donchian Channels: Donchian Channels can help identify breakouts and reversals in relation to TPS lines.
Using Keltner Channels: Keltner Channels can offer insights into volatility and potential trading ranges alongside TPS analysis.

Limitations of Time and Price Squared

Despite its effectiveness, TPS is not a foolproof method. Here are some limitations to be aware of:

Subjectivity: As mentioned earlier, identifying significant highs and lows can be subjective.
False Signals: TPS can generate false signals, especially in choppy or volatile markets.
Lagging Indicator: TPS is a lagging indicator, meaning it relies on past price data. It may not always accurately predict future price movements.
Complexity: The calculations involved in TPS can be complex and time-consuming.
Requires Practice: Mastering TPS requires significant practice and experience.
Not a Standalone System: TPS should not be used as a standalone trading system. It’s most effective when combined with other technical analysis tools and risk management strategies. Risk Management is paramount.

Conclusion

Time and Price Squared is a powerful technical analysis methodology that can help traders identify potential turning points in the market. By combining the dimensions of time and price, TPS offers a unique perspective on market cycles. While it has limitations, TPS can be a valuable addition to any trader's toolkit, particularly when used in conjunction with other technical analysis tools and sound risk management principles. Remember to practice diligently and adapt the methodology to your own trading style. Further exploration of Harmonic Patterns can also enhance your analytical skills.

Start Trading Now

Sign up at IQ Option (Minimum deposit $10) Open an account at Pocket Option (Minimum deposit $5)

Join Our Community

Subscribe to our Telegram channel @strategybin to receive: ✓ Daily trading signals ✓ Exclusive strategy analysis ✓ Market trend alerts ✓ Educational materials for beginners