Theory of Time and Price (by Phantomcapital)

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One of the more commonly held beliefs is that time is constant.  One hour is 60 minutes or 3,600 seconds.  Furthermore, the equity trading day is 6.5 hours, 390 minutes, or 23,400 seconds.  This we can all agree on.  However, time, when measured by price, is no longer constant.  Bear with me, I promise this is going somewhere very meaningful for a trader. 

Price is determined by buyers and sellers acting on emotions, psychology, and information flow.  Emotion and psychology are human, information flow is mechanical.  Therefore, information flow is king when discussing time.  Information can be a streaming chart, a tip from a friend, earnings, a news event that has crossed the wire, etc.  Understanding the history of information is crucial to understanding how time, when it refers to price, is NOT constant.

Speed of Information


Let’s go back in time.  I need to send a message from New Amsterdam to London.  The year is 1650.  The message is carried by hand to the port and then sailed across the sea by a rudimentary sailing ship.  Transmission time is roughly three months.  Faster sailing ships whittled down transmission time for the same message to roughly one month in the 1800s.  The Transatlantic Cable then sped the process up to a day in the 1900s but the message still had to be written down and transported to the wire service.  Now I can create the message, post it to facebook, tweet it, or email it in under a second.  Simply transmission time has gone from 7,776,000 seconds in the 1600s to one second in 2012.  Information travels six factors faster now than it did in the 1600s.

Modern Trading Speed

Now we need to look at how trades have been placed historically.  At the beginning of Wall St. trades were actually executed at a specific post on the wall that used to run the physical length of Wall St.  Execution and confirmation of the trade could take over a day.  Trading then was placed inside they NYSE but couriers still physically ran trades.  Then trades were executed by wiring a broker who wired the floor who wired back confirmation to the broker who then wired the trader.  Next, trades were executed via a phone, but a broker was still needed.  Now anyone can trade instantaneously online and experience millisecond execution and confirmation.


Simply, time is no longer constant when talking about trading.  Information flows exponentially faster and trades are executed at lighting speed.  HOWEVER, price depends on two nasty little human traits as well.  Psychology and emotion.  As us imperfect humans are flooded with instant information flow and trade execution WE SIMPLY TRADE FASTER.  Meaning, price moves that used to take a month now happen in a week.  Moves that happened in a week now happen in a day.  A gigantic day in the market 50 years ago now can occur in an hour.  Time as measured by price is no longer constant.

The trader can learn from this.  Do not be afraid to take a profit when it has hit a price target even if the move occurred in hours or even minutes.  The current market behaves the same as it always has however its behavior now plays itself out in minutes not days like in the past.  Understand that time no longer is constant and trade accordingly!