V.13:09 (369-374): The Time Price Oscillator by Tushar S. Chande

A Time Price Oscillator by Tushar S. Chande

Technical indicators, and oscillators in particular, measure the behavior of price relative to time. For example, the rate of change oscillator calculates the percentage change in price over a set period. That said, now consider an indicator that reverses the roles of price to time and measures the passage of time relative to price. This article details such an indicator, presenting numerous applications.

All major price trends evolve, both in price and time. A market trading in a sideways trend may begin to advance, turning into an upward trend, forming a series of higher highs and higher lows. Over time the uptrend will mature and move into a sideways trend again, ultimately forming a market top, and then a downward trend will emerge. This new trend, led by lower lows and lower highs, will reach a market bottom and form another sideways trend.

During each phase of the trend, money can be made by simply following the trend or by anticipating price changes about a trend. For example, you can design a trend-following method to establish positions in accordance with the major trend. However, you can also use a trading range method, buying at the lower side of a trading range and selling at the upper side. This would be considered an antitrend philosophy.

The key question is: When is the best time to do either? At what point during a market cycle should you expect a trend to begin or end, and when can you accurately estimate that the direction has changed?

You can count on the markets changing direction, just as you can count on day following the night. Like the sun, trends emerge, rise to a peak, weaken and fade away. In Sanskrit, aroon is the word for dawn's early light, the first sign of a new day or a change from night to day. Thus, "aroon" is an apt name for an indicator that is sensitive to the beginning of a new trend. This new indicator combines price and time in a way that illuminates the evolution of the price trend, and you can use it to identify periods when trend-following or antitrend strategies are likely to succeed.

THE BASICS OF AROON

The simplest definition of an uptrend is a series of higher highs and higher lows. Similarly, the definition of a downtrend is a series of lower lows and lower highs. However, within this definition, prices can evolve in any of a number of ways. The distinct manner in which a trend moves can include a combination of price relationships; for example, traders often compare today's price to some price in the past, such as today's high to a high a number of days ago. Overlooked in this process is the passage of time as a measurable component of the picture. Hence, we can ask this question: How many days have passed since the most recent x -day high or most recent x -day low?

To answer the question in trading terms, we can use a breakout criterion and use a fixed period for reference. Say we arbitrarily pick 25 days as our reference period, since this number roughly corresponds to one month of data. We can now define a trend as consisting of a series of higher 25-day highs and higher 25-day lows, or as a series of lower 25-day lows and lower 25-day highs. All that remains is to ask how much time has passed since the most recent 25-day high or low.