Most people start trading with the knowledge acquired from reading books or a weekend seminar about technical analysis. The first thing they pay attention is price, the second is volume and the last one is time.I say that because this was how I started. We forget the a chart has to axis price and time, so I believe more time should be spend in this topic. Now I usually give all tree of them the same importance because these are the building blocks of value. How value is formed we will discuss on another series of articles. Now we just want to focus on the role of time. Same way we did with Price and Volume, looking to them individually.
Quick review: Our Ipad value is U$400 and a deal between a buyer and a seller is closed at U$325.
Let´s assume that our Ipad Dealer at Apple Market Place or Apple Store decide to make a discount and offers 10 Ipads for U$10. How long would you think it would take them to sell? Anyone passing by would probably buy, and not just one, probably all ten of them. You can keep one and make a profit on the others, U$50, U$100 or even U$325 as it happen on the last deal, as long as people are willing to pay the offer.
The other scenario, let´s say Apple Store is trying to sell it´s Ipads for U$375 and nobody is buying. We will not analyse why that is happening, but could be another better product in the market, a newer version of the Ipad is to be released or who knows. A couple weeks go buy and no sales, they drop prices again: U$350 and still no buyers. This cycle repeats until the Ipad price is let´s say U$200.
Now ask yourself the difference between the two situations. On the first one, value did not change, price did but it was so cheap that is did not stayed for a long period of time at U$10. On the second situation, value was shifting down, because as price was changing, value was following.
So we can assume that: the more time a good is traded at a certain price, there is a greater chance it will change value. You can find many examples time affecting value in your daily routine. Think when you notice that something you usually buy had an increase in price. Let´s say you buy a candy bar everyday for U$3. Any changes in price will be quickly noticed by you, till you get used to this new price, as you continue to buy the candy bar.
Now this is what you should take from this article:
- The longer the price stays at a certain number, the greater the chances it will change value. It´s all about perception.
- The better the deal is, the less likely price will stay at that number. Remember of our Ipad discount for U$10. It will not last forever (or it would shift value) and you must be at the right spot to get the better deals.
- The further price is from value (without change it), the better the deal will be.
Have this concepts with you when you are trading.
Next step is to understand how Price, Time and Volume work together to define value and how different players have different values for the same good. This will be the next series of articles.
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