The market has various ways to shake out traders. Usually after a fast move up or down the market goes into time based capitulation (TBC) to shake out weak hands. In this article, I’ll go over the why, when, and how the market operates in time based capitulation (TBC).

Why?

One of the ways markets shake weak hands out of the market is via TBC. What does this mean?

The markets generally trend 20% of the time and range 80% as a rule of thumb. This rangy chop period is also known as time based capitulation. The market will range for a long enough period of time that traders with weak conviction will eventually capitulate their positions in search for a trending market. Once these weak hands have left the market will then trend again, leaving the weak hands out of the market or having to chase price at a worse entry than what they were once positioned in.

TBC feasts on traders that oversize, have lack of conviction in future direction of trend, and have too little patience.

When?

TBC occurs usually after a fast move up or down. The market conditions traders to a fast trending market. Once the trend has exhausted the market will enter into either a distribution or accumulation phase. The choppy range that ensues can last much longer than traders expect. It is designed this way.

Generally Q2 and Q3 are slower and more prone to TBC. This is due to traders touching grass over the May - August summer months. Volume diminishes and trends tend to cool.

How does it work?

As previously mentioned in the why, TBC feasts on traders that oversize, have lack of conviction in future direction of trend, and have too little patience. Let’s dive into how this works.

Oversized:

When a market is trending you should size up sooner than later in the trend. The longer the trend is going, the less size you should have on positions. Market participants tend to do the opposite. They’re usually late to a trend, and to make up for the gains they “missed out” on participants will size up as they grow more convicted in the move as it continues to trend.

What participants should be doing is sizing up early or before a trend starts and take profits as the trend goes the traders way. Majority will do the opposite. They will fail to position early or identify a new trend. Once they commit to the trend (later than they should), they will chase price with size to make up for the trend they missed. They will mentally calculate how much they missed out on with the trend. This imaginary number that they create in their head will become a block for them to take profits. Even if they’re up in a position, greed will keep them from taking profits until they’ve hit that imaginary number that they “missed out” on. As the trend starts to slow down and enter a choppy range that includes pullbacks the trader will start to become fearful. Thoughts will enter like:

“Maybe I’m wrong?”
“I can’t risk going underwater with how much size I have, maybe I should close my position at breakeven.”
“Why isn’t the market continuing to trend?”

Emotionally they will already feel FOMO from missing out on profits from the original trend. This fear will be compounded by the new idea that they might be wrong about further continuation. Now you have an extra emotional trader that is more highly affected by the swings of the market. This is where TBC cleans up. The market will have volatile range swings testing the conviction of the oversized trader. Not wanting to run the risk of losing money and being dbl wrong, the traders will close their positions.

That imaginary number of profits that they’ve “missed out” on continues to grow. The market goes to the extremity of the range. They think a breakout is coming, now is their chance to get in with maximum size….but wait, it’s a failed break out. The market doesn’t break out and goes the opposite direction. Perhaps they’re wrong again? They close their position.

This process gets repeated and repeated, slowly but surely chopping traders up again and again. Eventually, traders will give up. They can’t handle the emotions of trying to play the breakout anymore. They’ve lost money and can’t afford to put more size on the table. The imaginary number profits number in their head starts to fade away and they accept that they got it all wrong. The trader capitulates all positions and moves onto the next market. Then once these oversized traders have cut their losses the market finishes TBC and re starts the trend. Due to the PTSD of mis managing the last trend the trader can’t mentally handle sizing up to the new trend again. By the time their PTSD has healed and they’re ready to re enter with size again the trend is near its end and the oversized trader cycle repeats.

Lack of Conviction:

Time based capitulation at its core is a long drawn out choppy range period. The chop and range is designed to test the conviction of traders. The market will form patterns that look like a breakout in either direction, just for the breakout to fail and continue to rangy chop.

Traders that lack conviction will be tested in their positions.

Why isn't the market trending already?
Am I wrong?
This pattern doesn’t look good to me
Why didn’t we break out here?
Did I make a mistake on my thesis?
Does someone know something I don’t?

These traders are likely to be heavily influenced by other traders. As TBC draws out, other traders lose conviction. This will snowball in their minds. Group think starts to take over. If other traders are bailing maybe they should too? They will start looking at other markets and think maybe there’s better trades to take. Once these traders have lost their conviction and capitulate their positions the trend will resume. Same as oversized traders, these participants will struggle getting over their PTSD of the choppy range. This can’t be the actual breakout can it? This will lead them to chase price will less conviction again and the lack of conviction trader cycle repeats.

Lack of Patience:

The achilles heal of traders is lack of patience and TBC devours these traders. The true essence of TBC is taking advantage of traders who lack the patience to see their thesis play out. One of the constant life battles is juggling the need for instant gratification and it is no different in trading.

Participants are constantly comparing their performance to others. People want to become rich quickly. They will see someone else make a lot in a short period of time and think why can’t I do that? What they lose sight of is markets reward patience participants who take high edged traders over a long period of time. These high edged trades aren’t always available and take time to play out. Most traders lack the emotional or mental state to have the patience to play out these trades. Even if their thesis is correct, the fact they aren’t making profits this instant will end up with them closing their position in the chase of instant gratification.

One of the hardest parts of trading is identifying an accumulation or distribution range and then having the patience to see the conviction play out. TBC usually happens after a fast trending move. Traders become used to the speed of the market and expect this to continue. Trend slows and we enter time base capitulation. The volume will decreases and the chop in a range. With no instant trend and gratification participants will pull their money in search for a faster moving market. The problem with this is participants will likely be late to whatever trend they chase. Chase trend near the end → enter time base capitulation → lose patience in the trade, close position and chase another trend → market starts to move once these traders have left.

Conclusion

One thing that lack of conviction, oversized traders, and lack of patience all have in common is the market will finally end TBC once these traders have capitulated their positions. This is where the name “time based capitulation” stems from. The chop and period of time that ensues shakes all these weak traders out of the market.

TBC can be a very painful period as there’s no instant gratification. This creates a lot of PTSD and pain in traders minds that capitulate. This PTSD becomes too big of a hurdle for them to react quickly enough to re join the trend once the market breaks in a direction. The problems continue to compound for the traders and they continue to act emotionally and repeat the mistakes they just made over and over again.

Smart traders do the opposite to these traders. They identify the TBC as accumulation or distribution. They slowly enter the market making sure not to oversize in case their thesis is wrong. Conviction is built as the TBC pattern continues to form. They have patience to continue building their position in favorable spots, usually at the extremities of a range. They continue to buy the TBC of others and wait patiently for the thesis to be right or wrong. Since they’ve not oversized and built positions in a favorable spot, if they’re wrong the loss is only a scratch. However, if correct the trader feasts on a new trend. They scale out profits as their thesis plays out, selling their position to the PTSD traders who capitulated their bags during TBC. The cycle repeats again and again and again.

Traders Corner: Understanding Time Based Capitulation