「Pattern, Price and Time: Using Gann Theory in Technical Analysis」を読む
James A. Hyerczyk
Pattern, Price and Time: Using Gann Theory in Technical Analysis
2nd Edition
ジェームズ ・ハイアーチェク
実践ギャン・トレーディング―相場はこうして読む
CHAPTER 1
Why Pattern, Price and Time?
Despite the proliferation of trading analysis programs claiming to have new indicators and new ways to analyze the markets, I've come to the conclusion that there really is not anything new under the sun and that all of these discoveries can be placed into the categories of pattern, price, and time.
Ever since the early days of trading up until today, traders have been trying to create ways to manipulate data in an effort to find an edge over everyone else. Today's sophisticated programs have the ability to smooth data and create sophisticated formulas to make the market's basic data appear to show anything the programs want to find. Some programs create moving averages, while others try to break down the markets into oscillators that move between 0 and 100. All of these new ways to look at data may be fine for some, provided that they understand how these numbers are created, and the programs create rules on how to use them, but I find working with the original Open, High, Low, and Close data to be most beneficial. In addition, while I acknowledge that using computer-generated oscillators or indicators may speed up the process of analyzing a market, I have found that all of these smoothing tools will eventually collapse to or agree with my simple analysis of the markets using the Open, High, Low, and Close.
This book, although it is concerned with the technical analysis approaches to trading Forex, futures, and equities, should not be considered the definitive answer to making tremendous amounts of money in trading. Instead it should be used as a guideline to give the trader an edge as to what is actually taking place in the marketplace. My application of pattern, price, and time analysis allows me to see and understand what is happening in the markets. It does not hide anything in complicated formulas or computer number crunching. Although this is a personal preference, I feel that the analyst who understands how pattern, price, and time work independently and in unison with each other creates an edge to trading the markets that computerized analysis cannot.
CHAPTER 2
Who Was W. D. Gann?
CHAPTER 3
Gann Theory in a Nutshell
Gann Theory can be described as the study of pattern, price, and time and how these relationships affect the market. Gann Theory looks at pattern, price, and time as the key important elements in forecasting the future movement of the market.
It is the balance of these three elements, especially price and time, that creates the best trading opportunities that can lead to more success in the market. Gann Theory helps the trader to determine the best combinations of pattern, price, and time to initiate successful trades.
Pattern study consists of the proper construction of minor, intermediate, and main trend-indicator swing charts and closing-price reversal patterns. Price study consists of Gann angle analysis and percentage retracements. Time study looks at swing timings, cycle timing, and historical dates. The combination of these three time factors helps the trader decide when and where to buy or sell.
It is my intention to focus on the portions of Gann Theory that can be used to create a profitable trading system.
As a key element of Gann analysis, I do discuss some simple examples of how Gann applied financial astrology to the markets. In addition, Gann created a series of major and minor trading charts, which he used to determine current and future support and resistance points.
Gann wrote:
❝5010 is opposite 150 degrees from 6600, 4800 is on a 45-degree angle from 1000, 5000 is on a 30-degree angle from 4650. From 35 degrees, which is half of 90, the 45-degree angle crosses at 88 points. This is why the market made its lowest close on April 11, 1998. The Master Chart shows the same resistance levels and by using the angle principle it will know the basic mathematical and geometrical laws for market evolution.❞
The Basis of Gann Theory: The Law of Vibration
During an interview, Gann once revealed that the secret to his trading was understanding the vibrations of a commodity. "The Law of Vibration," as he called it, explains the cause of the periodic recurrence of the rise and fall in commodities. The following excerpts are from an article Gann wrote that covers this topic in greater detail.
Gann wrote:
❝I soon began to note the periodical recurrence of the rise and fall of stocks and commodities. This led me to conclude that natural law was the basis of market movements. After exhaustive research and investigations of the markets, I discovered that the Law of Vibration enables me to concentrate on the exact points to take action on commodities should rise and fall within a given time. The working of this law determines the cause and predicts their losses before the Street is aware of either. Most speculators can trace the fact that it is looking at the effect and ignoring the cause that has produced their losses.
There is no chance in the market, because mathematical principles of the highest order form the foundation of all things. Pythagoras said: "There is nothing in the Universe but math."
Through the Law of Vibration, every stock in the market moves in its own distinctive sphere of vibrations, and is characterized in its own rate of vibrations. Stocks, like electrons, are really centers of energies, therefore they are controlled mechanically, which gives them the power of field and energy and power, power to attract and repel, which in principle explains why certain stocks at times flood the market and "turn heads."
After years of patient study, I have proven to my entire satisfaction as well as demonstrated to others that vibration explains every possible phase of the market.❞
Gann was a rare mathematician. He was a student of numbers, number theory, and the progression of numbers. He often said his analysis theory was based on natural law and measured in numbers.
Since time progresses as the earth turns on its axis, and time is measured by numbers and cycles in movements, and since prices in their movement upward and downward are measured in numbers, we can understand why Gann had an intense interest in number theory, number theory, and mathematics.
Gann said his trading method was based on natural and mathematical law. For those who refused to reveal any part of this method, the method was based on natural law, but the theory behind this was based on mathematics. Since the arithmetic was fundamental to the movement of the markets, his system involved numbers and number progressions. The saying said that he had researched far back into history and even went to India for a time to study ancient philosophies as well as other periods.
As steadily Gann’s works, we begin to see that some numbers took a dominant role in his trading method. The square of numbers was an important tool in this, namely: 16, 25, 36, 49, 64, 81, and 144. He found that markets moved in patterns with the price movement of these squares in terms of both price and time.
Anniversary Dates
Among the timing tools Gann used is a concept he referred to as anniversary dates. This term refers to the historical dates the market made major tops and bottoms. The information collected in effect reflects the seasonality of the market because often an anniversary date repeats in the future.
Cycles
When looking at anniversary dates he saw a series of over-year cycles. In geometric terms, the cycle is often represented as a circle or 360 degrees.
When looking at timing dates, Gann considered three major cycles: the 90-day cycle, the 180-day cycle, and the 270-day cycle. In using the one-year cycle and the divisions of this cycle, you will find a date where a number of these cycles line up (preferably three or more) on a single point in time in the future. A date where many cycles converge is called a price action. This time cluster is used to predict major tops and bottoms.
Squaring the Price Range with Time
Gann stated:
❝If you stick strictly to the rule, and always watch when price is squared by time, or when time and price come together, you will be able to forecast the important changes in trend with greater accuracy.❞
The squaring of price with time means an equal number of price units to the time units. Gann suggested traders square the range, low prices, and high prices.
Squaring a low means an equal amount of time has passed since the low was formed. This occurs when a Gann angle moving up from a bottom reaches the time period equal to the low.
For example, if the low price is 100 and the scale is 1, then at the end of 100 time periods an underlying Gann angle will reach the square of itself. The market will continue to square the low as long as the angle holds.
Squaring a high means an equal amount of time has passed since the high was formed. This occurs when a Gann angle moving down from a high reaches the time period equal to the high.
For example, if the high price is 500 and the scale is 1, then at the end of 100 time periods a downtending Gann angle will reach the square of itself. Watch for a low, bottom, or change in trend at this point. The market will continue to square the high as long as the angle holds.
Natural Cycles and Financial Astrology
A natural cycle is a cycle that can be assumed to change over time. For example, a naturally occurring 14-day cycle is the moon cycle. The moon cycle cannot change. Since the moon cycle follows a natural law, its position can be predicted well into the future.
Financial Astrology and Natural Cycles
To Gann the division of time by the natural cycles of the moon, the sun, and the planets was very important. For example, his 30-day cycle was based on the sun cycle, and the 12-year and 84-year cycles were based on Jupiter and Uranus cycles, respectively.
The study of planetary cycles, their origins, and their influences on the markets led Gann to develop a trading system based on financial astrology. Financial astrology is the study of how planets and their phenomena affect commodity and stock markets. The financial astrologer believes planetary influences are the cause of bull and bear markets.
A note that in much of his work Gann used the term cycle as did the Greeks (to the Greeks the word cycle meant circle.
For years Gann made charts predicting the future of prices, a year in advance (his annual forecasts), and financial astrology was apparently the method he used in making these forecasts. Included in them were the exact price, the time of the day, as well as the day and month.
The fundamental principle behind financial astrology is that the planets' orbits, rulerships, and progressions of planets, and the sun and moon have an effect on the cycles of people and events, and in particular, these planetary effects dictate the cycles and prices of stocks and commodities.
Gann was able to convert time to price, and was thereby able to generate a point at which action could be expected. This was a new advance in financial astrology, and helps to explain how he could allegedly make calls within the graph of a point on stocks for highs and lows.
The following is an excerpt from a rare time that astrology played a major role in the development of Gann's forecasting technique.
In the first paragraph, Gann explains how to convert degrees of the planets to price to find support and resistance.
❝... 67 cents), and 60 degrees 157 or 7 degrees Virgo. Add 135 gives 202 or 22 degrees Libra. Add 120 gives 127 or 7 degrees Leo. Add 198 gives 237 or 7 degrees Sagittarius. Add 225 gives 252 or 22 degrees Capricorn. Add 319 gives 317 or 7 degrees Aquarius. And 310 gives 317 or 7 degrees Pisces. Add 211 gives 225 or 17 degrees Aries. Add 306 gives 292 or 24 degrees Taurus. Add 211 gives 295 or 17 degrees Gemini. Highs on May Beans was 326½, and that was the next extreme low was 201½. Next, it is 221½, which is also the combined reasons why May Beans made bottom at 201½.
All of the above can be measured via Time Periods of days, weeks, and months, and when the time periods come at these prices, it is important for a trader to know, especially if confirmed by the geometrical angles from highs and lows.❞
Here, Gann created support and resistance levels using the longitude of the position of the sun. In the next excerpt, Gann used the longitude of the major planets to create support and resistance levels.
❝By live or active angles is meant Prices and Time Periods where the Longitude of the major planets are or where the squares, triangles, oppositions are to these planets.
The averages of the six major planets Heliocentric and Geocentric are the most powerful points for Time and Price Resistance. Also the Geocentric and Heliocentric average of the five major planets with Mars left out, is of great importance and should be watched.
You should also calculate the averages of eight planets which move around the Sun as this is the first most important odd square. The square of ”1” is one, and ”1” is the Sun. The Sun, added to “1” gives the square of “3” and completes the first important odd square, which is important for Time and Price.
At the present writing, January 18, 1954, Saturn occupies 6 degrees of the sign Aquarius and equals the price 303-309 for May Beans.
The planet Jupiter is at 21 degrees Gemini, which is 81 degrees in longitude from “0” the square of “9.” Subtract 135 degrees from Jupiter gives 36 or 6 degrees Aquarius. This is why May Beans have been resistance at these prices of 311½. The Price Resistance levels are not always strong and these geometrical angles can change week to week, but the Power of such planetary aspects, occurring monthly, for these Price Resistance Levels, is what holds the relevance in Soy Beans.
Example: December 2, 1953, May Soybeans high 311½. This equaled 18 degrees 45' in Pisces, door square or 20 degrees of Jupiter, 135 degrees to Saturn and 180 degrees of the averages, and 120 degrees of Uranus.
300 price equals 30 degrees Virgo, 302 equals 30 degrees Libra, 304 equals 30 degrees Scorpio. On January 18, 1954, the planet Saturn occupies 6 degrees 30 minutes, and 15 degrees Scorpio. This gives 6 degrees, Neptune would also be close to the body or longitude of Saturn and with indicators here. At the same time, using the Earth’s revolution of 365½ days, to know when high prices are due to occur, you can expect them to occur before the 24th revolution, when the price breaks above 304, it is the inner sign of Scorpio.
Study and analyze all options of all commodities in the same way as we know and understand planetary movement. Remember, these Resistance Points are what you need to keep in mind. Do not guess; until you get a definite understanding of price and time. You must make a study based on timing before making your next trade. This is certainly clearer when you show Soy Beans prices December 2, 1953 and cover your shorts on December 17 at 306 because the price was above 304.❞
The Master Charts
Gann sensed the need to simplify his analysis by developing a pattern, price, and time chart that was universal and permanent. This became the motivating force behind the design and invention of the master charts.
Over the years Gann developed a number of master charts, including the Square of Nine, the Square of Four, and the Master 360 Degree Chart. These charts incorporated the best features of his price and time techniques, and provided him with a quick and easy way to forecast a market. The master charts can best be described as permanent charts in the form of circles, squares, and spirals, which represent natural angles and permanent resistance points for either price, time, or volume.
The master charts can be described as essential patterns in the form of circles, squares, and spirals, which represent historical signals and important resistance points used for either price, time, or volume.
GANN THEORY AND ITS APPLICATION TO TRADING
Gann theory is based on the principle that price and time must balance. Markets are constantly in a position of change and subject to movement, sometimes with great volatility. Gann Theory states that there is order to this movement. By using the proper tools to analyze this movement, an accurate forecast for future direction can be made.
Finding the balancing points is necessary to predict future prices and movement. Gann developed a number of methods to help determine these balance points. The first method uses patterns created by swing charts to find the balance points. The second method uses angles and the squaring of price and time to find the balance points. The third method uses time.
Now that the theory has been explained, how can it be applied to trading?
1️⃣ The first step is to create the charts that properly demonstrate the concepts of pattern, price, and time analysis.
2️⃣ The second step is to create swing charts or trend indicator charts that provide the trader with a way to analyze the size and duration of the rallies and breaks.
3️⃣ The third step is to use the information derived from the swing chart to forecast future price and time targets. In addition to forecasting, this chart is also used to determine the trend of the market.
4️⃣ The fourth step is the creation of Gann angle charts. Using the tools developed with the swing chart, the trader draws properly scaled geometric angles up from bottoms and down from tops. These angles not only indicate speed, the trader uses these angles as support or resistance, and attempts to forecast future direction and price potential of the market.
5️⃣ Percentage retracement levels are also created using the information derived from the swing charts. Each price point and bottom on the swing chart forms a range. Inside of each range are the percentage retracement levels, the strongest being 50 percent retracement level. The 50 percent level is the most significant inside each reaching. A strong market will be trading above the 50 percent price and a weak market will be trading below the 50 percent price.
6️⃣ Traders should use historical data to search for anniversary dates and cycles that could indicate the dates of future tops and bottoms. The swing chart is used to correlate future dates for tops and bottoms based on the duration of previous rallies and breaks. Gann angle charts are used to predict when the market will be squaring price and time. Now the percentage retracement chart indicates the major time divisions of the current range, with 50 percent in being the most important.
7️⃣ The information obtained from the pattern, price, and time charts is combined to create a trading strategy. The swing chart tells the trader when to reveal changes. If the trend changes up, the trader uses the previous rallies from the swing chart bottom show the target upward stop for the next move following a turn in price. In addition, the Gann angle chart shows the trader where to draw the next angle based on the level of the Gann angle. The 50 percent price level acts as support when the market is above it, and resistance when it is below it. The strongest point of resistance is in the intersection of the new Gann angle and the 50 percent price. Finally, the new angles are used to provide the trader that the upside target is possible because anniversary dates and cycles can resolve the existence of similar market trends through time.
CHAPTER 4
Chart Basics
Scale
The scale of the chart is important in price and time charting because of the sensitivity of the price movement per time period. Price and time or Gann-format charts need to have a one-to-one scale or an equal number of squares in the grid up and to the right. For example, Gann preferred 8 grid and 12 grid to the inch chart paper. This gives the market a square look that is necessary when drawing Gann angles from tops and bottoms. A line drawn diagonally from one corner to the next corner on this type of chart cuts the square exactly in half and produces a true 45-degree angle.
Gann encouraged traders to research and experiment, and often changed his techniques to fit changes in contract specifications and market activity. In order to keep up with conditions that exist today, the trader must be flexible in her analysis. The chartist is therefore strongly encouraged to use all of the data that are available for each contract. Based on current market conditions, the trader should build monthly, weekly, and daily charts with the most actively traded contract from the first day of trading along with Gann continuation charts.
Consistency in charting is the key to proper analysis. Combining the day session and overnight trading open, high, low, and close on a chart made up primarily of day-session-only ranges will yield improperly constructed ranges, percentage retracement points, swing charts, and Gann angles.
An intraday chart poses a similar time-period problem. The chartist must designate an intraday chart "full session" or "day session." Incorrectly charting the intraday full session and day-session will yield improperly constructed ranges, percentage retracement points, swing charts, and Gann angles. If the chartist chooses full session only, then she must connect the data properly when combining the overnight session with the day session.
Yearly and quarterly charts can be constructed primarily to show major long-term tops, bottoms, and percentage retracement points for the purpose of long-term forecasting. Trading using these charts is not recommended because the trend changes take too long to develop. Instead these charts should be used to identify the beginning or ending of major trends or cycles with the short-term charts used to pinpoint entries and exits.
Gann incorporated a top-down approach to trading. In other words, he started his analysis with the big picture charts then made a more precise trade entry with the smaller time period charts, even using tape reading at times for entry.
The monthly chart is an important chart to observe if the database contains at least five years of data. The monthly chart identifies the major tops and bottoms on the weekly and daily charts as well as smoothing out the swings.
The weekly chart is an important chart to observe if the database contains at least two years of data. The weekly chart smooths out the swings and emphasizes the major tops and bottoms on the daily chart.
The daily chart is an important chart to observe if the database contains at least one year of data. The daily chart is also used to identify the major tops and bottoms on the intraday charts and to smooth out the multiple swings.
It is recommended for intraday charts to begin with a weekly swing top or weekly swing bottom. At a minimum, a daily chart main top or main bottom should be the starting point. This is important because it will allow the trader to participate in a move at the beginning or end when the best trading opportunity exists. The swings and bottoms on the daily chart are the major tops and bottoms on an intraday chart. In order to maintain a clear narrative in a chart, identify the major tops and bottoms on the daily chart on the intraday chart. This helps the trader because he will know at all times where the market is trading on an intraday basis in reference to the daily chart's major support and resistance levels.
Horizontal, Diagonal, and Vertical Charts
The basis of Gann Theory is the interlocking relationships between pattern, price, and time. It is the balance of these three factor that creates the best trading opportunities that can lead to more success in the market.
Throughout his writings, W. D. Gann implied that in order to learn the markets you must study its horizontal, diagonal, and vertical movements. Horizontal movements are tops and retracement prices. Diagonal movements refer to Gann angles. Finally, vertical movements are time.
The three main concepts can be categorized this way:
Pattern: Horizontal indicators, trend indicators or swing charts, chart formations, swing tops and bottoms, and percentage retracements.
Price: Diagonal indicators, Gann angles, and planetary longitude.
Time: Swing chart counts, cycle timing, seasonals, historical dates, square dates, and astrological phenomena.
The Trend Indicator or Swing Charts
The first chart the analyst must construct is the trend indicator or swing chart . All other charts are based on the information created and observed on this chart. The swing chart follows the up and down movements of the market.
Swings can be created in terms of both price and time. The most popular forms of swing charting are the one-time-period or minor-swing chart, the two-time-period or intermediate chart, and the three-time-period or main-trend swing chart.
Swing Charts
In addition to the support and resistance (price information) that are contained on the swing chart, the trader will also find time information readily available. This time information includes anniversary dates (cycle dates), length of swings up and down, and the seasonality of the market.
Percentage Retracement Charts
The percentage retracement chart is also constructed from the swing chart. The swing chart tops and bottoms form ranges. Inside these ranges are percentage retracement points such as 33 percent, 50 percent, and 67 percent. These points represent potentially important support and resistance prices.
Gann-Angle Charts
Inside the horizontal and vertical zones the market also moves diagonally. These diagonal lines or angles represent both price and time and create patterns that have to be judged to determine the strength and direction of the market. Because of the price and time nature of these angles, they have predictive value, which gives the trader the ability to forecast future price movement.
The angles are drawn from tops and bottoms. Each angle drawn from a top or bottom carries the characteristics of that top or bottom. An angle on a monthly chart will be stronger than an angle from a weekly or daily chart.
In order to have a properly constructed angle chart, the chartist must know the correct scale for each market traded. Without the correct scale, price and time will be incorrect and predictive information will be lost.
The crossing of two or more independently determined support and resistance points must be noted, as these price levels become the strongest support and resistance zones on the chart.
Time Charts
On a separate chart or on a working chart, the analyst must mark time. Time is identified by vertical lines or zones. Time can consist of divisions of the circle counts (that is, 30, 60, 90, 120 days), anniversary dates of major tops and bottoms (5-year tops, beginning and ending seasonal dates, Fibonacci counts, or astrological dates (conjunctions, squares, oppositions).
CHAPTER 5
Pattern: Trend Indicator Charts
Gann Swing Chart [1 bar]
Gann Swing Chart [One-Bar]
GL Gann Swing Indicator
From a low price each time the market makes a higher-high than the previous bar, a trend line moves up to the new high. This action makes the low price a bottom. From a high price each time the market makes a lower-low than the previous bar, the trend line moves down from the high to the new low. This action makes the high price a top. The combination of a trend line from a bottom and a trend line from a top forms a swing.
The only way for the trend to turn up is to cross a top, and the only way for the trend to turn down is to cross a bottom. In addition, if the trend is up and the market makes a swing down that does not take out the previous swing bottom, this is a correction. If the trend is down and the market makes a swing up that does not take out the previous swing top, this is also a correction.
Minor Trend Definition
We call each trading period a bar.
The minor swing chart, or one-bar chart, follows the one-bar movements of the market. From a low price each time the market makes a higher-high than the previous bar, a minor trend line moves up from the recent low to the new high. This action makes the previous low price a minor bottom.
From a high price each time the market makes a lower-low than the previous bar, a minor trend line moves down from the recent high to the new low. This action makes the previous high price a minor top.
The combination of a minor trend line from a bottom and a minor trend line from a top forms a minor swing.
Once the first minor swing is formed, the trader can anticipate a change in the minor trend.
Intermediate Trend Indicator
The intermediate trend chart offers the trader more "true" changes in trend and is less likely to whipsaw.
Benefits of Trading with Intermediate Swing Chart
Intermediate trend opportunities occur less frequently than minor trend opportunities. This keeps the cost of trading to a minimum.
Trading less frequently than the minor trend indicator makes the trader less likely to be whipsawed and also makes the possibility of a long series of losses less likely.
Intermediate trend trading opportunities develop more slowly and more predictably than minor trend opportunities. This gives the trader time to watch the formation and to make adjustments when necessary.
Although the same technique is required to create the intermediate trend chart and the minor trend chart, the amount of time devoted can be less especially if the market is currently in a steep uptrend or downtrend.
The mental exhaustion caused by frequently changing direction, overtrading, and taking a series of losses is not as common for the intermediate trend trader as it is for the minor trend trader.
Study of the minor trend chart is helpful in determining upcoming trend changes on the intermediate trend chart. Additionally, study of the intermediate trend chart is helpful in determining trend changes in the main trend chart.
Intermediate Trend Definition
The intermediate swing chart, or two-bar chart, follows the two-bar movements of the market.
From a low price each time the market makes a higher-high than the previous bar for two consecutive time periods, an intermediate trend line moves up from the low two bars back to the new high. This action makes the low price from two bars back an intermediate bottom.
From a high price each time the market makes a lower-low than the previous bar for two consecutive time periods, an intermediate trend line moves down from the high two bars back to the new low. This action makes the high price from two bars back an intermediate top.
The combination of an intermediate trend line from an intermediate bottom and an intermediate trend line from an intermediate top forms an intermediate swing.
Main Trend Indicator
The main trend chart has low trading costs in terms of commissions, but high costs in terms of missed opportunities. The best way to use this chart is in conjunction with the intermediate trend indicator.
In a bull market as determined by the main trend chart, it is better to use the intermediate trend indicator for buying opportunities following corrections. Conversely, in a bear market as determined by the main trend indicator, it is better to use the intermediate trend indicator to enter the market following corrections.
The best way to use these charts is to always trade in the direction of the main trend; use the intermediate trend chart to enter and exit the market in the direction of the main trend; and the more aggressive traders can use the minor trend chart to trigger buys and sells in the direction of the intermediate and main trends. Do not use any one chart as the sole reference for trading. Use a combination of the charts in the direction of the main trend.
Main Trend Definition
The main swing chart follows the three-bar movements of the market from a low price each time the market makes a higher-high than the previous bar for three consecutive time periods, a main trend line moves up from the low three bars back to the new high. This action makes the low price from three bars back a main bottom. From a high price each time the market makes a lower-low than the previous bar for three consecutive time periods, a main trend line moves down from the high three bars back to the new low. This action makes the high price from three bars back a main top. The combination of a main trend line from a main bottom and a main trend line from a main top forms a main swing.
The only way for the main trend to turn up is to cross a main top, and the only way for the intermediate trend to turn down is to cross a main bottom. In addition, if the main trend is up and the market makes a main swing down that does not take out the previous main swing bottom, this is a correction. If the main trend is down and the market makes a main swing up that does not take out the previous main swing top, this is also a correction.
The Inside Bar
When charting the swings of the market, the analyst ignores the inside bar and waits to see the trading range of the next bar. Since the inside bar is ignored, the analyst must always look at the preceding bar to determine if the trend line should be moved up or down.
The Outside Bar
Contrary to the inside bar, the order of occurrence of the high and low on an outside move day is critical and should be noted. If the minor trend line is moving up and the first move of the outside move day is to the high, the minor trend line moves up to the high, then down to the low.
It is critical that the correct order of the high and low of an outside move day be recorded properly, because the market will either be continuing the trend or the trader will be forced to move the stop to a new level.
Stop Orders
The general rule to follow is to place them under bottoms and above tops. This is because when the stop is hit, the trend will change. On the other hand, stop loss orders that are placed under lows and above highs are caught more often and simply take the trader out of the market.
Keep a record of all swings, as these points can become important support and resistance points during the life of the current market or historical support and resistance points in future years. Besides being important price points, the dates of the swing tops and bottoms can become important trading points during the life of the current market or historical turning points in future years.
Record the swings in terms of price and time from top-to-top, top-to-bottom, bottom-to-top, and bottom-to-bottom. This information can be used to determine whether or not a market is expanding or contracting.
Interrelationships of Time Periods and Swings
A swing top on a monthly chart is always a top on the weekly, daily, or hourly charts.
A swing top on a weekly chart is always a top on the daily and hourly charts, but not always on the monthly chart.
A swing top on the daily chart is always a top on the hourly chart, but not always on the weekly or monthly charts.
A swing top on the hourly chart is not always a top on the daily, weekly, or monthly charts.
A swing bottom on a monthly chart is always a bottom on the weekly, daily, or hourly charts.
A swing bottom on a weekly chart is always a bottom on the daily and hourly charts, but not always on the monthly chart.
A swing bottom on the daily chart is always a bottom on the hourly chart, but not always on the weekly or monthly charts.
A swing bottom on the hourly chart is not always a bottom on the daily, weekly, or monthly charts.
Uptrends and downtrends on the monthly chart are composed of a series of swings from the weekly, daily, and hourly charts. Study how many weekly, daily, or hourly swings on average it takes to form a monthly uptrend or downtrend.
Uptrends and downtrends on the weekly chart are composed of a series of swings from the daily and hourly charts. Study how many daily or hourly swings on average it takes to form a weekly uptrend or downtrend.
Uptrends and downtrends on the daily chart are composed of a series of swings from the hourly chart. Study how many hourly swings on average it takes to form a daily uptrend or downtrend.
Uptrends and downtrends on the hourly chart are composed of a series of swings from the other intraday time periods, such as the 30-minute, 15-minute, or 5-minute charts. Study how many time period swings on average it takes to form an hourly uptrend or downtrend.
Characteristics of Swings
A main swing downtrend is made up of minor, intermediate, and main swings.
An intermediate swing top is always a minor top, but a minor top is not always an intermediate top.
An intermediate swing bottom is always a minor bottom, but a minor bottom is not always an intermediate bottom.
A main swing top is always a minor top and an intermediate top, but a minor top and an intermediate top are not always a main top.
A main swing bottom is always a minor bottom and an intermediate bottom, but a minor bottom and an intermediate bottom are not always a main bottom.
CHAPTER 6
Pattern: Swing Chart Trading
Initiating a Trend Indicator Buy Signal from an Extreme Low
From a flat position and following a prolonged move down in terms of price and time when the market is at an extremely low price level, place a buy stop for one contract or 100 shares over the last swing low, then wait for the market action to reach the stop and fill the order. After receiving the fill, place a sell stop order under the last swing bottom. If the market continues to rally, then stay in the position as long as the market continues to make higher-highs and higher-lows, as this will stop maintained under the last swing bottom. Throughout the life of the rally, the market may develop a series of higher-lows and higher-bottoms. When this happens, continue to follow the market up by moving the sell stop and placing it under each new swing bottom and locking in profits along the way. Once the market forms a swing and goes back to the last swing bottom, the position is stopped out, and the trader is flat.
Initiating a Trend Indicator Sell Signal from an Extreme High
From a flat position and following a prolonged move in terms of price and time when the market is at an extremely high price level, place a sell stop for one contract or 100 shares under the last swing top (Figure 6.5). After receiving the fill, place a buy stop order over the last swing top. If the market continues to make lower-lows and lower-highs with the buy stop maintained over the last swing top. Throughout the life of the break, the market may develop a series of lower-tops and lower-bottoms. When this happens, continue to follow the market down by moving the buy stop and placing it over each new swing top and locking in profits along the way. Once the market forms a swing bottom and breaks the last main top, the position is stopped out, and the trader is flat.
Initiating a Buy Signal with a Reversal Buy Stop
More active traders may choose to buy following the liquidation of a short position. After a buy stop and reversal is reached, the trader simply follows the upward swings of the market and moves the sell and reversal stops up each time a new swing bottom forms. He maintains the same long position as long as the market continues to make higher tops and higher bottoms. The trade is liquidated, and the position reversed when the last swing bottom is crossed and the sell stop is hit.
Choppy, two-sided trading may occur at this level, and whipsaw-like trading may be common. The frequency of losses therefore increases because of losing trades and high commission costs.
The best time to enter a long position on a buy reversal signal is following a prolonged move down in terms of price and time that has taken the market to a historically low price level.
Initiating a Short Signal with a Reversal Sell Stop
If the short is triggered at or near a historical support level or major percentage in the retracement zone, the trader may find himself trading on both sides of the market for several time periods until the market can break away from the support prices. This type of signal is recommended for aggressive traders who wish to trade more actively and can withstand whipsaw trading activity and increased commission costs.
Two Ways to Determine a Change in Trend
The basic definition of a change in trend is from a downtrend the market crosses the last swing top and from an uptrend the market crosses the last swing bottom. The basic definition of an uptrend is a series of higher-tops and higher-bottoms and of a downtrend, a series of lower-tops and lower-bottoms.
A change in trend to down occurs when the market breaks the last trend bottom. This bottom can either occur before the last swing top or after the last swing top.
It is very important to note that when a market crosses the last swing bottom before the last swing top, the trend changes to down, but this formation is likely to be followed by a sharp retracement up to set up a secondary lower top.
The second type of change in trend to down occurs when the market breaks the last swing bottom made after the last swing top. When this pattern takes place, the last swing bottom is crossed following a retracement of the break from the top. The market not only changes the trend to down, but simultaneously forms a secondary low. This pattern often leads to an immediate breakdown in the market.
This is the equivalent of a soccer player stopping the ball before kicking it. If the player tries to kick a moving ball, he usually does not have as much control over its direction. Instead he settles the ball with his foot, then kicks it while he has control.
What is basically happening when tops or bottoms are being formed on a swing chart is that order size has shown up on either the bid or the offer to stop the move causing traders to take action.
Buy/sell when a trend top/bottom is crossed.
Buy/sell at fixed price intervals in the direction of the trend.
Swing Trading at Fixed Time Intervals
Buy/Sell a Combination of the Three Trend Indicator Charts
Another way to swing-trade the market is to use the minor trend indicator to enter the market in the direction of the intermediate trend. All trades triggered by the minor swing chart will be in the direction of the intermediate trend. Protective stops can be placed below the last intermediate trend bottom or below the minor bottom.
Swing Trading Using a Combination of the Minor Trend Indicator and the Main Trend Indicator
In this strategy, the trader waits for the main trend to turn up or down and uses the minor trend indicator to initiate the entries. This strategy is popular because often the main trend swing is very wide and the trader would rather risk taking a few small losses than one big loss if wrong. Often when using this entry strategy the minor trend bottom or top will form in an important retracement area or on a Gann angle. This is just one example of how the swing, retracement, and Gann charts get linked together.
Another way to trade the trend is to use the monthly, weekly, and daily charts as substitutes for the main, intermediate, and minor trend indicators.
The Whipsaw Market
The biggest negative factor affecting the swing chart trader is the whipsaw market. A whipsaw is a series of false changes in trend characterized by rallies and breaks that do not follow through to the upside or downside and change direction after one or two bars following the last change in trend.
Lost Motion
When researching filters to use with swing charts, the trader will encounter a concept Gann referred to as "lost motion." Lost motion can best be defined as the amount of penetration in a market allows above a swing top without changing the trend to up or below a swing bottom without changing the trend to down.
Studies of volatility and Average True Range may be helpful in determining the proper stop placement.
Lost motion also occurs when using percentage retracements and Gann angles to find support and resistance.
To be successful using these trading strategies, the trader must know the swing characteristics of each market he trades. This includes size and duration of rallies and breaks and lost motion. Knowledge of lost motion helps the trader avoid whipsaw conditions and aids in the proper placement of stops.
Chapter 7
Pattern: Other Chart Formations
Double Top/Bottomなど
プライスアクションについて
特にに目新しい情報なし
以下参照
「The Trading Methodologies of W.D. Gann」を読む
CHAPTER 8
Price: Horizontal Support and Resistance
Swing Top/Swing Bottomで引く水平線
Percentage Retracement Price Levels
Gannとは何の関係もないFloor Pivotsなど
CHAPTER 9
Price: Gann Angles
These angles are often compared to trend lines, when in fact they are not. A Gann angle is a diagonal line that moves at a uniform rate of speed. A trend line is created by connecting bottoms to bottoms in the case of an uptrend and tops to tops in the case of a downtrend.
The swing top is the origin of the downtrending angles, and the swing bottom is the origin of the uptrending angles.
The best charts from which to place Gann angles are the intermediate trend chart and the main trend chart, the optimal one being the intermediate chart, as it provides just the right number of angles from which to determine and forecast support and resistance. Angles drawn from the main trend indicator chart are also important, but occur less often. They are strong because they are an extension of the strong bottoms and tops, but their infrequency on this chart often forces the trader to take unnecessary risks.
There are 19 basic geometric forms to explain the angle theory.
Square of the range from a low price
Square of the range from a high price
Strong-position bull market above a 1 �~ 1 angle
Weak-position bull market below a 1 �~ 1 angle
Strong-position bear market below a 1 �~ 1 angle
Weak-position bear market above a 1 �~ 1 angle
Swing chart and angles from a top
Swing chart and angles from a bottom
Angle at old top, new support
Angle at old bottom, new resistance
Angles from double tops
Angles from double bottoms
Uptrending channel from a double bottom
Downtrending channel from a double top
Zero angle from a high price
Zero angle from a low price
Angle from a top forecasts a future top
Angle from a bottom forecasts a future bottom
Angles repeat as long as the market remains inside the range
How to Construct Gann Angle Charts
Scale
Gann angles move at uniform rates of speed, which makes Gann angle charts sensitive to price scale. A properly constructed chart must be made with the proper scale in order to have any value. As we said earlier, each market has its own unique price scale, and the markets are geometric in design and function. Thus, they will follow geometric laws when charted.
A study of the charts and manuscripts of W. D. Gann shows that he used a price scale that agreed with a geometric design or formula. When the markets were trading at lower levels, a smaller unit of price was used. When trading at higher levels, a larger unit of price was used.
One rule to remember is to choose a price scale that follows a geometric progression and is in direct relation to the level of the price. If this is practiced, geometric angles will measure price and time in an accurate manner. Price units for daily, weekly, or monthly charts that follow a geometric design can be one of the following:
0.01—0.02—0.04
0.02—0.04—0.08
0.04—0.08—0.16
0.002—0.004—0.008
0.10—0.20—0.40
0.20—0.40—0.80
0.125—0.225—0.50
0.25—0.50—1
2/32—4/32—8/32
It must be remembered that Gann used eight-squares-to-the-inch paper with each fourth line measured as his only charting medium from 1904 until his death in 1955. He chose this chart paper because of its geometric design.
Gann angles are a function of price and time, which is why the price scale is so important. Since the angles move at a uniform rate of speed, they have predictive value. This is another reason why the proper scale has to be used—if the scale is off, then the prediction will be off.
How to Determine the Scale for Markets
The easiest way to determine the scale of a market is by taking the difference between top-to-top and bottom-to-bottom and dividing it by the time it took the market to move from top-to-top and bottom-to-bottom. This equation yields the speed of the uptrend and downtrend lines. For example, if the difference between top-to-top and bottom-to-bottom is 50 points and the time is 27 days, then the speed of the trend line connecting these two points is 1.85. The average speed of the trend line can be determined by making this calculation several times. After determining the average speed of the trend line, round it to the next whole number. In this example, if the average uptrend line moves 1.85 per day, then assume the Gann scale is 2.
Equation to Determine the Proper Scale of a Market
The distance between two main bottoms divided by the time between the main bottoms equals the speed or scale of the angle. This same formula can be applied to the distance between two main tops. Once a series of scales has been determined, the trader can determine the average scale and round off to the nearest whole number.
Uptrending Scale
(Main Bottom 2 – Main Bottom 1) / Difference in Time Between Bottoms
Downtrending Scale
(Main Top 1 – Main Top 2) / Difference in Time Between Tops
Calculating the Gann Angles
A properly constructed chart is one that was charted to scale by market day only. Holidays and weekends cannot be included on this chart because there is no price activity during these periods.
The basic equation for calculating Gann angles is as follows:
Price x Time
Gann never intended his geometric angle rules to stay fixed, since he considered research, testing, and applying them to the markets to be the key to understanding angles. His books and courses are intended as guidelines; he encouraged experimentation.
It is virtually never too late to enter the market after a definite signal—even if you miss the bottom or top, the geometric angle will guide you into position.
The geometric angles also provide valid support and resistance points continually as the market moves up or down away from that bottom or top. This is because the geometric angles drawn from a bottom or top are actually an extension of the bottom or top and move at a uniform rate of speed.
The most important angle is the 1 x 1. Gann said this angle determines the strength and direction of the market, and that you could trade off this angle alone, buying every time price rested on the 45-degree line.
A contract is always strong when it holds above the 1 x 1 angle from a bottom, and weak when it is just below the 1 x 1 line from a top.
Another important guideline is what Gann called the Rule of All Angles. When a market breaks an angle, it will move toward the next angle. This is because, as time passes, an angle’s importance weakens and the market eventually breaks through. Therefore a market breaking the 1 x 1 angle will eventually reach the 1 x 2 angle. Conversely, in an up move, an angle the 1 x 2 angle is likely to rally to the 1 x 1, just as overtaking the 1 x 1 is likely to lead to a rally to the 2 x 1.
As the market forms the bottom, always remember that when the market is above the 1 x 1 angle line, price is ahead of time; when the market is below the 1 x 1, time is ahead of price; and when the market rests on the 1 x 1, time and price are balanced.
On a daily chart, when price crosses the 1 x 1 from a bottom, it may not be strong enough to overcome time. This usually causes the market to rest on the 1 x 1 break under it, only to find support at the 2 x 2. When the time is right and the cycle has run out, the market will usually establish itself on either the 1 x 2, 1 x 1, or 2 x 1 angle. Ideally, the market will follow the 1 x 1.
The higher the market travels, the farther it is from its base and, therefore, more vulnerable to correction.
When you combine this with the Rule of All Angles, it is little wonder that the market sells off so sharply after breaking a 2 x 1 angle, only to rally quickly when it reaches the 1 x 1 angle. The converse is true for rallies.
The rule determining a change in trend from a top involves waiting for a decline exceeding the previous reaction. The rule for a trend change from a bottom involves waiting for a rise that exceeds the greatest rise of a previous rally. When price penetrates an angle by an amount that exceeds a previous penetration, it shows a probable change in trend.
Lost Motion
When applied to angles, lost motion occurs when a price penetrates an important support or resistance angle before it regains the angle and resumes the trend. Throughout the course of an uptrend, the market will follow an uptrending angle moving at a uniform rate of speed. At times the market will break to the downside through an angle, only to recover it within one or two days. The idea is to record the amount the market penetrates the angle before recovering it. This helps determine where to place stop loss orders when buying off an uptrending angle. The analysis can be done in two parts: the historical tendencies of the lost motion through a specific angle, and the immediate tendencies of the lost motion through a specific angle on the current active start.
The basic idea behind lost motion and Gann angles is to stay with the angle until the market breaks the historical pattern or the immediate pattern. When the angle is penetrated by an amount greater than a previous penetration, the stop loss order protects the trader from a greater loss. Remember that according to the Rule of All Angles once an angle is penetrated, it is likely to continue to the next angle.
Lost motion will vary according to the angle it is applied to and according to the position of the market (Figure 9.45). For example, lost motion will be different for a 1 x 1, 2 x 1, 1 x 2, and 1 x 4 angles. In addition, it will vary according to the price level of the market. At low prices, the lost motion will be tighter than at high prices.
After studying lost motion as it is applied to main tops, main bottoms, percentage retracements, and angles, the analyst will most likely come to the conclusion that the average lost motion is the same. This is important to know because it indicates that the combinations of these different price levels with properly placed stops according to the lost motion will yield more successful trading results.
Finally, recall that the reactions under Gann angles that are not changes in trend, most fall under the Gann label of lost motion. Lost motion describes slight breaks through an angle caused by market momentum. In Gann’s day, the average lost motion for grains, for example, was 1¾ cents. This is why he suggested a 3-cent stop loss order so many times in his books and courses.
CHAPTER 10
Combining Pattern and Price
While each of these price indicators can be used by itself, they are best when used in combination with another. Some examples of combinations becoming support are:
An uptrending Gann angle and a percentage retracement price. This is an especially strong support level when it is the 50 percent price and the uptrending 1 x 1 angle (Figure 10.1).
An uptrending Gann angle and an old top. This is especially strong support when it is the uptrending 1 x 1 angle (Figure 10.2).
An uptrending Gann angle and an old bottom (Figure 10.3).
A percentage retracement price and an old top (Figure 10.4).
Some examples of combinations becoming resistance are:
A downtrending Gann angle and a percentage retracement price. This is an especially strong resistance level when it is the 50 percent price and the downtrending 1 x 1 angle (Figure 10.5).
A downtrending Gann angle and an old bottom. This is especially strong resistance when it is the downtrending 1 x 1 angle (Figure 10.6).
A downtrending Gann angle and an old top (Figure 10.7).
A percentage retracement price and an old bottom (Figure 10.8).
The best support is the combination of three price indicators. This formation consists of the uptrending 1 x 1 angle intersecting the 50 percent retracement price and the swing-chart target. This is strong support because three independent analysis techniques are identifying the same price level.
By combining two or sometimes three price indicators, you can place a more powerful stop that is less likely to be reached, but when reached is more likely to indicate a change in trend.
CHAPTER 11
Time
Gann considered time the most important factor in determining changes in trend. He measured time in various ways, including natural cycles, anniversary dates, seasonally, swing cycles, and square dates. In this chapter, we discuss various ways that time can be used to determine tops, bottoms, and changes. We begin with the most difficult method (natural cycles) and end with the most popular method (the squaring of time). Natural cycles are considered the most difficult concept because it involves the complex topic of financial astrology, which requires hours of outside research before it can be successfully applied. Squaring time is considered the most popular because it involves using charts to forecast tops, bottoms, and changes in trend.
NATURAL CYCLES
A natural cycle is a time period that can be measured and forecast by natural law and cannot be altered by humans.
Celestial Phenomena
The Planets
The phenomena or the patterns created by the planets are very important because they move and create patterns such as conjunctions, squares, trines, and oppositions.
For example, two or more planets at the same degree are at a conjunction, two or more planets 90 degrees apart are square, two or more planets 120 degrees apart, there are trine, and two or more planets 180 degrees apart are at an opposition.
The bullish phenomena are conjunctions and trines, while the bearish phenomena are squares and oppositions. Gann and other financial astrologers would search the ephemeris (a table of the planets' movements) to find major planetary patterns to predict tops, bottoms, and market direction. Since the future positions of the planets can be predicted using an ephemeris, it was possible for Gann to construct market forecasts years into the future using planetary rulerships as his guide.
Generally speaking, the business planets are Jupiter and Saturn. Jupiter is considered a bullish planet and Saturn a bearish one. Jupiter is usually considered expansive, hence an expanding market is considered a bull market, while Saturn is considered restrictive and is, therefore, associated with a bear market. Uranus and Mars are associated with volatility and erratic trading.
Gann also used minor cycles such as the phases of the moon for the 7-day cycle and movement of the sun for the 30-day cycle.
The major moves were primarily predicted by the cycles of the major planets and the phenomena of the major planets. For example, the two-cycle year may have been associated with the orbit of Mars, which takes two years to circle the sun, or the 84-year cycle of Uranus, which takes 84 years to orbit the sun. The conjunction of Jupiter and Saturn is most often associated with a 20-year cycle.
The 30-Day or Sun Cycle
The actual sun cycle is approximately 365 days, which is very close to a circle or 360 degrees. A complete yearly cycle is measured as 360 degrees or 365 days. In other words, one degree is basically the equivalent of one day. This is the basis for Gann's explanation of cycles.
When divisions of the yearly cycle are converted into days, they equal approximately 90 days, 120 days, 180 days, 240 days, and 270 days.
Some examples of natural cycles include the Spring Equinox (March 21), Summer Solstice (June 21), Autumn Equinox (September 21), and Winter Solstice (December 21). These "seasonal dates" are measured by the movement of the sun cycle and are approximately 90 calendar days apart. Although these dates are "quarterly," the major quadrature is measured from March 31, June 30, September 30, and December 31, which are not natural quarters or natural dates.
Financial Astrology
The study of these cycles falls under the heading of financial astrology, which is beyond the scope of this book.
It is also very important to know that Gann wrote in a hidden, veiled language at times. This means that those with a thorough understanding of astrology may be able to find the hidden references to astrological cycles throughout original Gann texts and course books.
Gann extensively researched the cycles of planets and phenomena. He looked for correlations between the up and down cycles of the market and the up and down movements of the planets. His conclusion after many years of study was that the latitude and longitude of the planets create forces that cause price changes, and that their squares and trines raise and lower prices.
The individual who wants to use natural cycles must be familiar with an ephemeris. An ephemeris identifies various phenomena such as planetary conjunctions, squares, trines, and oppositions.
Gann used this information to forecast tops and bottoms as well as the strength of bull and bear markets. Using the ephemeris as his guide, he would look for the planetary positions to indicate potential reversals in the market.
By definition, the rallies in an uptrending market in terms of time should increase over the life of the uptrend. One of the first signs of an impending top is a rally that falls short of a previous upswing in terms of time. In addition, the rallies in terms of time should be greater than the corrections. Other signs of an impending top are a correction that lasts longer than the previous upswing, and a correction in terms of time that is greater than a previous correction in terms of time. Finally, the combination of a shorter-than-expected upswing in terms of time and a longer-than-expected correction in terms of time should be seen as a strong indication that the trend is getting ready to change.
The opposite is valid in a downtrending market.
A time objective is reached if the trader has a profit on a trade and the market has reached the date on which the market is expected to make a correction based on the swing chart. On this date, the trader should take the profit on the opening, on the close, or at a price predetermined by either a percentage retracement or Gann angle. The key is to liquidate the position on the day that the swing chart forecasts the next top or bottom is due. This form of profit taking allows the trader to trade with the market according to time. Holding on to the position will indicate the trader wants to beat the market.
Constructing the Square Chart and Divisions in Time
The steps for constructing the Gann square for timing are the same as for the Gann square for pricing support and resistance.
Find a main range. (A main range is created by a main top and a main bottom.)
Divide the range vertically into time periods.
The major time periods are 25.0% and 75% of the range (Figure 11.6). These points represent 1/4, 1/2, and 3/4 retracements of time, respectively. For example, if the range is 50, then 25 percent of the square in time is the range times 0.25. In this example,
50 x 0.25 = 12.5
The time period will be represented by the type of chart used, either monthly, weekly, or daily. In this case, 25 percent of time represents 12.5 months, weeks, or days.
Fifty percent of the square in time is the range times 0.50. In this example,
50 x 0.50 = 25
The time period will be represented by the type of chart used either monthly, weekly, or daily. In this case, the 50 percent of time represents 25 months, weeks, or days.
Seventy-five percent of the square in time is the range times 0.75. In this example,
50 x 0.75 = 37.5
The time period is represented by the type of chart used either monthly, weekly, or daily.
Step 3: Identify Time Periods on the Chart
It is important to mark these time periods on the chart, as they represent dates on which the market may have a top or bottom. Often the market exhibits high volatility on these dates.
These time periods remain intact as long as the market remains inside the range used to identify them. When the range is violated, the dates are no longer valid for tops and bottoms.
Other divisions of time that could be used to identify future tops or bottoms are the 33 percent and 67 percent time periods. These represent 1/3 and 2/3 retracements of time. A 33 percent retracement of time is found by taking the range times 0.33, and a 67 percent retracement of time is found by taking the range times 0.67. In our example, if the range is 50, then a 33 percent retracement of time is 16.5 months, weeks, or days. A 67 percent retracement of time in a range of 50 is 33.5 months, weeks, or days.
One technique utilized by Gann was squaring a high price. Squaring a market by a high price yields additional time periods to watch for tops and bottoms. This is especially important on the weekly chart. In order to square a high, the analyst must know the main top and the scale used by a particular market. Once again, the all-time high, or the second- or third-highest high, is important to use to project future tops and bottoms. Unlike squaring a range, squaring a high price extends into infinity, as each high from the past is related mathematically to each high or low in the future.
Another technique utilized by Gann was squaring a low price. Squaring a market by a low price yields additional time periods to watch for tops and bottoms. This is especially important on the weekly chart. In order to square a low, the analyst must know the main bottom and the scale used by a particular market. Once again, the all-time low, or the second- or third-lowest low, is important to use to project future tops and bottoms. Unlike squaring a range, squaring a low price extends into infinity, as each low from the past is related mathematically to each high or low in the future.
Possibly the three most important timing tools Gann used to forecast tops and bottoms were the square of the range, the square of the high, and the square of the low. These tools use prices to determine when tops and bottoms may be due.
Timing can be natural and adaptive. These cycles can be represented by natural phenomena, such as planetary movement, or they can be applied directly from past market action, such as the anniversary dates and time divisions. Timing can also be achieved by using an adaptive method that uses the actual price movement of the market to determine and forecast future tops and bottoms, such as the square of the price range, the square of the high, and the square of the low. In addition, the duration of the up and down swings can be used to forecast future tops and bottoms. Finally, it should be noted that a combination of the timing methods is strongly suggested. Experience shows that market tops and bottoms will most likely occur when clusters of time indicators come together simultaneously.
CHAPTER 12
Combing Pattern, Price and Time
The Euro/US Dollar Forex Market
The chapter gives examples of how to apply these techniques to real markets.
