As I was watching the market today, I noticed some interesting relationships between time and price that I wanted to point out to traders following these articles. As a chart is two dimensional, there are three directions we can go: horizontally (time), vertically (price), and diagonally (space). This third measurement is not usually talked about, because it is a little more difficult to do. To measure the distance between two points in time or price is very easy, but to measure the distance as the crow flies is a bit tougher because it requires some extra work beyond just consulting the chart axis. If you've got a properly scaled chart, you can just measure this distance in inches or centimeters using a ruler connecting your points. If you don't have a properly scaled chart, you have to calculate the distance using the Pythagorean Formula, creating a triangle using time as the base and price as the side. The space measurement would then be the hypotenuse.
Wave59 has a nifty (don't mind if I say so myself!) feature that allows a quick measurement between two points in space. Just click on one spot, drag to the next, and check to see what the distance is. Let's take a look at this applied to a chart for the last few days:
Those pink lines represent the space counter working on a 5min ES chart. I've set it up so that 0.25 units of price (1 tick) represents one unit of price/time, and one unit of time represents one unit of price/time. One you have the conversions down, the rest is just plugging numbers and cranking out a result.
One thing to note about this chart is that all the measurements shown add up to 9. You can see that this is an important number to watch in the ES. Take a look at the middle of the day on the 17th. We had two separate price/time measurements coming together at that low (marked with an arrow). We then moved up 9 units from there to the high, before reversing for the day.
Markets are very rhythmical, so they like to keep the beat and dance out the same distances over and over. If you can find what measurement the market is moving to, you can then project out targets for future turns. Of course, the 9 count didn't get all the swings on the chart, but that's because the ES was also moving to units of 15:
You can see there was a time one this chart (marked with the arrow) when two measurements came together at one place. This kicked the market out of a consolidation period and down to the low of the day.
Something interesting to note is that 9 * 1.618 is almost 15, so these two measurements are related by the Fibonacci number sequence. If that's true, it means that 15*1.618 should also be there, which it is:
Gann wasn't joking around when he said there was a mathematical relationship between all important highs and lows on the chart. If you take some time and learn what those relationships are, you can then use them to forecast future turns. Knowing these particular price/time measurements set us up very nicely for the break out of our consolidation period today. One 24 unit measurement plus two 15 unit measurements was bound to force the market one way or another, so unlike most other traders who were bored to death at that time, we were alert to the possibility of a directional move.
Happy trading, and stay tuned!
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