012502
Prompted by the recent thread about scaling issues on the discussion board, this showcase will look at the interesting relationship between price and time. Specifically, we'll take a look at Gann's "squaring of price and time". Gann had a lot of these squarings, but one of the more interesting ones was taking the price at a significant high or low and projecting ahead that many bars into the future to find another turning point. So if we made a high at 105, we'd simply count out 105 bars from that high to find a future turn.
It's a simple idea, but contains in it a great truth about markets. This truth was the basis for many of Gann's other tools like his angles and some of his master calculators. It works for day trading too. Here's a chart of the last three days action in the e-mini:
We've got to modify the technique a bit since we're dealing with prices above 1000, so what I've done is simply move the decimal place one point to the left. The very first low on the chart came in at 1117.50. Move the decimal to the left by one to get 111.75, then round to 112. Count ahead this many bars and get a minor high the next day. Various similar relationships are marked on the chart.
It's not quite as interesting on an intraday chart since the length of swings when rounded is pretty much always the same, but it still works. That's what's important.
Obviously, there are tons of possible projections that we can make, especially when changing the decimal places around like we've done above. Not all of these projections will come out at tradable turns, but we can use them as a timing tool to hone in in on high probability areas for potential trades. As usual, we've got to have confirmation from other non-correlated indicators before we actually risk any money.
Here's an example:
The pink ticks at the bottom are the output of the Time Cluster tool, which automatically goes through and finds all the important projections. It can project using any combination of three different methods, but in this example it's only using Gann's time and price squaring technique.
The red fan with vertex at point A is a modified version of Gann's Angle tool. The difference here is that the scaling factor has been set dynamically by the market. Specifically, the main 1x1 angle has been set to move exactly from point A to point B. This means that the 1x1 angle, at least temporarily, is vibrating at the same rate as the market.
The green horizontal lines are Fibonacci retracement levels measured from A-B. These are well known by most traders, although the ratios we're using are probably a little rarer. 78.6 and 127.0 are the square roots of 0.618 and 1.618. Unless the market is really moving, I hardly ever look at any other ratios than these four.
Finally, the blue line that starts at the low on the 25th is a mirror-image fold back. The idea here is that once the market hits an important energy center and makes a turn, the forces moving the market can fold back on themselves and create a mirror image of what just happened. So that blue line is actually the data from the 24th, but fed forward in time. Credit goes to Michael Jenkins for this one.
Point C is where everything came together to give us a trade. The low at C came in exactly on a pink tick mark shown by the Time Cluster tool. This means that at this point we've got a time/price squaring. The market is only one tick from the red fan and fib retracements on this bar. Interestingly, the fan line crosses the retracement level exactly at the time this bar formed as well. Lastly, our mirror-image foldback shows that this ought to be a low. Price has been following this forecast all morning so far, so we've got a good fit to rely on.
What really makes this opportunity a good one is how exact everything is. There is simply no slop between any of the time and price tools - all of them agree that the odds are high for there to be a low at this time and this price. Such focused indicators mean that we can use a very close stop, maximizing the risk-reward ratio. Time and Price trades can sometimes be tough to find, but are definitely worth the search.
Stay tuned!