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This week we'll take a closer look at one of the more interesting indicators found in Wave59, and talk about a unique way of looking at price charts. As we all know, a price chart is built using two quantities: time and price. By plotting one against the other we end up with the common charts that everyone is so familiar with. What most people are not so familiar with is the implied measurement created when a chart is set up.
Starting at a given point on the chart, we can find any other point if we know how much time has passed, and what the price change was. But we need both pieces of information to find the second point, not just one or the other. So there are two components involved in moving from one location to the next. What we can do is combine these two components into a single value that also describes the particular move we are looking at.
This is done using Pythagorean' formula for finding the hypotenuse of a right triangle (c^2 = a^2 + b^2). Take the price distance as the vertical leg of the triangle and the time distance as the horizontal leg. Run them through that formula and you'll get the diagonal leg, in units of Price-Time. WD Gann used to call this space movement, but I think Price-Time sounds cooler.
One of the tricks is that when we put the time value into this formula, we need to decide exactly what units of time we're interested in. So do we toss in days, hours, or minutes? And what about price? Do we use ticks or full points? So it's not quite so simple as just plugging in numbers, but you get the idea. Let's look at a chart:
This is a 5 minute chart of the mini S&P. It displays concentric rings of Price-Time, centered at the close of the highest bar on the 26th. Every point on a particular ring represents the same Price-Time distance from the center. What these rings show are Price-Time levels equal to the swing from the "start" point down to point "1". I measured that value, then told Wave59 to plot a ring at every 50% interval.
Since that value was obviously important to the market, we want to watch and see how price reacts when it hits the same level again in the future. It's the same as looking for support at the price of a major low, only done using Price-Time.
First note that the top at point "2" came in on the same ring as the low at point "1". In Price-Time turns, this is like a double bottom. It's the same ring, which means it's the same Price-Time value. Obviously there was some important energy that stopped the market at point "1", and it ended up stopping the rally at point "2" as well.
The same goes for points "3" and "4". They lie on the same ring of Price-Time. Even more interesting, this ring is related to our earlier rings by being 50% larger. So on the chart, it might look like these four turns are somewhat random, but they are all related very intimately when viewed in the light of Price-Time.
Another interesting thing to note is the termination points of the 2nd and 3rd rings. An important turning point formed at both of these areas. The rings proved themselves to mark price levels of important turns, and now they are marking time distances as well. Since Price-Time is made up of both price and time, our rings can give us important information in both domains.
Even more interesting, when we take this ring exactly as it is and place it at point "2", we find point "3" falls exactly on the 3rd ring - the same ring it touched when measured from our original center. When the rings are centered at point "1", point "4" hits the 4th ring very nicely. So it's not just one interesting measurement. There are a bunch of them in there that overlap and give us the same information.
This is a good time to give the settings used for these particular rings, in case you'd like to experiment with this example at home. Wave59 allows us to set up our price time rings so that time and price are combined in a harmonic way. So we can set each time period in a bar to be equal to X points of Price-Time, and each 1.0 of price to be equal to Y points of Price-Time. This lets us customize the shape of those rings.
I used 1.25 units for time and 10 units for price. The 1.25 is because we're on a 5 minute chart, which is 25% larger than a 4 minute chart. So we're adjusting to let 1 unit of Price-Time to correspond with 4 minutes of pure time. The previous showcase explained why 4 minute bars are important. The 10 was chosen because otherwise the rings were way too steep. So it's like moving the decimal place in price to keep things manageable. So it's nothing fancy, and by no means have they been optimized for this example. It's all based on the same ideas behind the square scaling feature you can use when formating your charts.
What this example shows is that there might be better ways to draw our charts than we've settled on. Markets might be so confusing to us because we're tracking them in the wrong way. This example showed that the relationships between price highs and lows might not be so complicated after all. They're just bouncing off important Price-Time values. Could it be that simply measuring things in a different way than we're used to could solve our forecasting and trading problems?
Stay tuned!