True Market Geometry Part 2

Fancy geometric patterns on the chart are all fine and dandy but the question is, "can the pattern be used as a practical tool for actually making trading decisions?" The answer is a resounding but qualified yes. While the patterns may map out paths of price and provide price and time projections, the basics of sound trade decision making still apply. Such as buy support and sell resistance. I don't recommend trading anything based on one condition alone and these patterns are no different.

The first chart started as a peak to peak measure of price that perfectly projected a swing low. From the swing low a new geometric pattern was created that essentially was a measurement of the decomposition of the cycle. In other words, the waves start to get smaller as the energy dissipates. Note how price interacted with the lines and arcs within the pattern. Interesting but nothing really sticks out as a trade until price rockets to the top of one of the circles. Now the triangle apex becomes a legitimate target of both price and time.



This next chart shows the exact same picture of price but overlayed with a pattern that was based on a low to high swing. Price interacted with lines and arcs but again, nothing too tradeable until price shot up to the boundary of one of the circles. So now price is being held by two different circles. The triangle apex on this pattern is now a legitimate target of both price and time although it is further out in time and lower in price than the previous pattern.



Now that it has been determined that price is at resistance the next step is to formulate a trading plan.

From the first chart, the line projections from the initial yellow pattern create a trading channel. Channel trading is one of my forte's and I had designed an entire multi time frame system around the concept of channel trading.

The premise of channel trading is to buy or sell when price has reached a channel boundary preferably in the direction of the channel. IE buy the bottom of an upward channel or sell the top of a downward channel. The example setup isn't ideal in that price is at the top of an upward channel. However, there are a few things that make the trade acceptable. First is the fact that circles on both charts are acting as resistance. Second is that the move up was a rocket. What goes up that fast will likely come down at at least 50% of the way most of the time. So the initial target is the middle line in the channel or the median which is also the triangulation point. The upper channel and circle also provide a good area to place a stop above.

The second chart gives a triangulation point that is pretty close to the rising trend line that price had followed previously. That trend line is a high probability target and another reason why it's worth trading against the channel of the first chart.

The Plan:
1) More than one condition indicating a turning point? - Check.
2) Identifiable price target(s)? - Check.
3) Additional indications that the price target(s) are valid? - Check.
4) Discernable and logical placement for the stop/loss? - Check.
5) Positive risk/reward ratio? - Check.

The first chart shows the entry point but not the stop which I added after the screen shot was taken.




The channel median line and triangulation point of the first chart hit spot on. Target 1 achieved. One thing to note about these triangulated points in price and time. Price doesn't always take an exact path to the point. As is shown, price actually dropped below the target area and meandered into it. It's not common for the target area to get surpassed and then price retracing back to the projected point. So it's important to have other exit criteria than just the projected point.

The triangulation point from the second chart also hit spot on. Target 2 achieved. There was positive price to oscillator divergence on a different chart (that I didn't capture) so I chose to exit.

I hope this example shows that price does truely behave in a geometric fashion and that there are some very outside the box and creative ways to apply geometry to map out price behavior.

The final part of this True Market Geometry series will show some interesting correlations between geometric patterns and price action that shows how 4 dimensions are represented in a 2 dimensional price chart.