Wanna see me naked?

Akuma99 privileged me with the opportunity to write some guest articles on his blog. Since he's primarily a naked trader.. meaning trading with no indicators and not necessarily in the buff although I suppose those aren't mutually exclusive.. I wrote the series on using some simple time counts to provide market turn timing marks on a naked chart.

Links:
http://beginnertrader.com/blog/technical-analysis/naked-time-part-1
http://beginnertrader.com/blog/technical-analysis/naked-time-part-2
http://beginnertrader.com/blog/technical-analysis/naked-time-part-3

Be sure to check out all of Akuma's blog posts. Great stuff. Especially the MT4 programming. He's made some tools for me in the past and his work is top notch. He definitely knows his stuff. He's also been a huge inspiration considering the health battles he's one. So here's to you, Adam. Cheers. *clink*

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.

Manual Gann Square

Here are the step by step directions for creating a Gann Square manually in Metatrader 4. It's actually doable in any charting software that has trend lines and preferably a static cycle tool or bar counter.

Background
The Gann Square or Master Chart is a geometric chart dividing a square into 4th's and 3rd's horizontally, vertically, and diagonally. The standard square is typically a perfect square. IE a Square of 90 is 90 bars x 90 points. However, not all trading instruments and time frames work out to be perfect 1 to 1 price to time relationships. Moreover, applying other Gann techniques such as squaring a range of price and/or time can yield good results as well. So adjustments are perfectly allowed.

Usage
My usage of the Gann Square is to divide time and price on also create a 3rd axis in space. The vertical lines divide time, the horizontal divide price, and the angles divide space. The play is to watch price reaction at intersections of price and time, price and angles, time and angles, or all 3. Horizontals and angles will more often than not create support resistence. The 1x1 lines are the balance lines. Price tends to gravitate towards the 1x1 lines.

Construction
Constructing the Gann Square is actually really simple. No more difficult than connecting the dots. Only our dots are evenly spaced around the square.

Step 1: Determine the starting point and square size. The starting point is usually from a signicant swing high or low. For double tops/bottoms, try both and see how things look. Try to avoid picking spots out of consolidation. It's also advisable to choose a spot that has enough price action to the right to get an idea how valid the square size is as it's being built. If the first few lines added have no correlation to price action whatsoever, choose a different square size.

There are many ways to determine the square size. Gann numbers such as 360, 90, 144, 52, etc., all work well. These can be days, bars, degrees, or whatever measuring device suits your fancy. All will work because of the harmonic nature of charts. But ideally, one is chosen that fits the data profile. For example, it may not be practicle to choose a 360 hour x 360 pip square for data that swings 600-700 points in a move for the time frame. In that case, 360 hours is probably fine, but the heighth could be adjusted for the more recent price range. Or adjusted to the nearest whole circle number which would be 360 x 2 or 720. Or by degrees from the square starting point which might be 90° on the square of nine as the most appropriate price range. Again, there are no hard rules. 39 x 42 is perfectly acceptable. (Any square will work imho because anything divided evenly will yield proportion within itself. As long as the square starts from the right point, that self proportion should still correlate because price moves are nothing but various degrees of proportion.)

For this example I chose a range of price for the height. For the width I chose 360 bars. I use the MT4 cycle tool to measure out 360 bars from my swing high. In MT4 it's important to use the cycle tool because MT4's chart scaling is different on the empty space right of the price area. This creates a lot of charting issues when dealing with visually "squared" charts. If a verticle line is used, it will move out of proportion. What started out at 360 bars out will end up creaping up and up around 315 bars out as time advances. The cycle tool will stay consistent.



Step 2: Divide the square. The next step is to divide the square into 4ths. I start by taking the cycle tool and shortening up the cycle. So 360 now becomes 90 with the fourth line being the last line. From there, I draw in 45° trend lines from corner to corner. Where the 45° lines intersect the verticle lines are where the horizontal lines will go.



I also divide the square into 3rds. Add another cycle tool and adjust it to divide the square vertically. 360/3 = 120. I typically change the line style to dots or dashes. Where the 1/3 verticle lines intersect the 45° diaganol lines are where the 1/3 horizontals go. I also set these lines to dots or dashes.



Step 3: Add more angles. Additional angles are drawn in connecting the corners to the mid point of the square boundaries. In other words, from the top left corner, a line is drawn to the 4th verticle at the 2nd horizontal. Another line is drawn from the top corner to the 4th horizontal and 2nd verticle. Repeat for four corners.



Lines connecting the mid points to the other mid points are added. I usually dot or dash these. The square is now complete.





Validation
It's important to validate the square. As mentioned in step 1 it's important to have sufficient price action to the right of the square start. Ideally, it was easy to validate things as the square was built. Validation is simply observing how price reacts at horizontals as support/resistence, at verticles as price reversal/acceleration points, and at the angles as support resistence.

The chart below has highlights on where price was relating to the square. The hits aren't dead on exact in terms of support/resistance, but the first vertical line was a hit and the 2nd vertical is shaping up as a good hit. Also note that smaller squares can be created and divisions of those squares will typically yield hits. The upper left corner shows an additional division line where two angles intersect. Any intersections should always be observed as possible reaction points.




Conclusion
The Gann Square is a great tool for measuring price and time and can encompass many Gann techniques. I find the tool invaluable not only as a timing device but a device that saves time hunting down price reaction areas. I mean which is easier... glancing at a Gann Square or working up a Square of Nine? Circles and additional squares can also be added to create even more levels of harmonic proportion. I'll update as this square plays out. Based on the hits so far, this square should result in some finding some good trades.

Edit: I'd also like to add that drawing the squares by hand is a good mental exercise. It focuses the mind on a single purpose of syncing to the vibration of the chart. It also trains the eye to see proportion on a naked chart. After enough practice, you'll be able to eye ball a chart and guesstimate where all of the lines are based purely on price re-action points. The eye and mind seek harmony and proportion just as the ear seeks harmony and melody.