Price, Time and Market Geometry

By TradersLog on September 28, 2009 in Articles, Technical Analysis

By Earik Beann

©2006, Reprinted with permission of Traders World Magazine

(www.tradersworld.com)

In this article, I’d like to take a look at a subtle yet powerful relationship
between time and price that is misunderstood and overlooked by 99% of
traders, but that has allowed the select few who truly understand it to
consistently and repeatedly pinpoint market reversals weeks and months
ahead of time.

In most of the works written on technical analysis, you’ll fi nd that the charting
techniques tend to fall into one of two general categories. The first category is
price analysis, such as Fibonacci retracements, where the major focus of the
technique is the price of the stock or commodity being analyzed. For example,
Fibonacci retracements are calculated by subtracting a recent swing high and
swing low to obtain a difference. Th is difference is then multiplied by various
ratios, and added to or subtracted from the most recent swing level to obtain
future areas of support and resistance. The focus of this tool is entirely based
on the price axis of the chart, with no information given as to when a particular
projection ought to take place, only the price level at which it will happen. Most
oscillator style tools fall into this category as well, being calculated using
inputs limited to the last few price points recorded on the chart.

The second category is time analysis. You can apply the Fibonacci techniques
to the time axis as well, measuring the time between two swing points,
multiplying by the appropriate ratios, and adding this distance to the last swing
point to get projections of future turning points. This tool works primarily on the
time axis, with no regard to the price at which the projected swing is expected
to occur at. Cycle analysis falls in this category as well. While prices tend to
be used in cycle analysis as a way to pin down the appropriate cycles to use,
this information gets washed out in the algorithm and we are left with nothing
more than time projections telling us to expect a turn at a given time but with
no information about the price which this turn ought to happen at.
The point here is that we’ve all been trained to regard the time and price axes
of the chart as two separate and totally independent things, and the
techniques we use reflect this view. While we need both time and price values
in order to construct our chart, we treat them as two separate variables, each
with their own units and labels that don’t cross over. Just as you can’t convert
from inches to gallons, we assume that the time and price axes of our chart
are similarly segregated and independent, as the units measure two totally diff
erent and separate things.

In trading, all assumptions must be questioned, especially the most basic

ones. In my work, I’ve discovered that markets represent energy movement,
and this energy movement expresses itself in both time and price
simultaneously. What this means, from the perspective of markets, is that
there really isn’t any difference between time and price aft er all. Time and
price are recorded in separate units, but rather than being like inches and
gallons as everyone assumes, they are more like inches and centimeters.
Both measure the same energy just using different labels. This means that
once we know how, we can convert between the two, transforming price into
time and time into price.

This is one of the reasons why WD Gann was able to make projections in both
time and price simultaneously. He didn’t just say that price would hit a specific
level, or that there would be a turn at a specific date. He would say that the
market would turn on a specific day at a specific price. There was both a time
component and a price component to his forecasts, which is something that
would have been impossible for him to do if he focused his techniques on only
one axis of the chart as most traders do today.

With this idea in mind, let’s take a look at a very basic example of what we
can do with this information. Please take a look at Figure 1, a daily chart of
IBM.
In early February of 2004, IBM made a high at 100.43 and spent the next six
months in a decline. The price at the high represents a very important
vibration level for this market, and like a rock thrown into a pond, it will
generate ripples that move out into the future on our chart. Detecting these
ripples is very easy, once we know to look for them. On the chart, I’ve taken
100.43 as a base unit, then multiplied it out by various Fibonacci ratios to
obtain the following:

100.43 x 0.382 = 38.3 (0.618 x 0.618)

100.43 x 0.618 = 62.06 (0.618 = 1/golden ratio)
100.43 x 1.0 = 100.43 (the most basic ratio)
100.43 x 1.27 = 127.54 (1.27 is the square root of 1.618)
100.43 x 1.618 = 162.49 (1.618 = golden ratio)

Then, for kicks, we can also throw in a couple other ratios common in Sacred
Geometry:

100.43 x 1.73 = 173.89 (root 3)

100.43 x 2.23 = 224.5 (root 5)
Now, using our high as our initial starting point, we count forward to find areas
on the chart where the market should react. I counted forward using degrees
of movement of the Sun, the true timekeeper. So take our high, add 62
degrees of movement of the Sun, and you get the reaction high in April. Take
the high, add 100 degrees, and you get the date for the low in May.

You can see on the chart how well this technique worked to locate turning
points in the future. The important thing to realize here is that we are using a
pure price number to generate pure time targets. This would not be possible if
there was no relationship between the time and price axes on our chart. Th is
is not a selected example either – you can take any chart and repeat this
exercise and you’ll see that an important price will generate important times in
the future. The only requirement to do this successfully is the proper
conversion factor between the two. I’ve used the Sun in this case, which
works great on IBM, but diff erent markets have diff erent vibration rates, so
keep that in mind when you experiment with this technique on your own
charts.

Once you know the conversion factor between time and price for your market
and timeframe, that factor should never change and will remain valid forever.
Just as every object has a resonant frequency at which it absorbs energy,
every market has a factor that it uses to convert price to time and time to
price.

When you know the right factor for your market, you can set your chart up in
such a way that you can actually see the relationships visually. This is called
proper chart scaling or square scaling. All the legendary traders of the past
like Gann, Bayer, and Marechal knew about chart scaling. If you draw charts
by hand, you have to determine the scale ahead of time, and the chart scale is
a direct connection between the price axis and the time axis. So if you take a
look at Figure 2, you’ll find our IBM chart drawn out using the scale of 0.1
points per bar. What this means is that for every bar width on the chart, we
need to go up 0.1 points on our price axis. If there are 300 bars on the chart,
and our chart is perfectly square, then our price axis needs to cover exactly 30
points of vertical movement (300 x 0.1). Said another way, if our chart is 10
inches long and covers 300 days, then 30 points of price movement also
needs to take up 10 inches of paper. If we have a rectangular chart, then we
need to take the dimensions of the paper into account when calculating the
height of our price axis. When this is all done correctly, then a 45 degree line
drawn on the chart will represent a perfect balance of price movement and
time movement, given the market’s built-in exchange rate between the two.

A chart that is properly scaled in this way will suddenly exhibit geometrical
patterns and shapes that were not visible beforehand. Th ese patterns are
more than just pretty – you can use them to trade. Take a look at Figure2,
where I’ve added 3 simple squares to the chart.

All I’ve done is take a swing high and a swing low, and drawn a square
starting from the first point and ending at the second. So our fi rst square
begins at point A, then extends down to the level of the low at point B. Find
that square, then move over to the rightmost edge and you’ll see that it lines
up with the time of our turn at C. Th e next square moves from C to D, and
gave us a turn at E, not to mention a price level at F. The third square moved
from F to G, and generated the turn at H.
I only added three squares to this chart to keep it clean and easy to see what
was happening, but there are many more. Most of the highs and lows on the
way down from C to G were marked off by squares based on previous swings,
and it would be a great exercise for an enterprising trader to go back and
locate all the squares on this chart. Note that our scale factor of 0.1 points per
bar works well on most stocks, although commodities all have diff erent scales
that have to be determined before this approach can be used on them.

Let’s take a look at the same chart, but this time using triangles. Please turn
your attention to Figure 3.

Again, we have three triangles drawn on the chart. The first triangle extends
from point A to B, and if you move your eyes over to the rightmost tip, you’ll
see that it lines up with the low at D. The next triangle has an edge running
from C to D, and the third point coincides with the low at F. The last triangle
runs from E to G, with the projected turn falling on H.

None of this is very complicated. We are using the simplest of shapes, and
just drawing them in on our charts. A moving average is more difficult to
calculate than this, but you’ll never see a moving average telling you anything
about turning points months in advance.

This is all possible because our charts are scaled correctly. One of the
reasons why so few traders are aware of this kind of thing is because most
soft ware programs just can’t draw charts properly. Ganntrader can do it, and
Wave59 can do it, but that’s about it. If you’re a daytrader, then Wave59 is
your only choice. This is what happens when you have non-trading computer
scientists designing trading software. They are not aware of the subtle
relationships between price and time and just do things the easy way by
putting the highest price on screen at the top of the chart, the lowest price at
the bottom, and then adjusting on the fl y as things change. The problem with
this kind of automatic scaling is that it totally distorts the chart, and conceals
the geometric nature of markets. If you had pulled up this chart using any of
the major “industry standard” programs, you’d have no clue that there were
any triangles or squares anywhere on the chart. Th e worst part is that as the
chart updates, it would be re-scaled as you went and any shape you had
drawn at that point would be moved on you so that the edges were in diff
erent locations due to the new scale. So if you’re currently using any charting
program aside from the two mentioned, you need to realize that an entire
branch of extremely powerful techniques are being withheld from you by your
soft ware. I’ll take simple triangles and squares any day over the complicated
algorithms like RSI, Stochastics, or moving averages that make up the heart
of the modern day analyst’s tool box. None of the famous traders of old used
these algorithms, and if you take a look at their results you’ll see that they
weren’t any worse for wear without those oscillators.

So far we’ve looked at simple shapes in order to demonstrate the geometric

nature of a scaled chart, but I’d like to take a moment to demonstrate just how
far you can go with this style of analysis. If you’ll take a look at Figure 4, you’ll
see a chart of the Fibonacci Vortex, a pattern I developed over the years
when studying scaled charts. It is based on a golden spirals and 45 degree
angles, and is used to forecast future turning points in price and time.
The Vortex is centered on the most recent swing high or low, and then a
mechanical procedure is applied to determine the correct size and positioning
of the pattern. I don’t have enough space in this article to go through that now,
but suffice it to say the vortex shown on Figure 4 was already drawn just after
the low at point A formed, long before the market approached point B. As the
Dow rallied up into the spirals and that spoke at B, we knew the time was ripe
for resistance to kick in, which is did and the market corrected back almost
500 points before finding support at the next spoke down on our pattern.

The arrows on the chart show all the other turning points found over the last
year, using the same procedure on different swing points in the past. Squares
and triangles demonstrate the geometric relationships well, but patterns like
this are really where the money is at. I recently gave a talk to the Denver
Trading Group about the Fibonacci Vortex, and in that talk we went over the
last five years of action in the Dow and were able to pinpoint every single
major turning point using nothing more than this pattern and a properly scaled
chart. I don’t know of any other technique available in the public domain that
comes anywhere close to that result, which demonstrates what can happen
when you simply scale your chart to mimic the market’s own vibration rate.
At first it sounds amazing that any single technique would be so powerful as to
be able to pinpoint every turn on the Dow within a day and a oft entimes just a
few points, but Wave59 users have been doing it for years now with great
success. Trading success is not really a matter of obtaining some graillike
technique, but of organizing the information the market provides in a way that
reflects true reality. In this case, the reality is that price and time are one, that
you can convert between them with the right knowledge about chart scaling,
and that you can use this relationship along with simple geometry to forecast
turning points in the future with a high degree of accuracy. The rest is
psychology and discipline, the addition of which results in trading success and
consistent profits.

Earik Beann is President and CEO of Wave59 Technologies, a cutting edge

software corporation focused on applying natural law to financial markets. He
splits his time between guiding Wave59, researching market behavior, and
trading his own account. He may be contacted at earik@wave59.com . For
more information about Wave59 and access to other articles Earik has written,
please visit www.wave59.com.