HOW TO SPOT LONG-TERM TOPS AND BOTTOMS
4th in a series - Dave Reiter
Is it possible to accurately forecast long-term tops and bottoms in the various commodity markets without error? Probably not. But there are a few tools, which we can use to put the "odds" in our favor.
For the past few months, I've been studying several long-term commodity charts in order to find some type of forecasting tool, which could be used to spot major tops and major bottoms in the markets.
For the most part, I focused on the grains, meats, metals, and soft commodities. The majority of the price charts examined contained over 25 years of data.
Specifically, I discovered that when a particular market reaches 85% of its historical trading range, it's on the verge of topping out or bottoming out.
If a market does indeed exceed 85% of its historical trading range, it will usually continue to move until it exceeds its all-time high or' low. Once the market exceeds its all-time high or low, most of the time it enters a "blow off" phase which could last as long as several weeks.
When the "blow off" phase has been completed, the market will make a sharp and sudden reversal.
It's virtually impossible to determine the end of the "blow off" phase. Therefore, I've found that it's best to wait for the market to put in a 20-day high/low.
For instance, the cotton market is currently in a "blow off" phase to the downside. When will cotton prices "bottom out" and at what price level? I have no idea. However, when the cotton market trades above its 20-day high, there's a fairly good chance that a major bottom is in place. This method is certainly not perfect but it's better than trying to pick the exact high/low (which can be quite damaging to your account balance).
MIND OVER PROFITS - Rick J. Ratchford
It's fair to say the great majority of those who enter into trading the markets do so to make money. Regardless of their overall goals, whether it be to make a living from trading or to simply increase their wealth, a trader enters this business for one main reason; to succeed at it.
As traders, we have the complete freedom to buy or sell in the markets. This is an incredible amount of power that each and every trader has at his disposal. What we do not have control over, however, are the market forces themselves. In other words, the market will do what the market will do, and that part of this business we do not control individually.
To be successful and profitable trading the markets requires that we do well with what we can control. What we can control are our actions. To control our actions well requires that we have strong positive mental habits. A good trading method is also important, but even the best approach will fail if used by a mind that is negative, lacks confidence, discipline and focus.
Our mind is more powerful than anyone can imagine. Over our lifetime, we have developed a particular attitude as a result of feedback from our parents, school, environment and friends. During this course, we have come to see the world and ourselves in a way that no other person can possibly know. Every experience plays some part in our own self-image, how we look at ourselves. If we have a healthy self-image, this manifests itself in various positive levels of achievement. However, if our self-image is negative, we would find ourselves unable to grab the brass ring of success.
Abraham Lincoln once said, "Most folks are about as happy as they make up their minds to be". This is profoundly true. There are many accounts about individuals who have met with disaster in their lives, whether it be an accident or illness of some kind, and yet do not let the shortcomings handed to them affect their happiness and ability to enjoy life. On the other hand, there are many more accounts of individuals who have allowed even the most minor setback to fill their life with depression, anger and self-pity.
Trading successfully requires that the trader have a POSITIVE ATTITUDE. Even if all our prior experiences were negative, our attitudes are continuously in a state of attention for instruction on how it should be from one minute to the next. We have an inner voice that continuously feeds our conscious and subconscious mind, and it is what we feed our mind from within that molds our attitude.
It is easy to develop a bad attitude about a number of things around us. We can be negative about other people, our job, our car, our bills, and our selves. And of course, we can be negative about our trading performance and point to everything other than our attitude as the problem and reason for failure.
If you are frustrated about your trading, consider the problem is likely due to your attitude.
To Succeed, Adjust Your Attitude
Some believe there is nothing that they can do about their attitude. It is their parents fault, or due to something or someone. This belief alone is spawned from a negative attitude. The question is whether you want a better attitude, regardless of why you think your attitude is as it is right now. If you WANT to succeed, you must WANT to improve your attitude. And you can if YOU WANT TO!
The mind can be trained, no matter how old you are or how long you have been doing something one way. When you walk, move your legs, hands and fingers, you do so without much thought on a conscious level. The reason for this is that you have developed a HABIT of doing certain things that it no longer requires conscious thought to perform. After something is done for some period of time on a conscious level, soon it becomes part of the subconscious and you have successfully trained your mind with new tools.
Take for example the Typist. When you first started to learn how to type, it required a great amount of conscious effort on your part. You had to CONCENTRATE on where the keys were located, which finger to use to press the proper key, and what you were required to type. Hours of practice was required over a period of time, and done regularly without letup, until you came to a point when typing was no longer a conscious effort but a subconscious one. As I am typing this article right now, I am not giving any thought as to where the letters are on my keyboard or which one of my fingers are pressing the letter at the time. Since I have been typing now for 27 years, it is now a habit and part of my subconscious.
Another example is learning to play the Piano. A conscious effort was required for a period of time, with a great amount of practice. However, soon that practice becomes a habit and then a part of your subconscious mind. You can enjoy the music of you fingers rather than concentrating on where a particular key is located.
Our attitude can be made to see things more positively if we make a CONCERTED EFFORT to talk to it about POSITIVE things rather than negative. If we make a constant effort to make sure that our inner voice is only speaking positive things about our present circumstances, whether it be the people around us or our jobs, whatever, in time it becomes easier to do and then becomes a HABIT. Once something becomes a habit, it is effortless and a part of us. It becomes a part of our subconscious mind.
As with any type of training, we need to have a plan as to what we can feed our mind. Here are some suggestions to start training your mind to have the RIGHT ATTITUDE TO SUCCEED.
1. Be enthusiastic about learning. If you want to succeed in trading, you must learn to enjoy the process involved. Think of each topic to learn in a positive light, as something that is going to help you reach your dreams. Which leads to the next suggestion;
2. Envision your success. See yourself where you want to be. Do you want to trade full-time at home, or trade for a large firm? See yourself already doing this in your mind. Experience the sounds and the feelings from inside as if you are already there. Do this regularly, several times a day. Although the conscious mind is aware of what you are doing, the subconscious mind is only aware of the experiences and information it being fed. It cannot tell the difference. Yet, it is the part of the brain we want to train as habits are held there. So feed it what you want to become a reality. Feed it the reality that you are a successful trader doing what you want to do.
To help you believe the power of the mind is as strong as I am suggesting, try this experiment. Close your eyes, and picture yourself cutting a lemon in half. Imagine the spray coming off the lemon and hitting your face and hands. Can you feel it? How about when it gets in your eye? Imagine that. Feel the sting? Now, imagine taking a bite of that lemon. Notice how your mouth starts to pucker as it senses the sour taste of that lemon? Yet, you are only eating it in your mind. It will do as you tell it to! So feed it only positive thoughts and watch how your mind will respond in a short period of time.
3. Keep focused on your goals. It helps to have a goal in the first place if you wish to be a success. A person without goals is a person with direction. Decide what is important to you and WRITE IT DOWN. Then, several times each day pick up your goals and read them. Do this religiously. By doing this you train your mind to find ways for you to achieve those goals. It will work on them day and night, even as you sleep. You will be presented internally with answers on how to overcome obstacles that separate you now from success. Keep focused on your goals and priorities, do not deviate, and you will achieve.
4. Do not allow the negativity from others affect you. If you are around negativity and find it is affecting you, stay far away from it. I have long ago trained my mind to believe that negative people are here to test the positive people, and that those truly positive will become more so in realizing this. But be careful. Even a solid rock cliff will slowly erode when constantly hit by ocean waves. Stay clear of constant negativity if at all possible. Surround yourself with positive people and positive things to read and do.
As you apply these suggestions, REMAIN OPTIMISTIC. Do NOT become discouraged or impatient. To become a good typist or pianist requires time, and this goes for anything worthwhile. If you TRULY and HONESTLY desire to achieve success in trading, then look at each day as another wonderful opportunity to learn at least one new thing about the markets, the techniques available, the process. Be POSITIVE about all the results from your learning, whether it appears what you have learned is useful or not. In fact, even something that does not work is a POSITIVE step in the right direction, because you become aware of the do's and don'ts that all successful traders need to know.
Regardless of the best trading rules and methods, if we do not have the right positive attitude, we will fail to execute the plan properly. We will find ways to fail, because we have allowed our mind to dwell on failure and that is all it understands. So start now if you have not already and develop that POSITIVE ATTITUDE. And I will see you in the winners circle.
GEOMETRIC ANGLES - THE BASIS OF MY
FORECASTING METHOD - W. D. Gann
Mathematics is the only exact science. All power under heaven and on earth is given unto the man who masters the simple science of mathematics. Emerson said, "God does indeed geometricize." Another wise man said, "There is nothing in the universe but mathematical points." Pythagoras, one of the greatest mathematicians who ever lived, after experimenting with numbers and finding the proofs of all natural laws, said, "Before God, was numbers." He believed that the vibration of numbers created God and the Deity. It has been said, "Figures don't lie." Men have been convinced that numbers tell the truth and that all problems can be solved by them. The chemist, engineer and astronomer would be lost without the science of mathematics.
It is so simple and easy to solve problems and get correct answers and results with figures; it seems strange so few people rely upon them to forecast the future of business, stocks and commodity markets. The basic principles are easy to learn and understand. No matter whether you use geometry, trigonometry or calculus, you use the simple rules of arithmetic. You do only two things: increase or decrease.
There are two kinds of numbers, odd and even. We add numbers, which is increasing; we multiply, which is a shorter way to increase; we subtract, which decreases; and we divide, which also decreases. With the use of higher mathematics, we find a quicker and easier way to divide, subtract, add and multiply, yet very simple when you understand it.
Everything in nature is male or female, white or black, harmony or in harmony, right or left. The market moves only two ways: up or down. There are three dimensions which we know how to prove: width, length and height. We use three figures in geometry: the circle, the square and the triangle. We get the square and triangle points of a circle to determine points of time, price and space resistance; we use the circle of 360º to measure time and price.
There are three kinds of angles: the vertical, horizontal and diagonal, which we use for measuring Time and Price Movements. We use the square of odd and even numbers to get, not only the proof of market movements, but the cause.
How To Make Charts
Charts are records of past market movements. The future is but a repetition of the past; there is nothing new. As the Bible says, "The thing that hath been, it is that which shall be." History repeats and with charts and rules we determine when and how it is going to repeat. Therefore, the first and most important point to learn is how to make charts correctly because, if you make an error on the chart, you will make an error in applying the rules to your trading.
Spacing: Use 1/8 inch for 1¢ per bushel on the daily, weekly or monthly charts except when the price is selling below $1 per bushel, then use ½ per bushel for each 1/8 inch space on the daily chart only.
No space is skipped on the daily chart for Sundays or holidays; therefore, the time period is for actual market days, but you should carry the calendar days across the top or bottom of the daily chart so that you will know when the price is 45, 60, 90, 120 or 180 days, etc., from an extreme low or high price.
Weekly Chart: When an option expires on May Wheat, or any other Grain, say in the month of May for the May Option, and the new option does not start until August, you carry the time periods in weeks and begin the new option at the time period in the week in which it starts. This will enable you to always have the geometrical angles correct from any high or low, and to know the total time elapsed from any high or low price. This will make the geometrical angles correct for all past movements.
After long years of practical experience, I have discovered that Geometrical Angles measure accurately Space, Time, Volume and Price.
Mathematics is the only exact science, as I have said before. Every nation on the face of the earth agrees that 2 and 2 equals 4, no matter what language it speaks. Yet all other sciences are not in accord as mathematical science. We find different men in different professions along scientific lines disagreeing on problems, but there can be no disagreement in mathematical calculation.
There are 360º in a circle, no matter how large or how small the circle may be. Certain numbers of these degrees and angles are of vast importance and indicate when important tops and bottoms occur in Grains, as well as denote important resistance levels. Once you have thoroughly mastered the geometrical angles, you will be able to solve any problem and determine the trend of any Grain.
After 50 years of research, tests and practical applications, I have perfected and proved the most important angles to be used in determining the trend of the Grain Market. Therefore, concentrate on those angles until you thoroughly understand them. Study and experiment with each rule I give, and you will make a success.
We use geometrical angles to measure space and time periods because it is a shorter and quicker method than addition or multiplication, provided you follow the rules and draw the angles or lines accurately from tops and bottoms, or extreme highs and lows. You may make a mistake in addition, or multiplication, but the geometrical angles accurately drawn will correct this mistake.
Example: If you should count across the bottom of your chart 120 spaces, which represents 120 days, weeks or months, then you begin at "0" and number vertically on your chart up to 120. From this top point at 120, draw a 45º angle moving down. This will come out at 0 on 120 points over from the beginning. If you have made a mistake in numbering, this will correct it.
Angles drawn on a chart always keep before you the position of the option and its trend, whereas, if you had a resistance point on time written down, you might mislay it or forget it, but these angles are always on the chart in front of you.
These angles or moving-average trend lines, correctly drawn, will keep you from making mistakes or misjudging the trend. If you wait and follow the rules, these angles will show you when the trend changes.
The mean-average, as commonly used, is obtained by taking the extreme low price and the extreme high price of the calendar day, week or month, and dividing it by 2 to get the mean, or average price, for the day, week or month, and continuing this at the end of each time period. This is an irregular movement in spaces, or points, per week because at one time it may move up 2 points per week, and at another, 5 points per week, while the time period is a regular unit. Therefore, geometrical angles, which are really mean-averages, move up or down at a uniform rate from any bottom or top on a daily, weekly or monthly chart.
How To Draw Geometrical Angles
There are three important points, which we can prove with mathematics or geometry: the circle, the square and the triangle. After I have made the square, I can draw a circle in it using the same diameter, and thereby produce the triangle, the square in the circle.
The angles, or moving trend line, measure and divide, time and price into proportionate parts. Refer to Form 1, where I have drawn the square of 28. You will note that this is 28 high and 28 wide. In other words, 28 up and 28 across. It is the same as a square room, which has a bottom or floor, a top or ceiling, and sidewalls. Everything has width, length and height. 28¢ was the low price for Cash Wheat in 1852.
To get the strongest and most important points in this square, I divide it into 2 equal parts by drawing a horizontal and a vertical line. Note angle marked "A" which divides each of the smaller squares into 2 equal parts and runs from 0 to 28 diagonally. This is a diagonal line moving on a 45º angle and divides the large square into 2 equal parts. Then, note angle "B" at 14, running horizontally across. This divides the square into 2 equal parts. Note angle "C" which is a vertical line running up from 14, which is ½ of 28. This crosses at the center or ½ point at 14 where the other angles cross, dividing the square into 2 equal parts.
Then, note angle "D" which forms another 45º angle moving from the N.W. corner to the S.E. corner, crossing 14 at the exact ½ point. You see by this that, if we draw the first line through the center of the square, we divide it into 2 equal parts. When we draw the lines from the other directions, we divide it into 4 equal parts. Then, by drawing the 2 lines from each corner, we divide the square into 8 equal parts and produce 8 triangles. We use 28 because 28¢ was the lowest price Cash Wheat ever sold.
As you look at this square, it should be easy for you to tell with your eye where the strongest support point is, or resistance point. It is at the center where all the angles cross. Four angles cross at this point so, naturally, this would be a stronger support point than a place where only one angle crosses. I could divide each one of these smaller squares into 4 or 8 equal parts by drawing angles in the same way. Later, when I give you the rules and examples, I will explain how to square the range of an option, that is, the difference between the extreme low and the extreme high prices, or the difference between any low point and any high point, and also how to square the bottom price.
Pattern Chart For Geometrical Angles
The square of 90, or the Pattern Chart, shows all the measured angles that are important to use in determining the position of an option.
These angles are as follows: 3¾, 7½, 15, 18¾, 26¼, 30, 33¾, 37½, 45, 52½, 56¼, 60, 63¾, 71¼, 75, 82½, 86¼ and 90º.
It is not necessary to measure these angles with a protractor. All you have to do to get the angles correct is count the spaces on the chart paper, using 8 x 8 to the inch, and draw the lines or angles accordingly.
On the square of 90, which you will receive with these instructions, note how equal angles drawn from the top and from the bottom prove themselves by the point at which they cross. Example: The angles of 8 x 1 from 90 down both cross at 45, 5-5/8 points over from 0 counting to the right. Then, the angle of 4 x 1 from 0 and the angle of 4 x 1 down from 90, you will notice, cross at 11¼ on 45, equal distance from the other angle and twice the measure. The reason these angles prove this way is because the 45º angle, or 45 points or degrees from 0 to 45, is ½ of go. Therefore, parallel angles, beginning at 0 going up and at 90 coming down, must cross on a 45º angle or at the gravity center.
Editor's Note: I believe Mr. Gann wrote this article during the early 1950's. Though dated, it's still timeless advice. Geometric Angles seem to work just as well today as they did ½ Century ago. This is an extract from our large Gann Commodities Trading course, which reprint is available from us. Follow the link at the bottom of this ezine to order.
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