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Basic Understanding
Time Analysis
The Market Geometry we're studying here is in the realmof Time analysis. The primary reason we're drawing these methods is toestablish time-zones in the future when a trend may change. Most of us havebeen exposed almost exclusively to price analysis. Price analysis can take overa hundred different forms, but there are features common to all of them:
- the market is monitored very often (or continuously) for specific occurrences of a pre-determined event; these can be chart-patterns, combinations of technical indicators, wave counts, etc.
- these specific events are determined by examining past price history, with the assumption that what occurred in the past will occur in the future. This determines the parameters for technical indicators.
- when these specific events occur there are expectations of a result. These expectations are that price will now move a certain way, and a systems trader will even require a risk/reward ratio to be met before initiating a trade.
Time analysis is a paradigm shift in technical analysis.It should affect your trading style. Rather than analyzing historical data andre-acting, you're defining future times when you will act. The decision-makingprocess becomes very simple. You've become "analyst light" and"administrator heavy". The current geometry of the markets tells youhow price will evolve. Knowing a trend-change time in advance willgive you a tremendous advantage in your trading - but when you first begin tonote future trend-change times you won't know whether to go long or short.Rather, you'll be creating a Time-Zone and will observe price inside theTime-Zone. You received my "Trade Execution" manual with this course which describes the process in detail, and advises how to enter and exit themarket for maximum opportunity.
The lines we extend into the future using these methodsfor dynamic support-resistance are a union of price and time, they're both equal partners in the formation of the line. The only thing we look athistorical price for in Market Geometry is simple pivot points - in drawing the techniques we ignored all other price activity. I'm asking you to consider that not all the data in a price series is of equal importance. It appears, from what you'll see in this course, that pivot point sequences contain information about the times of upcoming swings in the market.
Time analysis may be a paradigm shift in your view ofmarkets, it's not like price analysis:
- we only look to trade when a future time-zone we have previously predicted is here; the market is monitored periodically to see if new significant pivots have formed, which allows us to draw these Market Geometry methods. This affords the time-analyst a tremendous psychological advantage over price-based technical analysis.
- these Market Geometry techniques never change, they are self-optimizing. You can look at charts from any decade and they work exactly the same. Past price history can be examined to increase ones confidence in the methods, but there is nothing that needs to be changed in the methods.
- the Time-Analyst has very little expectation.
A trend change can just as easily be down to sideways asdown to up. We use Swing Lines (or similar entry-techniques, as described inthe Trade Execution manual) to have price confirm that a trend-change isconfirmed. Even more important, we don't have specific profit expectations, weusually use trailing-stops coupled with inactivity-stops. These swing lines areabout all we use in the realm of traditional technical analysis, they're prettysimple.
Self-Optimizing
What self-optimizing means is that the techniquesautomatically adapt themselves to current market activity. More specifically they adapt themselves to both price and time volatility. And this isfacilitated by using only significant market decision points which may beoutside the category of random market noise. Let me elaborate. 1) When you use significant pivots (as we do in drawing these methods) you have identifiedprice points where most of the market participants who are interested in thatmarket agree - this is evidenced by price not being able to go higher (orlower) for several periods afterwards. Prices that are between significanthighs and lows, we do not know who the traders are that caused those price"wiggles", so in effect those prices are basically random to us.Using pivots we dramatically reduce the effects of random market noise. 2)When you connect a high to a low you are operating in two dimensions. The first dimension is price, the difference between the high and the low prices.The second dimension is time, the time between the high and low pivots. Soin drawing a technique like Fib Fan Projection or either of the PF techniques,we are being accommodated by the changes in these two dimensions automatically.But the Pitchfork techniques are also being aided by an implied thirddimension, and this may be why they are so powerful. 3) When you draw adiagonal line between pivots A and B you've just drawn a perfect "45degree line" between those two points. In the below image. The median lineof a Pitchfork, the line that extends from the leftmost pivot, is actuallygoing thru the 50% retracement between the other two pivots in price AND intime. Want to see it? Just draw a pitchfork - then draw a Fib Retracement between the middle and rightmost pivots. That median line is special! There'sone other way these techniques are self-optimizing, and that's when you use two time frames. 4) Lets say you're overnight trading and your primary chartis a daily chart. As volatility patterns change the actual pivot may form earlyor late in the time-zone. By going down one timeframe, to a 30 minute chart,you will often be able to nail the exact day down by using the pivots in that lower time frame. In that time frame the volatility change has already occurred,while the daily time frame is "just beginning to notice".
Identifying Pivots
All the drawing techniques in this course share one thing in common in their drawing application - you must first identify pivots,ideally significant pivots. A pivot is a top or bottom in prices such that, fora low pivot, you see higher lows in the prior two price-bars and next twoprice-bars. In Market Geometry theory most of the price bars on a chart areconsidered random, sometimes called market noise. In truth, for most any pricebar we don't know if its composed of knowledgeable commercial entering themarket, speculative small traders entering the market, hedging activity,traders closing positions, etc. However, at significant pivots we know thatmost market participants agree that we have a top or bottom in place. Eventhough we see this in hindsight Market Geometry is based on the premise that these significant high s and lows influence the growth and contraction of subsequent market swings. You shouldn't have to struggle finding significantpivots. You can apply a simple technical indicator called ZigZag to find them.Below is an example of a 1% ZigZag applied to a Stock Index. For Daily StockIndex charts, use a 3% ZigZag. After a short while of practice, well before youactually start using this in your trading, you'll be able to spot them easily.
Below is an example of FT's Gann Swing Chartist study,with the parameters I use.
Market Types
At the end of each methods Drawing section I'll beplacing a picture of the Market Type it works best in. By market type I'mreferring mainly to the level of trend and volatility in the timeframe you areviewing on a chart. The Fib-Fan works best in trending markets that show strongtrends. It is poor in narrow and medium range markets, and acceptable in widerange markets. By "acceptable" I mean that it can be used in theTiming Matrix to build time-zone clusters. The GS-Timer is strongest in wide rangemarkets and trending markets that show zig-zag type corrections. It is poor intrending markets that don't show corrections. Basically, you need a clear"A-B-C" swing pattern just to draw this method, and the clearer the trend channels are, the better this method will work. The PF-Intersect works best in wide and medium range markets as it requires 4 clear pivotsto draw. However, markets are in a wide-range most of the time. In strong trending markets where it is possible to draw it, you'll find that the angle of ascent or descent of the PF lines is very steep, making it impractical touse. If you can find three pivots, PF-Angles works well in all markets,except of course very narrow range markets. Certainly we can questionthe exact difference between a wide-range and a narrow-range market. If a 2.5%zig-zag or filtered wave doesn't show pivots, its a narrow-range. Common senseusually works here - if you put about 250 price bars on a chart it should beeasy to identify the narrow ranges.
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