The key to understanding anything is by going back to the basics! By going back to the basics, I mean to understand the underlying forces that allow you to do anything. If we want to put in water lines we ﬁrst have to understand how to sweat two pieces of copper pipe together. If we want to learn to drive, it would be a good idea to know where the ignition switch is. Look at our kids learning in school everyday! Learning the three R’s is where most of us started our fundamental learning processes. We have built and continue to build on them all through our lives.
The concept of learning before doing has always been sound. But what does all of this have to do with the commodity markets? The great masters of trading perceived things at a different level than the average trader. If there is any doubt in your mind about this last statement I would suggest that you are reading a magazine that is dedicated to this one principal alone. The level we speak of is not a higher plane but a fundamental plane, an extremely fundamental plane. Fundamental in that the nature of their composite discoveries was not based on complicated formulas or black box computer programs but the true underlying causes the why of market action. Gann was obviously the chief spokesman for this fundamental type of trading. In fact, I have yet to see anything that he wrote that didn’t ﬁt into this fundamental mold. If the basics are so important, why do we get carried away with all of the other esoteric theories that are out there? Is it possible that in our mile-a-second world we have overlooked some extremely basic principals? The answer is a resounding yes!
If we look at any commodity chart we only have two axis. They are time and price. Let’s look at time ﬁrst and see what we have. Gann stated many times, “Nothing is more important than time!” Our most obvious place to start is cycles.
Libraries have been ﬁlled with books about cycles. Two statements presented in all cycle books as fundamental truths are: cycles start with the long-term and divide into smaller and smaller cycles and expect cycles to be 10-15 percent longer or shorter than the average length. These last two statements presented so frequently as fundamental truths are just not so!
When did cycles start? They obviously started at the moment of creation. Well, didn’t they? How many long-term cycles were in effect after the Lord had created the world twenty-minutes ago? Not many! I am being mildly facetious to try to hammer home a point. We are trying to stick to the most basic nature of the market. Doesn’t it stand to reason that we should have the most basic understanding of it for our foundation? If there weren’t any long-term cycles in effect at this time, that must mean that the short-term cycles acting as a composite, make up the long-term. Does it make a difference? Yes, it does! Do we build a house from the roof down, or the foundation up? This is an exact analogy because it points to true fundamental cause and effect. If we could look at the markets with our Celestial Universal Law Book in hand it wouldn’t be hard for us to determine the why’s of market action. I have yet to see this book for sale.
Let’s now approach number two. Cycles can be 10-15 percent off and still be valid. Where do cycles exist, just in the markets? Can we think of any in our daily lives? How about our daily 24-hour cycle. Let’s see now, if we deduct 10 percent from 24 hours we get 21.6 hours. Can you imagine what the 6:00 news could do with the ﬁrst 21.6 hour day. This may strike you as foolish but I am trying to establish the basic criteria for you to look at the markets in a whole new way. If cycles are not exact then how are the astronomers able to predict when the moon will be eclipsed, to the minute, 15 years from now? How are weathermen able to tell you when the sun will rise on July 23, 2006? Cycles are exact! Universal law is not haphazard. Many times in the Bible Jesus Christ said, “I am the same yesterday, today and tomorrow.” Don’t you think everything, including the markets, must obey universal law?
Let’s next turn our attention to price? What do we know about it? It goes up and it goes down, but very little of the time is it stationary. How about cycles in price? Think about Gann’s Square of 144. It is 144 trading days wide and $1.44 tall (soybeans). Could it be that there is also a price cycle co-existing with our time cycle. You bet there is! Let’s go one step further and present a basic truth. Our price cycle starts at the same time as the underlying time cycle!
Before we go any further we need to take a step backward and clarify a couple of things. I mentioned in the proceeding paragraph soybeans. Are we just talking about soybeans? No! Are we talking about orange juice? Yes! What about the S&P? Yes! How about Swiss Franc? Yes! Why are all of these commodities related? Indeed, why are all commodities related? Because there are only two variables: price and time. Before all of you cycle buffs out there have a coronary let me throw you another curve! All cycles, with the exception of the precious metals are the same length. I can already here some of you crying, “Heretic, Heretic!” There are any number of you that can point to a daily chart and show me a different daily cycle for soybeans than for the S&P. I can do that same thing! What is the point?
We are searching for a basic understanding of what makes the markets as a whole function. When we look at a daily bar on a chart we see what happened over a day’s length. What is our most basic time frame of trade. When markets are open don’t they trade every minute? When you look at a daily bar for soybeans aren’t you really looking at 225 minutes of trading? When you look at a daily bar for the S&P aren’t you really looking at 405 minutes of trading? Are you starting to see how we are chipping away at the basics? Do I mean that you should be charting every minute’s action? No. The time unit that I have found to be the most accurate on all commodities is the 30-minute time bar (if you pay no attention to this article and do nothing else but start applying what you are already using to this 30-minute time frame your trading proﬁts and accuracy will go up substantially, this is a fact). Intra-day charts tell what is happening now. Isn’t that when you trade, when you place an order. Of course it is. Cycles’ lengths are all the same, except the precious metals, when you apply our 30-minute time yardstick to them.
We now have a way to relate all commodity markets to a common time frame. Remember that we are trying to build our foundation one piece at a time. This master time cycle is the cornerstone of our foundation, for it lets us relate each part (commodity) of the market as an individual part of the whole. This is very simplistic in nature if you will look at it as such.
We now need to turn our attention back to price. If there is a time cycle that will relate almost all markets, then maybe there also is a price cycle that does the same. Good news there is. There is a price cycle that relates every commodity, including the precious metals. On 30-minute bars all commodity moves are related to the number 44 (by coincidence [?] the lowest price cash soybeans ever sold was 44). Remember, we are talking about our basic 30-minute structure not daily. We are trying to start at the very beginning of knowledge and proceed forward one step at a time.
Let’s take an example to make it clearer. Soybeans’ price cycle on 30-minute charts is 44. Within the time cycle soybeans will move within this 44 range unless acted upon by other fundamental law. Another fundamental law? It is the law of projection. A noted scientist said, “There is nothing in the universe but mathematical points of force.” This statement can be compared to one of Newton’s laws: for every action there is an equal and opposite reaction. And ﬁnally Davis’ Law: present market action predicts future market action. I hope you are starting to see that we are approaching the market as a living entity.
What are these mathematical points of force? They are a derivative of Gann lines. They allow us not only to project moves in the direction of the trend but retracements as well. Before you say, “I have seen this before!” Let me interject you haven’t. Gann discovered lines drawn at prescribed angles would project a support level for prices. It seems like everyone that draws any type of trend lines, no matter what the time frame, call them Gann lines (in fact, if all of the information attributed to W.D. Gann is his, then he must have lived to be to be 200 years old). I much prefer to call these shorter term intra-day lines TR lines. The TR stand for Time Ratio. They are a direct derivative of the ratio between our master time cycle and our master price cycle. When we start applying our TR (Gann) lines to the shorter-term intra-day charts they take on much more importance and also play a crucial role in projecting exact price levels and trend change areas (in fact, the shorter the time frame the more exact these projections become. The only problem we have in going to a shorter term than 30-minutes is the sheer volume of work required to handle our charting).
Please see the chart on the preceding page which relates a little bit of what we have learned so far. It is in 30-minute bars. I would hope you are starting to see the possibilities of this very basic nature of trading. Let’s summarize our three basics: 1. Master time cycle. 2. Master price cycle. 3. TR projection lines.
These proceeding laws and the rules that govern them are all you need to be successful in the market. I fully realize that this ﬂies in the face of complicated algorithms, computer programs and, yes, even astrology. Learn the basic underlying rules and structure of any task and your result is assured. Are the markets any different?
- Back to the Basics By Terry R. Davis