It is gratifying to be asked to write an article for a magazine which is interesting in the reality of trading the futures and stock markets. For the small or large trader alike, validity of what we use to trade is critical. When people realize that trading the markets takes effort they usually start by studying all they can on market principals. Besides ﬁnding the best-known and least-followed advice of “cut your losses short and let your proﬁts run”, they read “the trend is your friend”, “trade only when you KNOW what the trend is”, and “buy on reactions in bull markets, sell reactions in bear markets.” These are true enough, but, however well-intended; advice like the above is almost valueless unless it is accompanied with a true deﬁnition of trend so you can tell how large your bull or bear market is that you are looking for. Also needed is an indication of the bull or bear market is that you are looking for. Also needed is an indication of the time involved in the forecasted move so you would know if what may only appear at ﬁrst to be a correction may in fact be a major change in trend.
In my study, only the works of W. D. Gann satisfactorily address these needs. Mr. Gann based his entire methodology on the concept of markets continually repeating themselves, and that they were their own best forecasters. Thus, he let the market ﬁlter itself. I want to discuss just one of his less complex buy highly accurate indicators, the within move; or trading range.
It is a rare trader who doesn’t have rules on trading ranges. In his premier effort, the book “How to Make Proﬁts in Commodities”, Gann talked about the apparent movement of markets being either just up or down as being somewhat incorrect. This is because markets spend a great deal of time just going sideways. He said, “After it gets out of the sideway movement, which is always accumulation or distribution, and breaks into new high or low territory, then you can trade in it with some certainty of having determined the correct trend.” He went on to say that the narrower and longer the range was, the greater the expectancy of continued move when it ﬁnally broke out. Most traders like to compare apples with apples, as it were, in the market. In searching for proper ranges to get consistent performance for examination, we need constants to base against. Prices move up and down. Time constants never change, so it is the proportion of time and price (Gann’s discovery) that makes it possible to compare a range of one market and time, and another.
This proportion of range size (price) versus length in time is perfectly handled with Gann’s technique of squaring the range. He considered it “one of the most important and valuable discoveries” he had ever made, it rally was. When a market range is “squared” by time; meaning an equal number of units of time elapsing as units of price determining the size of the range; important changes in trend take place.
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Gann students in general understand the concept well. The examples given are to show you an application of the important principal instead of completely explaining it in detail. How many squares the market has gone through with out breaking either the high or low determines the potential of a strong move when it leaves its range. Gann said to watch in particular the 3rd and 4th square; and then if it still was in the range; the 7th and 9th squares. When I go searching for a potential trade bases on ranges, I eliminate all ranges less than 3 squares in length. If you do this, watching all commodities, you should ﬁnd about 10 or so situations a year.
I have found an EXTREMELY STRONG tendency for the markets to move exactly to a multiple of the range(s) it just left. The examples I have shown here are just a small sample of the more than 500 squared ranges of 3 squares or more that I have studied, roving to me the validity of a range’s forecasting ability, this has application for even shorter time periods. I have included the 1987 June T-Bond example to show the way to do it correctly and the importance of squaring intra-day ranges for timing.
Since a market’s tops and bottoms are created by its own unique sensitivity to ever-present time cycles, it is logical to assume that tops and bottoms of ranges are functions of time. By remaining in a range. The option is respecting the time cycles that are rising and falling within the range, deﬁning yet other swing tops and bottoms because of smaller magnitude cycles. The longer that a market is trapped in a range, the greater the magnitude of time cycle contained. When broken, the major cycle leaving a range of 6 months duration should be a minimum of 1 -3 years in period.
To use this concept in actual trading, here are some suggestions:
- Wait for a market to square out a range of 2 squares or more.
- Watch the position of the market reference to 50% point in the range in the 3rd, 4th, etc., square to get indication of possible direction of break.
- Buy or sell breakout of the range, at market or on stop. In an upside break place a stop-loss order under the last swing bottom prior to the breakout. Reverse if the breakout.
- Consider the 1st multiple of the range the first possible target to be reached before some greater reaction. If this price is exceeded and closed beyond, watch other multiples and divisions of the range for reaction points both up or down.