Psychological Framework: Mastering Self
- Avoid Overtrading
- Assess Your Trade: Logic, Hope, or Personal Systems
Diverse Trading Strategies for Four Key Situations
- Bull Market: Recognizing Bull Market Peaks and Transitions to Bear Markets
- Bull Market Top (reversal from bull to bear market phase)
- Bear Market: Navigating Bear Markets
- The transition from Bear to Bull Market
The Power of Three in Trading
Rule of Three
- Most market movements typically take place within a span of three days, weeks, or months.
- Cautionary note: Avoid trading in the same direction as the trend on its third day.
Mastering Market Trends: Tops, Bottoms, and Strategies
- Tops typically form gradually, with spike tops being less common than spike bottoms. Extreme price movements, such as a 20% surge in a day, mark tops, making short-selling risky.
- Divergences appear at tops but aren’t precise for timing. Rely on time cycles to predict the reversal.
- In a bull market, watch for corrections that exceed prior ones in both price and time. In bear markets, look for the opposite.
- Corrections during uptrends often cluster around equal price levels, serving as strong support.
- Swing objectives, calculated by adding the previous move’s range to its top, help set future targets.
- Note the significance of square numbers and 50% of the difference between those squares as support and resistance, but use them alongside other indicators.
Gann’s Nine Mathematical Proofs of Resistance Points:
- Consider angles originating from tops and bottoms.
- Examine horizontal angles, focusing on previous tops and bottoms.
- Pay attention to time cycles (vertical angles). Look for opportunities, like short selling, when there are three or four days of sideways movement after a high day, followed by a down day with high volume where the low is lower than the low of the sideways movement, coinciding with the expiration of time cycles.
- Observe the crossing of significant angles starting at zero.
- Monitor the intersection or convergence of angles from double or triple tops or bottoms.
- Be alert to the crossing of double or triple tops or bottoms.
- Consider historical resistance and support levels.
- Analyze sales volume.
- Evaluate the squaring of time and price.
Weak stocks typically do not initiate a rally until they have either tested the initial bottom or established a higher bottom within the broader market context. The third attempt to breach the upper or lower limit of a consolidation zone carries significant importance. If this effort fails, it can trigger a rapid and substantial reversal in the opposite direction. False breakouts from consolidation patterns are noteworthy events. They usually involve a move beyond the consolidation boundaries, but this momentum quickly reverses within the following week, often failing to extend more than three points beyond the pattern’s upper limit. These false moves typically start with considerable momentum. Breakouts following a three- to four-day consolidation within a narrow price range often lead to sharp and rapid three-day price movements.
Additionally, faster and more robust price movements tend to originate from the third or fourth higher bottom, especially when there is noticeable space between these bottom points and the preceding peak. This distinction is important in anticipating the strength and velocity of market movements. Understanding these principles is crucial for traders seeking to navigate the dynamics of stock markets effectively and capitalize on emerging trends and reversals.
In the realm of trend-following techniques, particularly in rapidly advancing or declining markets, specific patterns tend to emerge. As a campaign reaches its final stages, the market’s reactions tend to diminish in magnitude as stocks progressively climb to higher levels. However, a significant shift occurs at the end of this run, marked by a sharp reaction and a reversal in the prevailing trend. This phenomenon holds true for both bull and bear markets.
When you’re convinced that a trend is underway, it’s essential not to delay your entry into the trade. During the early stages of a trend, consider buying or selling stocks that are already exhibiting strength or weakness. Rapid market movements often originate from bear market bottoms and follow a pattern: a three-week upward surge, followed by a period of sideways movement lasting three to five weeks, and then another acceleration, succeeded by yet another period of consolidation. In such fast-moving scenarios, one of the earliest indications of an impending trend change is overbalance, where reactions become more substantial compared to previous ones, particularly in the fifth wave.
Monitoring the momentum of price changes is also critical. In an uptrend, the market should spend more time rising than falling, and vice versa in a downtrend. Moreover, when looking for reversal patterns, it’s essential to consider time cycles alongside them. In the pursuit of successful trading, it’s often wise to disregard the financial press, which can be rife with noise and distractions. Additionally, a straightforward trading filter is to avoid entering the market on the third day of a move, as this strategy helps traders maintain discipline and make more informed decisions.
In the realm of year-based cycles and seasonality, traders should keep a keen eye on significant days within the solar year, such as December 22, March 21, June 22, and September 21/23. It’s also worth noting days that fall on important angles from these reference points. For example, consider the 15-day intervals from December 22, which result in key dates like January 5-6, February 5, May 6, July 7, August 8, and so on.
Another critical aspect involves counting days from significant highs or lows, which can signal significant changes in trend. These counts typically occur at intervals of 30, 45, 60, 90, 135, 150, 180, 210, 225, 315, 330, and 360. These counts are based on calendar days, but trading day counts like 11, 22, 33, 45, and so forth also play a role. However, a more comprehensive understanding of cycles often derives from calendar days.
Furthermore, it’s crucial to consider geometric charts, angles, and price squares when analyzing cycles. The cycle of one year, consisting of 365 days, is intrinsically linked to the circle’s 360 degrees, which closely aligns with this cycle. As a result, each day can be roughly equated to one degree of the Earth’s orbit around the sun. This connection underscores the significance of key divisions (or angles) within the chart, which include 45, 90, 120, 135, 180, 225, 240, 270, 315, and 360 degrees. Additionally, by dividing a line parallel to the 90-degree division of the circle, a square is formed, and divisions within this square yield essential angles on the charts.
In the world of cycles, there are two primary categories: natural time cycles and those derived from significant price points. These cycles also exhibit vital divisions at increments like 1/8, 1/4, 1/3, 3/8, 1/2, 5/8, 2/3, 3/4, and 7/8, contributing to a more comprehensive understanding of market dynamics.
The 30-year time cycle can be effectively divided into key turning points using fractions, such as 1/8 for 3.75 years, 1/4 for 7.5 years, and 1/3 for 10 years, among others. It’s important to watch significant time cycle squares, particularly the Square of 52 on weekly charts, which should be applied to crucial highs, lows, and points marking the start of a 90-day cycle. Additionally, consider utilizing two squares or a two-year cycle, and keep an eye on inner squares (squares within the square) and outer squares (squares of the same size placed adjacent or diagonal to the square) when price action aligns with them. The Square of 90 holds similar importance, as does the Square of 12, while multiples of 9 also deserve attention.
For monthly charts, the Square of 144 emerges as the most pivotal square. These cycles exert influence on price movements in terms of absolute numbers, making a 144-point movement in a stock significant in itself. Further divisions of time and price are derived from this master chart, encompassing divisions like 1/2, 1/4, 1/8, and so forth, across days, weeks, months, and years. Weekly and monthly time cycles are particularly vital.
In the short term, monitor the 3.5-day cycle, typically the 3rd or 4th day from an important top or bottom, as it could signify a shift in the minor trend, potentially marking the beginning of a major trend change. Reactions tend to last for two or three weeks, making the 14th day and 21st day, along with the 7th day from a significant top or bottom, crucial reference points. The 1/16 of the year, equivalent to 23 days, is also noteworthy. Keep an eye on the Square of 7 and 49, both important for detecting changes in trend. A shift may occur after 42 days (2×21), but the actual change might manifest around the 45th-46th day.
On yearly charts, focus on the 90-year, 60-year, 30-year, 20-year, 10-year, 7-year, and their multiples, as well as 5-year cycles, especially when they coincide. Combinations like 1/3 years from one top/bottom with 1/2 or 1/4 years from another top/bottom become significant. Additionally, anniversaries hold the utmost importance, with 39 weeks, 17 weeks, and 35 weeks also being notable factors. Cycles derived from price factors, encompassing high, low, and range (the difference between high and low), are equally significant. Among these, the square of the range stands out, with the absolute numbers at high, low, or within the range forming time cycles that should be assessed using the various divisions previously mentioned.
When dealing with cycles derived from prices, it’s essential to understand their two key components: the vertical price axis and the horizontal time axis. Anticipate significant changes occurring at critical divisions of price and time. However, the most profound transformations are typically expected at the angles formed by the combination of these two axes. These angles are based on the geometric square, where one side’s length corresponds to the price. To create these angles, draw a square down from the high and up from the low.
For example, a square drawn down from a high of 60 on a daily chart will have corners at four points: 1) at the price level of 60, 2) 60 days into the future (60 on the price axis) from the day the price reaches 60, 3) at zero on the price axis just below the high, and 4) at zero, positioned 60 days to the right of point 3. If the price decreases by one point each day, it will reach point 4 (zero) on the 60th day, a process referred to as “squaring off” the price. The angle of descent during this process is 45%, often called the 1×1 angle, indicating a fall of one unit in one day. Similarly, angles like 2×1 (a fall of two units in one day) and others can be drawn. The most significant angles are 2×1, 1×1, and 1×2, drawn from points 1, and 3, the midpoint between 1 and 3, and the midpoint between 2 and 4. Points where these angles intersect are considered probable turning points, and it’s crucial to pay attention to angles originating from the 50% mark.
In a robust rally, the lows of the reaction usually conclude above the top of the previous rally. Quick counter-trend moves typically last three to four days on indices and three to five days on individual stocks. If a movement exceeds the fourth day, it could signify a potential consolidation or reversal, with a reversal involving a higher top and higher bottom compared to the previous day, or vice versa. Bar reversals at cycle endings hold significant importance as reversal points. It’s worth noting that a stock or commodity can undergo a correction lasting more than four days and then continue the trend. The subsequent correction, in terms of time, often extends to seven to ten days.
Key time cycles to keep in mind include:
- The smallest complete cycle spans 5 years.
- Minor cycles of 3 years and 6 years.
- The 59th month signals potential changes.
- Bull or bear campaigns rarely extend beyond 3-3.5 years without a move of 3-6 months in the opposite direction, except at the end of a major cycle like 1869 and 1929.
- Many campaigns reach their peak around the 23rd month.
The primary objective in trading isn’t to precisely pick highs and lows but to make profitable trades. Having a well-thought-out plan is crucial. While there are numerous opportunities in the markets, you won’t catch them all. Don’t be overly concerned about missing one, as another will emerge soon. Stick to your trading plan and avoid impulsive reactions to market movements. Successful trading requires knowledge, discipline, courage, and hard work.
Here’s a table showing the time taken by various planets to complete their revolutions around the Sun:
- Mercury: 88.97 Earth days
- Venus: 224.70 Earth days
- Earth: 365.26 Earth days (1 year)
- Mars: 1.88 Earth years (686.98 Earth days)
- Jupiter: 11.86 Earth years (4,331.98 Earth days)
- Saturn: 29.46 Earth years (10,760.60 Earth days)
- Uranus: 84.01 Earth years (30,685.50 Earth days)
- Neptune: 167.69 Earth years (61,285.25 Earth days)
- Pluto: 247.69 Earth years (90,465.38 Earth days)
These values provide an understanding of the different orbital periods of the planets in our solar system.