It is without a doubt that what Gann intentioned for us to understand by this statement is that we should trade with the market trend. In other words, if the flow of the market action is changing, we should be ready to enter the market in that new market direction.
The questions have always been When, How, Where?
Approaches to the question of 'When' abound. Gann has stated that TIME is the most important, then PRICE. No market will reverse in trend until it's TIME to do so. But he also recognized that TIME alone, although powerful in itself, should be used in conjunction with PRICE discovery. Additionally, MARKET PATTERNS are a powerful compliment to TIME/PRICE analysis.
Amazingly enough, there exists more than one way to determine TIME. Methods employed today are Fibonacci and Gann ratios (similar), Cycle Analysis, Anniversary Dates, Fibonacci Day Counts, Gann Day Counts (divisions of 360), Date Clustering, Geometric Angle Convergences, Time/Price Squaring (midpoint/end of square counts), Planetary Position Correlation, and more (such as our geometric algorithm approach).
When it comes to TIME discovery, the more approaches you incorporate into your analysis, the better. The reason for this should immediately make sense when I tell you this: if more than one method points to the same time period, expect a reversal to occur within that time zone. Very logical assumption, don't you think?
To answer the 'Where' question, it would also help to discover PRICE. Just like TIME, PRICE discovery methods abound as well. Employed today are Fibonacci and Gann Static Retracement, F & G Expansion Wave, F & G Alternate Wave, Time/Price Squaring (static and 45-deg dynamic levels), Dynamic Fibonacci or Gann Levels, Important Gann Value levels (such as values derived from the Square of 144, etc.), Percent Price Changes, Price Geometry, and others as well.
As with TIME, it is best to incorporate as many PRICE techniques as feasibly possible and note the price zones that appear to be in agreement among more than one method. The HIGHEST probability of a change in trend is when the TIME zone and PRICE zone meet. When both TIME and PRICE are the result of differing approaches in agreement, and both TIME and PRICE come together at a particular point of reference on your price chart, the probability of a trend change is extremely high, and preparation should be made to plan the trade. This now brings us to the question of 'How'. As brought out at the beginning of this article, Gann stated that entry should occur only on 'indications of change in trend'. Therefore, up to this point your TIME and PRICE method has only provided you with the most likely time and price for a change in trend. The 'indication' has yet to occur. It is at this time that we should also consider the PATTERN equation, so as to answer the 'How' question of entry.
There are several patterns that will add additional weight to your possible discovery of a trend change. A highly reliable pattern, for example, is the Double-bottom or Double-top. Assume that such a pattern evolved starting from your Time and Price zone. As long as the second bottom or top of this pattern does not exceed that of the first, which we assume occurred originally at your Time and Price zone, this pattern would signal a low risk opportunity to enter in the new trend direction. One approach is to simply note a day where price is closing higher than the previous days high. An
entry can then be made at that closing price in expectation of a continuance in the new trend direction.
Another pattern seen on all price charts is the 'Step-Ladder' pattern. A new bull trend will always form higher swing bottoms, usually one after the other. A new bear trend will always from lower swing tops in the same, yet reverse, pattern. If the beginning of the trend starts at your Time and Price zone, and is then followed by a higher swing bottom (bull trend) or lower swing top (bear trend), this is a pretty reliable indicator that a trend change has indeed occurred at your Time and Price zone. Usually for this pattern, you will note that consecutive swings occurring at Fibonacci or Gann ratios of the initial move from the beginning of your new trend. In other words, if you note a possible bull trend starting to form from your Time and Price zone because price turned and moved up from there, but then drops only a ratio of that initial thrust up (you can use your PRICE tools for this, and with some methods, TIME as well to discover degree of drop) and starts to turn up again, an entry can be made at the point of resumption of the new trend. In other words, you could place a buy stop just above the high of the day that may form a higher swing bottom (at the ratio point of previous range).
It is very important to recognize patterns of trend changes. Double-tops and bottoms, step-ladders, Gann Angles, Basic Trend lines all can help you note that your Time and Price assumptions are correct. What I have described within this article concentrates more on the major trend changes that occur only a few times each year in all markets. Because the major trend changes are not as frequent as the minor ones, such planning and patience is needed to enter them with low risk and greater profit potential.
Always keep in mind that, regardless of how overwhelming the evidence may be that a bottom or top will occur on a particular day and price, it is always better than you allow time for a pattern to unfold that will confirm your assumptions, thus satisfying the requirement stated by Gann many years ago to only enter a position on "indications of change in trend."
Note: About the Author
Rick J. Ratchford is President of ProfitMax Trading Inc. He is a full-time commodity trader for his own account as well as assisting other traders. He has been a computer programmer for more than 20 years and a trader since 1990.
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