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Investing Articles

Techniques in Market Timing - Price Time Squaring I

In this article I will discuss a technical analysis technique used for forecasting a change in market trend called Price/Time Squaring. It is a technique that many associate with the late great W. D. Gann.

The idea here is to start from a major market top or bottom price and to calculate its 'square'. At first glance you might think this means to simply square the price by multiplying it with itself. Close, but not exactly.

First, to solve for the 'time' itself, you would actually take the 'square root' of the starting price. Take for example the weekly chart of Soybeans. Week of December 5, 2008 put in a major market bottom. Using the low of that week (my charts are reverse-adjusted, so your price may differ somewhat) at 626, you take the square root to arrive at 25.02. Because the result is just above 25, it is now inside the 26th square. To understand this, think of the first square to be from 0 to .99. The second square would then begin at 1 to 1.99, etc.

Starting from the December 5, 2008 weekly price bar as bar zero, you start to count 26 price bars to the right. We arrive at June 5, 2009, which turned out to be one weekly price bar from the major top of week June 12, 2009. In the world of market timing, getting to within a single price bar of a major market trend change is quite the edge to have.

Another misconception that some have is that when you are calculating for Price/Time that when 'time' arrives the 'price' would be at exactly square of the original price. In reality, however, while this may occur at times it is not what should be expected. Rather, when 'time' nears the trader should then be looking at price to reach one of the 'square' levels for which there will be more than one.

 


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Using our original Soybeans example on a weekly chart, if we were to calculate price levels based on 360 degrees (that of a circle), we would take the square root value of our starting price (25.02), then add 2 to arrive at 27.02. Why 2? The complete reason is beyond the scope of this article. But if you want to solve for 1 complete cycle revolution as on a Square of Nine (aka Gann Wheel), get the square root of any number, add 2, then re-square it and you will arrive at the next 360 degree value that on the wheel. In other words, you would have gone around the wheel and arrived right back to where you started, but the next cycle level up in value.

Anyway, we now re-square 27.02 and arrive at about 730. Therefore, the first 360 degree level is at 730. The second would be at around 834. The third at 939, etc.

The market topped within a few ticks of the 5th level (1146). On a weekly chart, that's extremely razor sharp.



 

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