VOLUME ONE – EDITION ONE

TRADIN G WITH THE TIME FACTOR

THE BEST OF TH E TRADING TECHNIQU ES

B Y W . D . G A N N – E X P L A I N E D , S I M P LY
LY .

BY FRANK BARILLARO
DEDICATED TO THE MEMORY OF CARMELO BARILLARO

Who always taught that in life it is much better to give, than to receive.

CI MA NCA LA TUOA PRESENZA,

MA TU R IMA NI SEMPRE PRESENTE NEI
 N O S T R I P E N S I E R I E N E I N O S T R I C U O R I .
THE BEGINNING It is possible to do what many
will tell you is the impossible.
 PREFACE

It is possible to do what many will tell you is the impossible. My friends and colleagues often ask me to explain how I can do it. However
I have always felt that it would need a book to provide them with an adequate
I am convinced there is a calculable geometric symmetry present in all answer. So, after much convincing, I guess this is that book. This book draws
financial markets. The secret is knowing how to find it. Once you know how to upon the input and experience of my good friend and long term confidante,
find it, you can apply it to predict the exact time and date of future market tops Frank “Bob” Nigro.
and bottoms, sometimes years in advance.
Together, we will be sharing with you over 30 years of collective experience
I am certain of this geometry because I have I seen it. I have also been able in the financial markets and thousands upon thousands of hours of study and
to predict it occurring in the markets time and time again. In 2001, I am on the research into the trading techniques which we have seen consistently working
record for outlining in writing that my timing calculations were indicating that for us to predict future market tops and bottoms. We have seen which
‘September 11, 2001 is a date to be wary of.’ I also nominated the date which techniques work. We have also figured out which ones don’t.
proved to be the yearly low for the Australian stock market in 2001 to the
exact day. All of this before the event. The course summarises that 30 years of experience into simple to follow
descriptions and illustrations. It does much of the hard work for you so
I saw the geometry that unfolded in the precious metals Gold market which that you can better understand the financial markets. It filters out the best
coincided with the end of the 20 plus year bear campaign in gold prices. It of the best – and allows you to apply these techniques to your own stock,
enabled me to make a number of long term investment decisions, including a commodity or currency market analysis. Importantly, I will show you how to
first purchase of gold bullion when it was trading just above US$300 an ounce. apply these Trading Tools in a manner that is simple to calculate and easy to
Interestingly, the same geometry which ended the 20 year bear market was understand. A few of these techniques are what Bob and I consider to be
also present to within a week of calling the current all-time top in gold prices. the best of those used by many of the professional traders and hedge fund
In this course, I will share with you how all that unfolded. managers currently out there. The majority however have been adapted off
the works of W.D. Gann – who was legendary for his contribution to trading
I have calculated, and have shared with colleagues (including my stock broker),
by technical analysis.
future dates to watch in the Australian stock market which have been accurate
at predicting major turning points in the market, more than two years in The Trading Tools I am about to share with you have proven the test of time.
advance. More recently in 2011, I wrote to friends and colleagues outlining They worked over one hundred years ago and I am confident they will continue
that the US equities markets will continue on to higher prices in 2012 and working for the next one hundred years.
2013 – advancing the bull market in US equities that has since reached all-time
record prices. This course will change the way you look at financial markets. By the end
of it, I am confident that you will have learnt the geometric secret that is
present in all markets – and that you too can achieve what others will tell
you is the impossible.

Frank Barillaro
Before you begin, please read this really important stuff first...

Firstly, thank-you and congratulations for Before we begin, there are some important The contents of this course are
purchasing Trading with the Time Factor. I have housekeeping matters which we need to cover confidential
absolutely no doubt that this trading course will off first. There is some fine print below that you
Please respect that I have spent hours upon
change the way you look at financial markets. should take the time to read and understand
hours in researching, drafting, writing and
before you proceed. But just in case your
your time
I also want to welcome you to the start of a publishing this trading course. Not to mention
is short, let me summarise the key points for
journey together. My goal is that by the end of it, the thousands of dollars spent. If you spent
you below.
I will have helped you to make better decisions countless hours researching what the winning
about your investments and trading. The lessons lotto numbers for next week’s jackpot were
I am about to share with you will stay with you going to be and you told me, how would you
This course is not personal advice
for a life time. To fully appreciate them, you may feel if I shared those with the rest of the world
I am not a licensed financial adviser, nor do I on the internet?
need to read this course more than once. In fact,
know your individual circumstances. If you
I strongly encourage you to do so.
are looking for personal advice, please consult Now, I’m not saying that reading this course is
This course has been separated into two parts. someone who is appropriately licensed to do so. going to be like winning the lotto, but I hope
Volume One is about PRICE. In it, you will you take my point. After all, if you are reading
find the best lessons I could find to help you this, you have agreed to terms of confidentiality
determine the likely prices of future market tops This course is not general advice with me anyway. You wouldn’t
wouldn’t go against your
and bottoms. It is all about teaching you “where” This course is about educational material on how word now, would you?
to buy or sell. to analyse the markets only. It aims to teach you
how to make your own investment decisions.
If you find Volume One of interest, then I assure That’s right, so that you can make your own
you that Volume Two will absolutely blow your decisions. This course teaches you the theory
mind. Volume TwoTwo describes how to TIME a on how to fish. Unfortunately, I cannot catch the
market and your investments by using techniques fish for you. But I can at least show you where to
to forecast the exact date of major market tops look. Trust me, by the end ofof it I am sure you will
and bottoms. It is all about “when” to buy or sell. be able to do it.

Imagine knowing when the stock market or the

price of gold is going to make its next major
bottom. What could that do for your investment
portfolio? If you think it is impossible, then I
encourage you to keep reading. You will soon
change your mind.
Accuracy of contents One view isn’t necessarily the right view
The contents in this course have been prepared If there are any views or opinions expressed in
in good faith and may be based on information this course, these may be the views of the author
obtained from sources believed to reliable but no or other parties. Whilst everyone is entitled to a
Imagine knowing when
independent verification has been made, nor is its view or an opinion, it doesn’t necessarily mean the stock market or the
accuracy or completeness guaranteed. Each of those views or opinions are right... price of gold is going
the charts contained in this book have been hand Just ask my wife.
designed by my good friend Joe Caminiti. Whilst
to make its next major
we have attempted to re-create every line, angle, bottom. What could that
axis and label as accurately as possible we are Future Returns
do for your investment
only human and humans can make mistakes. This is not a course telling you to implement a
particular investment strategy or to invest into a
portfolio?
These however should not detract from the particular market. That is a decision for you to
message we are sharing with you. To the extent make. Please bear in mind that when you are
permitted by law, ThirtyTen Investments Pty Ltd investing. The value of any investment and the
does not give any warranty of reliability, accuracy income derived from it can go down as well as
or completeness of the information contained up. Never invest more than you can afford to
in this document and does not accept any lose and keep in mind the ultimate risk is that
responsibility in any way (including negligence) you can lose whatever you’ve invested. Please
for errors in, or omissions from, the information seek independent financial advice regarding
in this document. The author or ThirtyTen your particular situation. Investments in foreign
Investments Pty Ltd is under no obligation to companies or foreign markets involve risk and
update or correct the information in this course. may not be suitable for all investors. Specifically,
changes in the rates of exchange between
currencies may cause a divergence between your
nominal gain and your currency-converted gain,
making it possible to lose money once your total
return is adjusted for currency.

Okay. Now that all of that is out of the way,

let’s begin,
Before we get started

For a long time now, I have been mesmerised by Unfortunately, the dream was short lived. My I am happy to cop such criticism – particularly if
the workings on Wall Street and the tales of fame father, who was an inspiration to me for many that person has read some of my forecasts and
and fortune by some of the great market legends things, sadly passed away unexpectedly on has a track record of being able to consistently
such as Jesse Livermore, JP Morgan and the New Year’s Day in 2006. produce them in writing as accurately as I have.
story of how the Hunt brothers cornered the silver
market, making and losing billions in the 1980’s. It prompted me to give up the traineeship so Secondly, but more importantly, I hope to
I could move back home from interstate to be demonstrate to you in this book that you
In order to get the record straight right from the closer to my family who needed me more at don’t have to be a full time trader to apply the
start however, I am not a full-time trader. As the time. techniques I am about to show you. By the end of
reluctant as I am to admit it, I am an investment this, it is my goal to have shown you how anyone
banker by profession (but please don’t hold that Eventually, I assumed a role working in structured can observe the symmetry which repeats itself
against me!). finance – it allowed me to remove my law in financial markets with only a modest level of
degree from being just a paper weight at home analysis and by keeping it simple…
A couple of years after my banking career and actually put it to some use. The rigours and
started, I was fortunate enough to be given demands of a job in investment banking however In writing this book, I have to recognise the
the opportunity of a traineeship on the foreign don’t afford me the luxury of being able to contribution by my mate Frank “Bob” Nigro who
exchange trading desk at a major Australian bank actively trade the markets day in and day out (not has been a key driver in identifying what is the
– and I am still very grateful to the person who to mention the restrictive compliance rules on best of the best of the trading techniques I am
gave me that opportunity to this day. For me, it trading that come with such a profession). about to share with you. Bob does earn his living
was a dream job. from trading the financial markets. He has lived
And becoming a proud father of two young and breathed the markets day after day for more
Although brief, I learnt many things about children recently now consumes most of my than fifteen years, and has always been his own
professional traders and the different ways they spare free time. Nonetheless, I have still found a boss. He answers to no-one, except the market,
approached the market. I had already been a way to keep an active interest in the markets… and sometimes, as Bob often tells me, his lovely
student of the markets and Gann theory for a and to calculate an accurate forecast or two along wife and young daughter.
number of years beforehand, but the experience the way.
on the desk certainly added a new dimension to He provides a wealth of knowledge which has
the way I looked at financial markets and the way I thought it is important for me to outline this to made its way into this course and a perspective
professional traders approached them. you from the start for a couple of reasons. Firstly, from a full time trader, just in case you believe
I am sure that there will be a few critics out there this course needed any.
dismissing the idea that a book can be written
about trading and the techniques pioneered by
some of the market’s greats by someone who
doesn’t trade the markets full time.
How the mathematical and geometric relationships work in the market

One of the things which I agonised over when Although I have chosen the S&P500 as the basis
writing this book was how to choose which for this book, it is important to recognise that the
market (or markets) I was going to refer to forecasting techniques I am about to show you
as working examples of how market geometry can be applied to all markets. For that reason, Each technique I am
works. where appropriate, I will be using some additional about to show you is an
examples from the gold and silver markets as
I have seen these techniques I am about to share well as some examples of the Australian equity
indicator which works in
with you work in all types of markets – be it, market, as they are basically the markets where I harmony with the others.
stocks, stock indices, currencies or commodities. first cut my teeth and began to apply my learnings The most successful
To demonstrate this, I was tempted to find an and making forecasts.
example of a particular technique working in each  forecasts therefore work
of those markets and to write each chapter based I will show you how to construct a road map when these techniques are
on that. In doing so, however, I felt that it may not for the next 12 to 24 months ahead so you may
all working together.
present the full picture which I believe is required determine the likely position of the market. In
in order to
to produce a successful forecast. addition, Bob has been kind enough to share
the trade entry techniques that he has refined
For that reason, I have chosen to present the over the years in order to successfully trade off a
examples in this book using the United States forecast top or bottom and the tips that he uses
S&P 500 stock index as the primary basis. In my to minimise losses and maximise profit.
view, this index represents the global benchmark
of equity indices, so it is a pretty reasonable place Calculating a successful market forecast is a bit
to start. like a jig saw puzzle that requires you to put all of
the pieces (or techniques) I am about to show you
Rather than go back too far in time and pick out together. This course tries to simplify the jigsaw
the best examples over the last one hundred into fewer pieces.
years, I have chosen to use the most recent
price action available (as of January 2014) – as I trust that you will find these examples as
I think this is probably more relevant to most of illuminating and useful as I do.
you. By the end of it, I hope to have shown you
how all of the Trading Tools presented are still
relevant in the market today dominated by an age
of computerised trading, just as they were one
hundred years ago before computers existed.
Discovering the geometry in markets

Bob and I began our journey studying the financial Whilst I have been very tempted at times, I have If you thought the price tag of this book
markets both as university students in the late been enjoying the challenges and rigours of the was expensive, it might be worthwhile to point
1990’s. Our study was heavily influenced by the banking world too much, particularly while I am out that it has probably cost you a lot less than
work of W.D. Gann in the early days, but we soon still young and energetic. I know that the markets a trip to the dentist. My sincere hope is that in
came to realise that there were many other tricks will always be there tomorrow and that once you reading it, it is nowhere near as painful!
which worked just as well, if not better, and more have mastered the techniques I am about to show
consistently in the markets. you, that they will stay with you for a lifetime. And just in case I have left you wondering how
Both of us had therefore agreed to leave the Bob got his nickname, it is a pretty simple story
Having been Gann students for a number of book for another day. Becoming parents recently really. Bob used to spend quite a considerable
years, the realisation that his techniques are not however certainly has changed our perspective. amount of time at our family home as we started
the be-all and end-all to trading helped simplify out, trawling through all sorts of books and
our thinking and improve our analysis greatly. This book therefore has much to do with making historical charts of stocks and commodities as
sure we have a record of our experiences in we tried to figure out how this stuff all worked.
– This book therefore isn’t all about Gann. writing for our children to follow should they one
day choose to explore the markets like we have. He was like an adopted brother to me and my
It is about the best of the techniques which we two younger siblings. Having the same first
The product of this book is exactly how Bob and
have found to consistently work out there – and name as your best mate however can have
I would attempt to teach our 30 years of collective
a number of them are used in practice by the its disadvantages.
experience to our own. I say that with the
professional traders in the current day!
upmost sincerity.
Eventually it became a bit confusing for my two
I had been trying to convince Bob for a number younger brothers each time one of them tried to
This book represents thousands of hours of
of years to help me with writing a book on the attract our attention – they would often yell out
our research in state and university libraries,
subject. Consistently, he has been able to find “Frank”, and naturally, both Bob and I would turn
hours upon hours of market analysis, and actual
a good reason not to do it. Bob prefers to have around. Eventually, they decided to call myself
trading experiences along the way. What you
his privacy and to focus his time on trading, and I “Bill” and Bob, “Bob” so the two of us could
are receiving are the Trading Tools which we feel
respect that. distinguish one from the other. The name Bob
represent succinctly, and simply, what is the best
of the best for analysing the markets. stuck. Fortunately, Bill didn’t – so I have always
Likewise, he has been trying to convince me for
been just Frank.
years to give up the banking game and join him
full time in the pursuit of the markets.
Who was W.D. Gann and why is he relevant?

William Delbert Gann is legendary when it comes Many have explained in different variations the By looking at a historical chart of prices, one
to Wall Street and the impact he has had on premise for why Gann’s theories work. One should be able to identify the past cycles which
trading the markets. Arguably, he has contributed simple explanation which I think resonates is that have occurred, and which will inevitably repeat in
more to the study of technical analysis than any as human nature will never change, history is the future.
other trader past or present. destined to repeat itself.
Of course, over the years, I have learnt that there
Gann developed the theory that there is a As a result, future generations will repeat the is a little bit more to it behind the theory of Gann
discernible relationship in all financial markets behaviour (or cycles) of previous generations, than what I have simplified from the quotes
between time and price. He believed that the thereby causing all financial markets to work in above. For our current purposes however, it is
geometric representation of price through time cycles which will repeat over and over. important for you to recognise that in order to
would reveal important cyclical patterns within discover the predictable geometry that is present
markets that had predictive values. In other At the start of his book How to Trade Profits in in all financial markets, you must accept that
words, future projections in the stock market Commodities, Gann outlined that: market cycles have, and will, repeat. This is the
can not only be made to calculate price, but also foundation for being able to successfully forecast
‘Observations and comparison of past market
to forecast the dates of future market tops and future market tops and bottoms.
movements, will reveal what [markets] are
bottoms.
going to do in the future, because the future is
Gann is reputed to have taken more than $50 but a repetition of the past…
million from the stock markets over his career in
the first half of the 20th century – which is worth The average man’s memory is too short. He
over a quarter of a billion in today’s money. In his only remembers what he wants to remember or
published annual forecast for 1929 he figured that what suits his hopes or fears. He depends too
‘a top must come no later than the end of August much on others and does not think for himself.
and that a “Black Friday” would come
in September.’ Therefore, he should keep a record, graph or
picture of past market movements to remind
He also nominated 3 September, 1929 as a key him that what has happened in the past can and
date. History will show that the high in the Dow
will happen in the future.’
Jones Industrials index which preceded the Great
Depression was reached on 3 September 1929. Gann believed that price charts which revealed
the past performance of stocks or commodities
What followed was the greatest ever fall in stock
held the key in order to predict the future
prices to this day. In my opinion, that makes his
performance of a stock or commodity.
work relevant!
The Ticker and Investment Digest – Volume 5, number 2 (December 1909)

If you are still not convinced by the relevance of The publication sent one of its staff to observe But what stood out to me the most from that
Gann and the trading methods he pioneered, the Gann real-time trading and the results article in 1909, and which continues to stand
following excerpts might help. In December 1909, he produced. out to me each time I read it, is the following
a publication called “The Ticker and Investment paragraph:
Digest” interviewed Gann after he provided So much for what W D Gann has said and done
them with a number of accurate predictions on as evidenced by himself & others. Now as to One of the most astonishing calculations made
commodity prices using the trading methods what demonstrations have taken place before by Mr. Gann was during last summer [1909]
which he had developed. our representative. when he predicted that September Wheat
would sell at $1.20. This meant that it must
During the month of October, 1909, in touch that figure before the end of the month
The article started by stating: twenty-five market days, W D Gann made, of September. At twelve o’clock, Chicago time,
in the presence of our representative, two on September 30th (the last day) the option
Sometime ago the attention of this magazine
hundred and eighty-six transactions in various was selling below $1.08, and it looked as though
was attracted by certain long pull Stock Market
stocks, on both the long and short side of the his prediction would not be fulfilled.
predictions which were being made by
market. Two hundred and sixty-four of these
William D Gann.
transactions resulted in profits; twenty-two Mr. Gann said, ‘If it does not touch $1.20 by
In a large number of cases Mr Gann gave us, in losses. the close of the market it will prove that there
in advance, the exact points at which certain is something wrong with my whole method of
In other words, in a period which covered less
stocks and commodities would sell, together calculation. I do not care what the price is now,
than a month, Gann made 286 trades with an
with the prices close to the then prevailing it must go there.’ It is common history that
extraordinary win to loss ratio of over 92%. That
figures which would not be touched… September Wheat surprised the whole country
trading resulted in a return of over 1000% of his
original capital.
by selling at $1.20 and no higher in the very
last hour of trading, closing at that figure.
And just in case you thought that was a typo, it
was 1000%. In my view, this is a trading record So there you have it. Not only do I believe Gann
that I have never seen repeated by anyone… is relevant, he was at times, truly astonishing.
ever! If somebody has, then they certainly aren’t
telling anyone about it.
The philosophy behind price and time

20000
Gann observed that price cannot exist outside
of time. He was able to quantify that whilst the
price of any stock, bond, commodity or currency
stops trading as the market closes, time continues
forward and is indifferent to price.

Most of you would be familiar with how a stock

chart plots the price of a stock or commodity 2000

displaying its historical price action as a function

of time.
PRICE =  y AXIS
Price is depicted on the vertical y-axis of a chart,
whilst time is recorded on the horizontal x-axis.
Gann identified that there is a total regularity to
time. Each of the hours, minutes
minutes and seconds 200

of a day can be scientifically measured with

precision and measured against a predictable
time line on a chart. At the time, this was a
TIME = x AXIS
revolutionary concept.

19 02 1912 1922 1932 19 42 19 52 19 62 1972 19 82 19 92 2 0 02 2 012

Price vs Time Graph Intro .01

One thing which is important to realise is that
112
Gann operated in an age where computer
technology did not exist.

Accordingly, he kept a meticulous collection of

hand drawn charts. He did, for the most part,
go to painstaking effort to ensure he recorded
his data on charts which were created with
108
equal intervals in both time (as measured on the
horizontal axis) and price (as measured by the       E
       C
      I
vertical axis). Gann employed the use of chart       R
      P
paper with eight squares to the inch, with every
fourth line highlighted.

This allowed him to create a chart that was scaled 104

where one unit of price (for example, one cent
or one point on a stock index) was exactly in
proportion to one unit of time (for example, one
day, week or month).

Personally, I think the need to keep track of your

charts on grid like paper is no longer required 100
given there are so many effective trading
software programs out there today to do it for 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

you. If however, you do intend

intend to maintain hand
drawn charts like Gann did then I would highly TIME

recommend doing so by using the same 8 x 8

chart paper that Gann used, and keeping your
charts in the same price to time relationship. Price vs Time Graph Intro .02

This method will help you immensely in seeing the geometry unfold with your very own eyes,
and will be of considerable assistance if you do go about attempting to re-create some of Gann’s
charts or work through many of the examples he left behind in his writings, by hand.
Fibonacci

There is no doubt that WD Gann has heavily The Fibonacci sequence was named after At this point in time, I think it is important for you
influenced my thinking and the way I approach my Leonard Fibonacci, the author of the book Liber to pause and reflect on that number 1.618, as you
analysis of the markets. But it was the discovery Abaci written way back in 1202. will see it (or a derivation of it) appear time and
of a broader, underlying geometry present in the time again in the markets.
markets which made me realise that my analysis Whilst Fibonacci is acknowledged for introducing
had to extend far greater than his work alone. the sequence to Western European mathematics, The relevance of 1.618 to geometry is that
its origins are dated back much earlier into it closely reflects the mathematical “Golden
I was aware of the Fibonacci sequence and its Indian mathematics. The Fibonacci sequence Ratio.” The Golden Ratio has fascinated
application to the financial markets when I began of numbers follows a distinctive pattern which Western mathematics for close to 2,500 years.
my traineeship as a foreign exchange trader in can be found throughout a number of biological Mathematicians from Ancient Greece first
a leading Australian bank. One of the up and structures such as the branching in trees, the studied the Golden Ratio because of its frequent
coming traders on the floor, who I figured had growth pattern of a flower and the arrangement appearance in geometry.
about 5 to 10 years of experience, quizzed me of a pine cone, amongst others.
whether I had heard of Fibonacci on my first day Since then, some of the greatest mathematical
on the role – he was expecting me to have no The sequence is depicted by a set of numbers minds of all time, including Pythagoras, Leonardo
idea who Fibonacci was, and to send me off on as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, of Pisa and the astronomer Johannes Kepler have
a research journey so that I would stay out of his 144… and so on. spent hours analysing the Golden Ratio and its
way for a little while. properties. Some have said that it has inspired
Each number in the sequence is simply the sum thinkers of all disciplines like no other number in
Much to his surprise, I told him what I knew of the two preceding numbers, allowing the the history of mathematics.
about the mathematician, so he sent me off to sequence to continue indefinitely.
indefinitely. In the example
fetch him a coffee and a sandwich instead! To above, I have deliberately left the sequence to
be perfectly honest, at the time, I was more end at 144 – it is a number you will become
surprised that he knew who Fibonacci was – familiar with a little later.
and surprised even further when I learnt that he
adopted the Fibonacci sequence in his trading. What is remarkable about the Fibonacci
I quickly learned that Fibonacci was used by sequence, and why it is so relevant to the
a number of the other seasoned traders on geometry of markets, is that the numerical
the floor. sequence is such that each number is
approximately 1.618 times greater than the
number preceding it.
The Fibonacci Retracement

In trading, I believe the Fibonacci sequence (in I also like to use the ratio of 38.2% in my analysis. The 61.8% point for example would be
particular, Fibonacci Retracements) is used more This is found by dividing one number in the represented by the price $7.18 – which equals
frequently by technical traders than any other Fibonacci series by the number that is found two 61.8% x $10.00 + the low of $1.00. We will
price forecasting tool in the industry. It is very places to its right – for example, 55/144 = 0.3819. discuss Fibonacci in more detail a little later.
rare for you to switch on the financial channel
on TV and not hear one technical analyst or Many traders will often use the ratio of 23.6%,
another discuss it. Perhaps it is the mere fact which is found by dividing one number in the
that nearly every technical analyst is aware of the series by a number that is three places to its right 23.6% 38.2% 61.8%
Fibonacci Retracement is what makes it relevant. – for example, 34/144 = 0.2361.
I will show you later on, just how powerful and
In my analysis, I stick simply to 61.8% and
predictive these retracements can be.
38.2%. For now, these are are the only two numbers
A Fibonacci retracement is created by selecting we need to worry about.
two points on a chart, represented by a market
The example in the next chart uses the market
top and bottom, and by dividing the vertical
top identified as point A as the starting point and
distance by the selected Fibonacci ratios. The
the following market low at point B as the end.
percentages are then used to draw horizontal
(The price action in the chart actually reflects the
lines across the chart and identify possible
movement of the Australian stock market from its
support and resistance levels.
all-time high in 2007 to the end of 2013).
The key Fibonacci level used the most is a
For the purposes of our illustration however, we
retracement of 61.8%.
61.8%. Again, I point you back
will assume a nominal price for our starting and
to the Golden Ratio number I referred to early.
ending points. Each Fibonacci retracement level
level
It can be found by dividing one number in the
is calculated using the percentages between
Fibonacci sequence by the number that follows
these two points). For example, if the top at
it – for example,
example, 55/8 9 = 0.6179.
0.6179. Whilst the
point A occurred at a price of $11.00 and the low
mathematical result of the numbers in each of the
at point B at a price of $1.00, we have a range
sequences does not exactly equal 0.618, they are
of $10.00 which we use to calculate the
very closely approximate. The number to use in
Fibonacci retracements.
your analysis however is 61.8%.
 A
Start 0%

61.8%

38.2%

23.6%

B
End 100%
2008 20 0 9 2010 2011 2012 2013 2014

The Fibonacci Retracement Intro .03

Ralph Nelson Elliott

If you have spent any time studying technical

analysis of the markets, you will probably notice 5
the name R.N. Elliott come up – a lot. Elliot
is credited with discovering his Elliott Wave
3 B
Principle, which he used to describe market price
movements occurring as a result of natural human
behaviour.

The underlying premise to Elliott theory is that A

markets represent a mass of people – the crowd 1 4
– and their behaviour.
behaviour. Changes in the mass of
psychology of the crowd will therefore cause C
fluctuations in markets based on the underlying
pessimism or optimism of the crowd prevailing at
the time.

According to Elliott, this creates specific patterns

which can be measured in the markets and will 2
often repeat themselves due to the underlying
basis that human nature over time never changes.

At the heart of Elliott Wave Theory is that each

major market movement (or dominant trend)
will unfold in a five way sequence (represented
below as 1 to 5), and each minor movement
(or corrective trend) will unfold in a three way
sequence (represented below as A to C). Elliott Wave Principle Intro .04
I acknowledge that this is just an over Making it simple
simplification of Elliott’s work, and I apologise One of the pitfalls which I have faced when
if I have offended any of the Elliott Wave studying the various tools used in technical
practitioners out there. analysis is that there are so many indicators, it
The basis of this book is
can make it difficult for the inexperienced to know all about simplifying your
However, what I have found, particularly with
which ones to use and when they should be used. analysis.
the increase of computerised trading over recent
years, is attempting to identify a more detailed Over the years, Bob and I have discovered
application of Elliott Wave sequence and applying that there were some techniques which work
it over the markets on the smaller moves (ie the better and more consistently than others. This
moves that occur within the major long term is particularly the case when using Gann. For For me, too much information can
trend) can produce confusing results. Bob in particular, this has caused him to redefine make it all a little bit unworkable.
his analysis and simplify the way he looks at With that in mind, the Trading
In the interest of keeping it simple, I stick to the
markets. My own ability to forecast market tops Tools I am about to share with you
basic five wave and three wave sequences above.
and bottom also relies on a selected number of are what I truly feel represent the
In the next chapter you will see that this is one
indicators which I use as primary tools.
thing that both Elliott and Gann had in common. absolute best.

These are the tools we will share with you in

this course – keeping it simple.
SECTION ONE Identifying the trend

The first objective for anyone looking to analyse A very good case in point is the bull market in
The simple objective the market is to be able to identify the trend and Gold from the 2001 low to the September 2011
should be to trade the make sure you are invested with it! high. Whilst there were a number of significant
corrections in between, the best money to be
trend – not a perspective. This section is all about showing you how to made was by holding a long position in gold over
review the historical price movements of your that period. Once you were able to identify that
selected market and identify what the chart is a bull market was underway, even a passive ‘buy
telling you. It is my opinion that the greatest and hold’ strategy would have rewarded you
profits are made by making sure you are trading handsomely.
with the major trend and not against it. Not
only can your profits be much greater, but On the other hand however, attempting to trade
trading with the trend is easier and requires each of the corrections in the bull market and
much less work. always trying to predict the top would have left
you licking your wounds from being short, or
One of the things you will need to control once feeling cold while you were out on the sidelines
you have mastered the ability to predict a market whilst the gains were being made. Repeat that
top is the lure of the fast gains that can be made experience if you were a perma-bear constantly
by successfully being able to nail a high which calling for a correction in US equities to occur
precedes a crash. It is often said that ‘markets throughout 2012 and 2013.
will go up by the stairs, but down by the
elevator’ – in other words, bear markets bring The safest money in that market (and the
fast profits. easiest) was made by the bulls – not by the
bears. It was afterall, a bull market.
The problem is however, that markets in general
(equity markets in particular) spend most of their
time these days going up. If you are constantly
being a perma-bear trying to call every market
top, you will often see yourself sitting on the
sidelines whilst the others are making the bull
market gains.
Chapter One – How to know you are trading with the trend

Markets will either operate in one of three stages 1900

of activity which can be described to categorise

the direction of stock or commodity prices:
1800
1. Bull market
Where prices are going up, defined by higher tops
and higher bottoms 1700

2. Bear market
Where prices are going down, defined by lower 1600

tops and lower bottoms

3. Sideways market
1500

Where prices appear to be ‘range bound’ and are

not consistently displaying the characteristics of
either a bull or bear market
1400

Illustration of a Bull Market

1300
The following chart depicts the performance of O -12 N -12 D-12 J-13 F-13 M-13 A-13 M-13 J-13 J-13 A-13 S-13 O-13 N-13 D-13
the S&P500 market throughout the 2013 calendar
year. Notice how the market was consistently
making higher tops (in green) and higher lows
The Bull Market Illustrati on 1.01
(in red).

In a bull market such as this, the safest money is made trading the long side of the market by
trading with the trend. The ‘buy and hold’ theory works beautifully in these types of markets.
Illustration of a Bear Market
The chart (right) depicts the performance of the
S&P500 market throughout the bear market
campaign which began off the high in October
2007 until it reached its final low in March 2009.
Notice how the market was consistently making
lower tops (in green) and lower lows (in red).

Bear markets will often move faster in terms of

price over a shorter period of time than a bull
market, and can easily get ugly if you are on the
wrong side of the trend.

The Bear Market Illustration 1.02

Illustration of a sideways market
The following chart depicts the performance of
the precious metal market in Silver throughout
2011 and 2012.
2012. Notice how the market during
that period was not distinctively making either
higher tops or higher bottoms, but was rather
trading within a range bound by the two horizontal
blue lines. These types of trading conditions
are a professional traders dream but can be a
nightmare for the beginner who will often get
caught buying from the professionals at the top of
the range and selling back to them at the bottom.

As an aside: notice how that it was not until late

2012 where the Silver market made its first lower
top and lower bottom (as represented by the
green and red markers) – this was your indication
that the trend had turned down and that a bear
market had commenced.

20 11 2012 20 13

The Sideways Market Illustration 1.03

 The clear lesson to be gained from that piece
of advice is that identifying what the trend is, is
fundamental before one should even think about
‘You will always m ake the
‘You entering the market. You will produce much
most profit by following better results attempting to identify and trade a
market bottom in the middle of a bull run than
the main trend and
attempting to forecast each corrective top
playing the long swing… against it.

This is the view I shared with friends and

colleagues in late 2011 when I became convinced
It is much better to make 3 or 4 that the bull market in equities was set to
trades each year and make large continue. Had I been looking for the short side
profits, than it is to try and make of the trade all of the time, it would have proven
100 to 200 trades a year and be itself to be quite
quite costly. Those who were have
wrong half the time, and finally missed out on some of the fastest gains in
end up with a net loss. recent memory.

Let your rule be to – Know what the trend is, and make sure you are
on the right side of it!
GO WITH THE MAIN TREND,
AND NEVER BUCK IT.

If you don’t know what the trend

is, don’t get in the market.’

Source. W.D. Gann – How to Make Profits in Commodities (Pg 55)

Swing charts In each case above, you can substitute the word
One of the simplest trend following methodologies ‘day’ with your preferred period of time – for
The swing chart provides you
used by Gann in his analysis was the construction example, week, month, hour, or 15 minute period.
with a definable, mechanical
of a swing chart. Gann used the swing chart not method for identifying a trend and
In a bull market, the Swing Chart moves to the
only as a trend indicator, but as the basis for a
high of on an up day and keeps moving higher removes much of the ‘noise’ that
mechanical method of entering and exiting trades.
until a reversal day or down day is recorded. If is created when using just a daily
In order to construct a swing chart, you will need the market has made three up days in a row, that bar or candlestick chart.
to know the daily high and low prices in each will convert into one vertical line moving all the
time period you are using. For this reason, swing way up to the high of that third day. When the swing chart is making
charts can be drawn using the traditional open- higher tops and higher bottoms,
For the swing chart to move down, either a ‘down
high-low-close bar chart or from the trend is up.
day’ or an ‘outside day’ would need to occur,
candlestick charts.
causing the low of the previous bar (or ‘day’) in Likewise, if the swings are making
the upward move to be broken, therefore creating lower tops and lower bottoms, you
How to construct a swing chart the swing down.
should consider the trend down.
The construction of a swing chart results in what The swing chart would then continue lower until a
Gann called a Trend
Trend Line Indicator. It can be new ‘up day’ or an ‘outside day’ breaks new highs
created using any period of time – daily, weekly, on the bar charts. To make your life a little easier,
monthly, yearly or even intra-day periods. inside days are simply ignored for the purposes of
constructing a swing chart.
When using a bar chart or candlestick chart,
there are four classifications of ‘day’ types. Each When an outside day occurs, my general rule
is identified with respect to the previous day or of thumb is to follow what the intra-day price
period. movements were when constructing your
swing chart. For example, if we have had three
1. Up day = higher high and higher low consecutive up-days followed by an outside day
2. Down day = lower low and lower high that started the trading day lower, but then ended
3. Outside day = higher high and lower low higher, I would swing the chart down to the low
of that outside day, and then back up again –
4. Inside day = lower high and higher low
simply following the chronological movement of
the market.
 Multi-period or multi-point swing charts
One useful adaption of the swing chart is to
minimise the number of swing movements using
time or price as a constraint. For example, rather
than construct a swing chart using every bar
(or day) as your time period to follow, you may
increase the amount of time or price required to
move your swing chart up or down. For example,
Gann often worked with 3-day swing charts.

A 3-day swing chart requires there to be three ‘up

days’ to occur before the swing line is moved up.
If only 2 days up occur, the swing does not move.
You can follow this same approach by filtering the
swings through price – ie a 100 point swing chart
means you need a price move of 100 points or
more before the swing chart line will move.
You should vary the price used depending on
your market.

In my experience, I will most often use a one-day

swing chart and a 2-day swing chart to confirm
my forecasting. I have found that the 2-day swing
chart in particular is useful to cut out some of
the noise which can often result with the use of
The Swing Chart Illustration 1.04
a daily swing chart alone. This is particularly so
with the influence of computerised trading and
many of the algorithm driven ‘black boxes’ out
there which are programmed to trigger stops and
therefore create false moves if using a one-day
swing chart.
Chapter Two – Sections of the market

Earlier on we touched upon the Elliott Wave Sections of Market Campaigns

theory and the contribution it has made to A Bull or Bear Campaign in wheat or other commodities runs out in 3 to 4 sections.
technical analysis. One of the common things
he shared with Gann was that they both Bull Market
identified that bull and bear markets often work
to a set pattern, or structure which repeats in a Advance after final bottom, then a secondary reaction
1st Section
predictable way.

On page 50 of his book How to Make Profit 2nd Section Advance to higher levels, above the highs of t he first advance, then a react ion

in Commodities, Gann discusses the various

sections that a market will run in a bull or Advance to new highs for the move. In many cases this means the end of the campaign.
bear campaign. 3rd Section But you must watch for a definite i ndication before deciding that the third r un up means a
change in the main trend

Often four sections are run out and this 4th move or run-up is the most important to
4th Section
watch for the end of a Bull Campaign and a change in trend

Bear Market A Bear Campaign runs opposite to a Bull Campaign

There is a sharp, severe decline which changes the main trend, then a secondary
1st Section rally on which Commodities are safer short sales. That marks the end of the 1st
section.

2nd Section There is a second decline to lower prices, followed by a moderate rally.

3rd Section A third decline or move to still lower prices, which may be the end of the campaign.

There is often a 4th move, which you must watch closely for for bottom. In determining
whether it is final bottom you use all of other [indicators], watching old tops and old
4th Section
bottoms and resistance levels for definite indication that the main trend is ready to
change.
Minor Bear Campaigns of short duration, Identifying the trend – the simple way It indicates that the momentum behind the
running one year or less often run out in two current trend is beginning to fade and that
The ability to identify a section of the market is
sections, especially if the 1st Section is from the market is beginning to reposition itself –
a simple task once you have seen the patterns
a sharp top. generally, the fourth section is where most of the
unfold a number of times. Despite its simplicity,
professional money takes the opportunity to lock
it is such a powerful tool to be aware of, as it
Therefore, always watch the action of the in profits and change their position.
helps you to identify what part of a run you are
market after the 2nd decline to see if it is in within the context of a much larger and longer The following chart is a weekly chart of the
forming a bottom and gives indication of a term trend. S&P500 index between 2000 and 2010. It covers
change in trend.
the last three completed market cycles at the
Identifying a section of the market is as easy
One of the subtle differences between the way time of writing (as the current bull market cycle
as looking at a chart and identifying which top
Elliott and Gann described the movement of a from the March 2009 low is still in progress).
and bottom stands out. If you are analysing a
bull or bear market was the way they referred bull market, look for a major low and the next
to the movements within. Gann describe the proceeding major high and that will give you your
market movements in “sections” whereas Elliott section. Using a weekly or monthly chart will
referred to them as “waves” which included the often help you in identifying these correctly for a
movements that were made against the trend. major bull or bear market.
For example, in Elliott’s five wave sequence,
waves 1, 3 and 5 are all with the trend, whereas It really is as simple as that – the trick is not to
2 and 4 are against it. Gann by contrast when overcomplicate it!
referring to his three “sections” was describing
A key observation which I have witnessed from
moves that were solely with the trend.
my analysis of past sections in major market
campaigns, is that more often than not, there
will be a noticeable fourth section that is much
shorter than the previous third section in terms
of both price and duration (or time). This to me
is a red flag, warning me that the major market
campaign is over and that a significant change of
trend is about to take place.
 OCT 2007 TOP
1600 – MAR 200 TOP

4 1
1 3
1500 –

2
1400 –

1300 – 2 2 3

1200 –

3
1

1100 –

1000 –

4
4
900 –

NEW BULL
800 –
MARKET BEGINS

OCT 2002 LOW

700 –

MAR 2009 LOW

600 –

1999 2000 20 01 2002 2003 2004 2005 2006 2007 2008 2009

Sections of the market – S&P 500 index Illustration 2.01

The first of the major cycles ran from the top in Once again, the fourth section of this campaign How to determine when the trend
March 2000 to the low in October 2002. You will was characterised by a period of smaller price is changing
have noticed that the market moved in 4 distinct movement up and shorter duration. The
sections down, with significant retracements up significance of the October 2007 top and the Gann laid out his rules pretty simply on page 51
occurring in between. Importantly, each of these confluence of price signals at the top gave a very of How to Make Profits in Commodities under
successive sections was characterised by a lower strong indication that the bull market was over the section headed ‘How to Determine Change
top and a lower bottom – confirming that the and that a period of lower prices was to follow. in the Main Trend by Space Movements’.
trend was in fact down. In that section he outlines that:
Finally, following the October 2007 top, we
Noticeably, the fourth section down was commenced another bear market which lasted ‘When a decline in [price] exceeds the greatest
significantly smaller both in terms of length (price) a period of approximately 73 weeks. decline of a previous reaction, it is an indication
and width (time), indicating that the market had of a change in trend.’
completed its bear campaign and that a long Again, the final section of this bear campaign
term bull market was about to commence. This was characterised by a movement that was He also identifies that we need to watch out for
was confirmed when the top of section 4 was both shorter in terms of
of price and time. Final the time periods to determine when the main
taken out during the first phase of the new bull confirmation that the bear market was over was trend is changing. Again on page 51, he wrote:
wrote:
campaign starting in 2002. provided when the top of section 4 was broken to
the upside after the March 2009 low had formed. ‘When a campaign has run only 3 or 4 sections
Following the October 2002 low you will again and the TIME period on a reaction exceeds the
see how the market moved to 4 distinct sections greatest time of a previous reaction consider
during a bull campaign which ran exactly five that the main trend has changed.’
years. You will notice that each of
of the four
sections is characterised by higher tops and These are what Gann referred to as an overbalance
higher bottoms when compared to the last, in price and an overbalance in time, respectively.
indicating the trend is most definitely up.

Some of you may point out that there was a

significant correction within the first identified
wave – I do not consider this to be a new section,
as it did not break the previous high of the last
section down which completed the preceding
bear market.
Overbalancing of price Likewise, the same works with respect to the
There are two main things to watch out for when movements in time for sections down. If in
it comes to an overbalance in price. The first, that bull market, the greatest period of time that
a market has moved down has been 30 days, Important note:
is to measure each of the price moves with the
trend. When these begin to get smaller, it is and the market makes a move lower that has
an early sign that the strength of the trend is continued for 45 days (as an example), time has
weakening. If for example, you have been in a now overbalanced and is warning you that the Always watch out for changes in
bull market that has been running up in sections change in trend is in place. both price and time separately, but
of 100 points, then the first time you see a new remember that the overbalancing
The best indicators are when you have both time
section up that runs less than 100 points, this of time is most important.
and price overbalancing at the same time. This
should provide you with the early warning that a
should be a major warning to you that the trend is
change in trend is due. This is particularly so for
changing.
campaigns that are in their third of fourth section
in a cycle.
Overbalancing of price and time –
The second thing to keep an eye on is the
movements in price in each of the counter-moves example S&P500
within a campaign. For example, assuming we The overbalancing of price and time described by
are in that same bull market that has been running Gann earlier, is seen by measuring the counter-
up in sections of 100 points or more, and that the trend moves within the sections of a major bull
movements against the trend have been running or bear campaign. A tool which I have found
at 50 points. The first time you see the market that has worked consistently is to keep a track
moves lower by more than 50 points, the market of the price and time movements of the sections
is telling you that price is overbalancing and that a that are trading with the trend, as they will also
potential change of trend is on. provide you with a guide as to whether the trend
is losing its momentum and is about to change.

To provide an example of how easy these

Overbalancing of time
observations are to make in the market, I have
The very same theory described to figure out the depicted the bull market campaign in the S&P
overbalancing of price can be applied to time. Say 500 index from the October 2002 low which we
for example that each section of the bull market used in one of our examples earlier.
earlier. To make
has been moving up in in 90 day time frames. The the analysis simple, I have identified both the
first time you see a new section run up in a time price and time movements (in calendar days) for
period that is less than 90 days, it is the early each of the sections up, as well as the counter
 205 pts UP
1600 –
336 pts UP

1500 –

1400 –

266 pts UP
1300 –
56
days

1200 –
394 pts UP 397 days

1100 –

1000 –
633 days

900 –

800 –

700 – 511 days

103 pts 107 pts 186 pts

600 –

Oct- 01 Jun- 02 F e b- 0 3 Oct- 03 Jun- 04 F e b- 0 5 Oct- 05 Jun- 06 Feb- 07 Oct- 07 Jun- 08 Feb-09

Overbalancing of price and time – example S&P500 Illustration 2.02

Table 2.01
Overbalancing of time and price – example S&P 500

Time Price Oberservations

Section One 511 days – up 39 4 points – up Ni l .

Counter-Trend Reaction 10 3 points – down N il .

Time expanding.
Section Two 6 3 3 days – up 26 6 points – up
Current 633 day move is greater than the 511 day move before it.

Counter-Trend Reaction 107 points – down Price reaction the same as first reaction.

Section Three 3 97 days – up 336 points – up Time decrease, but price expanding.

Price reaction significantly greater than previous reaction.

Counter-Trend Reaction 18 6 points – down
Early warning indicator to watch for a change in trend.

Significant decrease in time and price range up.

Section Four 5 6 days – up 205 points – up
Indication that a change in trend is forming.

The example above shows that by the time the third and fourth sections in the bull market had completed, the momentum behind the market was beginning
to wane. In particular, the fourth section of the market saw both the movements in time and price being significantly smaller than the previous moves in the
sections up. The counter-trend moves (ie the moves down) in price were also beginning to overbalance, indicating that bull market had completed its cycle
Chapter Three – The trend measuring techniques used by the professionals

The basic trend line is used as a starting point for

identifying the trend by almost all conventional
technical analysts. To construct a trend
trend line, you
simply need to connect two points (either a low
to a low, or a high to a high) in a historical price
chart with a straight line, and continue to extend DOWNTREND
that line out into the future.

In the case of a bull market, trend

lines are recorded by linking a low
to a low, and as long as the market
continues to trade above that line,
the trend is considered up. The
reverse is true in the case of a
UPTREND
bear market.

Using the trend line Illustration 3.01

Using the trend line Trend channels

Trend lines can be used in one of two primary Another of the most commonly used technical
ways. tools by professional traders and hedge fund Important note:
managers is the use of the trend channel. To
1. Firstly, it is assumed that the market will construct a trend channel, you need to begin
continue in the direction of the trend until the with a basic trend line as your reference
reference point. A Trend lines (in particular working
trend line is broken. Once a trend line is broken, parallel line is then drawn on the other side of the
it is an indication that the trend has changed, trend lines) always need to be
price bars connecting a significant top or bottom,
and prices will continue heading in the broken watched as they are used by
so that the price action is within the channel.
direction. For example, if an upward sloping trend almost every technical analyst in
line is broken, it could be interpreted as a signal In the case of an up-trend channel, the high side the market.
to sell - either to liquidate a long position or to of the channel is drawn across starting from a
instigate a fresh short position. significant top, while in the case of a down trend
channel the low side of the channel is drawn
2. Secondly, trend lines are often used as places across the bottoms. The following chart is the
to present buying or selling opportunities. When weekly price action of the S&P 500 index across
market prices move back to the trend line and 2004 and 2007. Notice how the market traded
then ‘test and hold’ against the trend line, it is a within a downward trend channel for almost a
signal to buy or sell off that point. In the case of year, before breaking out of the trend channel
a bull market, for example, this would occur if the and trading higher. Once it had broken up, it then
price has moved down to the trend line, touched began trading within a new upward trend channel
it and then rallied higher. for almost a further two years, before a break out
caused it to move to much higher prices.
A trend line is considered to be a ‘working’ trend
line when it has been ‘tested and held’ by the
market on multiple occasions. The greater the
number of times a trend line has tested and held,
the more significant it is when it is ultimately
broken.
1560 –

1460 –

BREAK-OUT

1360 –

RETEST
 N E
 L I N
 N E L
 C HA N
 T R E N D
 L L E L
1260 –  PA RA

BREAK-OUT

1160 –

1060 –

S N 20 04 M M J S N 2 0 05 M M J S N 20 06 M M J S N 2 0 07 M M J S N

Trend Channels – S&P 500 Example Illustration 3.02

Parallel trend channel lines 1. Break-out against the trend – which often I am always on the look-out for these to occur
I have observed quite regularly that secondary signals a change of trend has occured (this when a working trend line has been broken and
parallel lines can be drawn to create additional can be seen in the first break out in the chart I have missed the initial break-out. It is one of
support and resistance trend lines within a earlier) the very few times when the market gives you
working trend channel. In the same way that another opportunity to get set with the
the regular trend channel is created by linking 2. Break-out with the trend – which occurs new trend.
significant tops and bottoms, the secondary when prices move out of an existing trend
parallel lines can also be drawn in using other channel, but in the same direction as the trend
turns within the broader trend. (this can be seen in the second break-out on
Moving averages
the chart earlier) This is probably the most widely used and most
In the previous example, I have created a popular technical analysis indicator of all. Moving
secondary trend line (marked by the dotted line) You need to be mindful that the market will often averages can vary depending on whether you
within the upward channel by linking a significant make false break-outs by trading slightly above are using a simple or exponential method of
bottom and extending an exact parallel line or below the working trend lines. This behaviour calculation. The simple moving average however
across. This secondary line provided support and occurs typically as the professional traders and is the most common. It is calculated by adding
resistance within the larger trend channel on a ‘black box’ computer systems attempt to take out the closing price of the chosen market over a
number of occasions. stops that a number of people place right above number of time periods, and then dividing this
or below the working trend lines. total by the number of time periods. For example,
a 10 day moving average will add the last 10 days
Break-outs and re-tests A break out therefore should only be considered of closing prices and then divide the sum total
You will find the occurrence of trend channels valid when there has been a strong move out by 10.
happening frequently in the markets, particularly of the trend channel and the market has made
in strongly trending markets where the price consecutive closes above or below the trend line. As a general rule, the shorter the time period
action will move within the trend channel for used in calculating the moving average, the
Lastly, it is also worth noting that once a trend greater the use it has in identifying the short
an extended period of time. You should also
line or trend channel is broken, the market will term trend. In my view, the 10 and 20 day
pay close attention for break-outs of the trend
often trade strongly out of it, but then make a moving averages are the most commonly used
channels to occur. There are two types of break-
move back to ‘re-test’
‘re-test’ the same trend line. In the
outs to look for. by professional traders and hedge funds for
earlier example, you can see clearly that when the
short term trend analysis, whilst the 50 day, 100
S&P500 broke out of the upward trend channel, day and 200 day moving averages are the most
it made a subsequent retest which produced a
commonly used for longer term trend analysis.
terrific buying opportunity.
The way in which the professionals use a moving Once there was a sustained breakdown of this
average is to apply it as an indicator to guide longer term moving average, the trend turned
A number of trading systems out
them on the overall
overall direction of the trend. If lower for an extended period of time. Similar
there will often employ the use of
market prices keep trading above the moving break out patterns occurred when the bear
average, the trend is generally viewed as up. markets in 2002 and 2009 ended, as well as
multiple moving averages which
Likewise, the trend is considered down if prices when the bull market in 2007 was over following generate buy and sell signals when
are trading below the key moving average. the major high. certain moving averages “cross”
with one another.
another. Personally, I
A secondary way in which the professionals Throughout 2012 and 2013, the market has been have found the use of these types
commonly use a moving average is to use it trading well above its 200 day moving average, of systems to provide little to no
as a buying or selling
selling indicator. If a market supporting the view that the trend is still up.
assistance in my analysis, so I do
has been trending above the moving average This moving average line therefore becomes
not consider them when analysing
for a considerable amount of time, then many important to watch to determine if prices can find
the markets.
professional hedge fund traders will watch the support at the moving average, or whether they
market to see if it moves back to touch the will undergo a sustained break-down of the 200
In my analysis, I try and observe
moving average, before resuming the trend. day trend line, which will be an indicator to watch
the 50, 100 and 200 day moving
The point of touch will represent the buying (or out for a change in trend.
averages, and will use them
selling) opportunity.
primarily as indicators to help tell
I have noticed that a 200 day simple moving me what the rest of the crowd may
average in particular is a pretty decent indicator be looking at.
to identify when longer term trends are beginning
to break down. The next chart of the S&P 500
index shows how the 200 day moving average
essentially held the bull market intact throughout
1995 to early 2000.
1800 –

1600 –

BREAK = TREND DOWN

BREAK = TREND DOWN

1400 –

1200 –

1000 –

800 – BREAK = TREND UP

BREAK = TREND UP

600 –

400 –

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

200 Day Moving Image – S&P 500 Example Illustration 3.03

 TRADING TOOL BOX ONE HOW TO TRADE WITH THE TREND

1. Trend Identification 2. Sections of the market  3. Overbalancing of price

and time

• Identify the character istic that the • Identify what section of the • Keep a count of the price and time
market is trading in. Is it in a bull, market cycle you are trading in. movements in each section to
bear or a sideways market? determine if the market is
• Are you in the first, second, third
beginning a change in trend.
• Use your
your weekly swing chart to or fourth section of a major bull or
help you determine whether the bear market? • Look out for overbalances
overbalances in time
market is making higher tops and and price which might suggest
higher bottoms (bull market) or that the momentum behind the
lower tops and lower bottoms current trend is changing.
(bear market).
4. Trend
Trend l ines 5. Moving averages

“Always trade with

the trend – the
• Are there any valid
valid trend lines to • Is the market trading above or
or
objective should be to
determine whether the market is below the 50, 100 and 200 day
in a definable, consistent trading moving averages? Me dium term
identify opportunities
pattern? trends will be referenced by the 50 to trade in the same
and 100 day moving averages and direction as each
• In a bull market, buying
longer term trends by the 200 day.
opportunities can be found when section of the market.” 
the market tests the bottom of a • Keep an eye out to see if the
trend channel. market moves back to touch a
(vice versa for a bear market) major moving average line for
future price support or resistance
• Look to hedge your position or
- nearly all the professional
take profits at the top of a trend
traders do!
channel. The opposite is true in a
bear market.
SECTION TWO How to forecast price

Many traders and investors will probably know

This section of the course the feeling of what it is like to sell out of a stock
is all about demonstrating too soon or buying into it too late. It can certainly
be a frustrating experience selling a stock and
to you the geometric seeing it continue to rise another fifteen or
relationship that exists twenty percent.
between past movements This section of the book is all about
of price and how these demonstrating to you the geometric relationship
can be used to forecast that exists between past movements of price
and how these can be used to forecast future
 future moveme nts of price. movements of price.

Once you have mastered the ability to identify

how past movements in price affect future
movements, you will then be able to translate
these into calculating future price support and
resistance levels on any market – not only can
this be useful in forecasting future tops and
bottoms, more importantly, it will significantly
improve your entry and exit points into your
chosen stock or commodity.
Chapter Four – Price retracements

I think it is without doubt that one of the most According to Gann, you should therefore watch You will have noticed that two of my price
commonly used technical analysis techniques is for support and resistance at the 12.5%, 25.0%, retracement points 38.2% and 61.8% come from
the price retracement. Nearly all on-line trading 33.3%, 37.5%, 50.0%, 62.5%, 66.6%, 75% and the Fibonacci sequence of numbers. The other
platforms contain a function allowing you to 87.5% levels. Personally, I think the use of so level however, is what I consider to be the most
calculate pre-defined price resistance levels with many levels in your analysis is overkill, particularly consistent and powerful of them all – the 50.0%
the simple click of a button. in fast moving markets such as stock indices point.
or currencies.
I have found price retracements on defined levels Gann describes this on page 36 of How to Make
to be one of the most reliable indicators available. In Gann’s defence, he was writing about Profits in Commodities under the heading ‘The
Retracements in price on key levels occur time commodities (as the title of his book points out), 50% or half-way point.’ In that section he says:
and time again, no matter what the time frame is and those divisions of price can be relevant in
that you are looking at. markets that trade at low prices. With that said, ‘Always remember that the 50% reaction or
to simplify my analysis, I will filter many of these half-way point of the range… is a point for
Gann covered this topic in quite some detail divisions out, and I therefore rarely ever use the support on the downside or for meeting selling
in chapter II of his book How to Make Profits 12.5% or 33.3% divisions in any of my analysis. and Resistance on the way up. This is the
in Commodities. There are probably two key The point I am trying to make, is that when you balancing point because it divides the range of
sections in that book to turn your attention use every possible division of a range, you come fluctuation into two equal parts.’
to. The first is on page 34 under the heading up with too many price objectives and this will
‘Range of Fluctuations’ where Gann describes confuse your trading decisions.
how to calculate price retracements using the Later on, he goes on to say:
previous range of price. The basic rule is to I have found that the use of the following price
take a significant high or low of a price move retracement points are all you need to know ‘You can make a fortune by following this one
and subtract the high from the low to get the in order to produce a successful forecast and rule alone. A careful study and review of past
range. You then divide the range using your price identify key buying and selling points: movements in any Commodity will prove to you
retracement levels to determine your support or beyond doubt that this rule works and that you
resistance points.
3 8. 2 % 50.0% 61.8% can make profits following it.’
On page 34, Gann describes a number of
percentages to use when determining price
Strangely enough, these are often the default
retracements. These are divisions of 12.5%,
12.5%,
percentage levels used by most on-line trading
25.0% and 33.3%.
platforms. Maybe it is the reason why they
seem to work so often as everyone is looking
out for them.
I have found that the 50% rule has an application Major, minor and intermediate Minor price ranges will use a much shorter
in markets no matter what the time frame being price ranges period of time, typically over a number of days.
used. I use it predominantly on daily chart Retracements within a minor price range will
In all of your analysis, there will be a major, a
analysis to help me identify intermediate buying often allow you to determine other minor tops and
minor and an intermediate range of price or time
and selling points to provide an entry point that is bottoms within a move, but will provide you with
period of significance. In general terms, the
with the trend. I know that Bob uses it heavily on very useful targets for trade entry and exit points.
longer the price range (as measured by the period
his intra-day chart analysis, to help him with his
of time in between the high and low points) the I regularly use minor price retracements in
initial trade entries.
more significant is the range. conjunction with my ‘trading to Time’ Tool in order
What I find truly astounding however is that a to establish tradeable turns within a market. I will
A major price range is determined by taking
number of significant turning points in the market also show you an example of intermediate and
the yearly (or cyclical) high and low of a major
will often coincide with a 50% retracement. This minor price ranges working in the market shortly.
bull or bear market and calculating the distance
is particularly so when a market turns on a fifty
the market has travelled in price. A major price Finally, intra-day movements can be used to
percent level between a yearly top and yearly
range will therefore be significant for calling other determine micro price ranges. Just as a major,
bottom. As Gann outlined in his book – ‘The
significant market tops and bottoms (such as a minor or intermediate price range is calculated,
wider the range and the longer the time period,
yearly high or low). I will show you an example of micro ranges can be determined using intra-day
the more important is this half-way point when
a major price range at work, shortly. charts (such as an hourly, 15 minute or even a 4
it is reached.’ In a later chapter, I will walk you
through an example of the 1929 Great Depression minute chart). Micro ranges can be especially
An intermediate price range is determined by
high and the final low in 1932 for the Dow Jones. useful to zoom in when you are looking to take
taking a significant high and low within a major
The significance of the 50% level between a trade by providing you with very close entry
cycle and calculating the distance between those
those two points was immense – it was only points. As an example, if my time calculations
two prices. Intermediate ranges will sometimes
until that point was crossed (in 1952 nearly 20 are indicating a top due on say 16 September,
call significant (yearly) tops and bottoms, but will
years later) that a new major bull market in US I will often zoom in and use the 50% or 61.8%
often determine turning points within a section of
equities started. This highlights the importance retracement of an intra-day chart to help me
the market. Additionally, the price retracement
of identifying the level that balances price in determine a trade entry point.
of an intermediate range will help you determine
a market. the strength of a market, and whether the next
section of the market is likely to exceed the
previous one.
Determining major ranges – Start- 1576
S&P 500 (using yearly lows)
The following chart is a weekly bar chart of
the S&P500 illustrating the importance of
our three key price retracement levels using
the major range that was made between the
October 2007 bull market high at 1576 and
the March 2009 bear market low at 667.

Notice how the market retraced and found

resistance almost exactly at the 61.8%
Fibonacci level to form a significant top. It 61.8% - 1229
then found future support and resistance on
our two other key price retracement lines,
further illustrating the significance of these 50.0% - 1121
major price retracement levels in the market.

38.2% - 1014
Determining minor ranges –
S&P 500 (daily chart)
The same application of calculating price
retracements using ranges can be made
using a shorter time frame and by using
minor tops and bottoms within a section of
the market.

In the next chart, I have again used price

End - 667
action in the S&P 500 off the October 2011
low, and have used the minor tops and
bottoms that subsequently occurred to OCT 2 0 07 MAR 2009 O CT 2 011

calculate future price support points over

a shorter time frame
Determining
Determining major ranges – S&P 500 Illustration 4.01
 You will notice that the market found support at on one of our three key price retracement levels at every single turning point during the bull
market campaign from 2011 to 2013. This provided five distinct buying oppor tunities that would have kept you long and with the main trend
using this single technique alone!

1800 –

E
1700 –
E
50.0%

1600 –
38.2% S

1500 –
E

E
1400 –

61.8% S
1300 – END
61.8% S

1200 –

61.8% S

1100 –
START

1000 –
J ul 2 011 Dec 2011 May 20 12 Oct 2012 Mar 201 3 Au g 2013

Determining
Determining minor ranges – S&P 500 Illustration 4.02
Gauging the strength of a market using To illustrate how the 50% level can be used as
price retracement points a gauge of strength, the following chart depicts
the weekly price action of the S&P500 off the
Earlier, I highlighted that the 50% level acts as a
March 2009 low and the subsequent major high Important note:
significant level to watch within all markets. The
that it made in late April 2010 (an intermediate
half-way point acts as a balancing level for price,
price range). As we established in section one
often giving you an indication of the underlying
earlier, once it became clear that the March 2009 As a general rule, a market is more
strength of a trend. You should always watch
low was in and the trend was up, the primary likely to continue moving with the
to see how deep the corrective retracement (or
objective would be to ensure you are trading
counter-trend price move) is within a market to current trend if it is able to find
with it and identifying buying opportunities along
determine the overall strength of the support or resistance before the
the way.
main trend. 50% level is reached.
It can be seen from the following chart that the
When the market is able to find support or
market moved almost exactly to our first key
resistance before the 50% level is reached, you
intermediate price retracement level at 38.2%.
can normally expect it to continue to new highs
(or lows) when the market resumes its trend. Once this point held as support, using our general
The opposite is generally true when a market rule we figure that the new bull market underway
retraces more than 50%. This is a potential sign has strength, and that the April 2010 high should
of trend weakness. If the 50% level is broken, ultimately be taken out. The following chart
I will then pay particular attention to the 61.8% reveals how the future price movement unfolded
level within a price retracement. I have found that in exactly that way.
if the market cannot find support at the 61.8%
level it is an indication that the previous trend is
weakening and running out of puff.
1800 –

Once the 38.2% price level held, we knew the bull market underway had
strength and that the April 2010 high should ultimately be taken out.

1600 –

1400 –

APRIL 2010 HIGH

1200 –

1000 – 38.2% < 50% (STRENGTH)

50.0% = 50% (BALANCED MARKET)

61.8% > 50% (WEAKNESS)

800 –

MARCH 2009 LOW

600 –
J an-0 8 Aug- 08 Mar- 09 Oct - 09 Ma y- 10 De c- 10 Jul- 11 Fe b-1 2 Sep- 12 Apr- 13 N ov- 13

Gauging the strength of a market – S&P 500 Example Illustration 4.03

Chapter Five – How to use previous tops and bottoms to forecast future prices

One thing which has consistently stood out to There are only nine pages contained in chapter In his book, Gann described the 1921 extreme
both myself and Bob during our years of analysing IV of 45 Years in Wall Street, but these are nine low as 64 points exactly. We will use 63.9 in our
and trading the markets, is the way in which the pages well worth the read. I think reading this calculations, as that was the actual price of the
price of a future top or bottom has, in some way, chapter with a historical price chart of the Dow low according to my data.
a direct mathematical proportion to a previous top Jones in front of you is the best way to truly get
or bottom. a proper appreciation of what Gann is trying to We use that low and then calculate repeating
tell you. When doing so, you should perform the ranges of that price to give us future price targets
Gann described this in some detail in both calculations yourself and identify the tops and to act as support or resistance in the market.
Chapter IV of his book How to Make Profits bottoms he is referring to. A 100% repeat of the low gives us 127.8 (or 2 x
in Commodities and in Chapter IV of his book 63.9) as a future resistance level to watch. The
45 Years in Wall Street. I think both of these cycle low for the year in 1943 came in at 128.9.
chapters are worthy of further study and Dow Jones index 1921 to 1953 Whilst it doesn’t look like a huge turning point on
attention. On page 30 of his book 45 Years (45 Years in Wall Street) the following chart, it did see the end of a pretty
in Wall Street, he outlines: significant run down off the 1943 high which ran
To speed up the process for you, illustration 5.01
for a period of 138 days – so it is certainly not a
outlines a number of the significant turning points
point to be sneezed at.
‘One of the greatest discoveries I ever made in the lead up to the Great Depression high in
1929 and the subsequent low which followed in Next we figure that 300% of our 1921 low
was how to figure the percentage of high and
1932. In 45 Years in Wall Street, Gann refers
refers to (or 3 times 63.9) gives us a price objective of
low prices on the averages and individual
a number of other significant tops and bottoms 191.7.. You will notice that a ver y major cyclical
191.7
stocks. The percentages of extreme high and
when arriving at his calculations. The price points top formed in 1937 around that resistance level
low levels indicate future resistance levels. I am about to show you below however illustrate at 195.6.
the power of this Trading Tool using only one
There is a relation between every low price to
major low as a reference point. Moving on to our next price next target using that
some future high price, and a percentage of the
that low, we calculate 400% of 63.9 which equals
low price indicates what levels to expect the The monthly bar chart starts using the extreme 255.6. Notice how the yearly low in 1953 came
next high price. low in the Dow Jones Industrials index which in at a price almost within one exact point of
occurred at 63.9 on 24 August 1921. (As an aside, this price.
please remember that date of 24 August for the
time being – you will see it popping up again a
little later). Gann often referred to extreme lows
or highs as the points which ended or began
multi-year long bull or bear markets.
At this point in time, I would like to take you Finally, we go to our next major percentage level
back to our chapter earlier on price retracements. at 600% of the 1921 low which gives us a price
The Fibonacci level of 61.8% between the 3 target of 383.4 to look out for.
for. In his book, Gann
Remember, we are using
September 1929 top and the 8 July 1932 low is calculates other price resistance levels using
254.1. So our 1953 low was also within a single other previous tops and bottoms to give him the calculations which called
point of that! In other words, our calculations additional price targets of 384.75 and 388.50. a low in 1953 from a price
are telling us that the 254 to 255 price region is a Averaging out the three of those prices together
that occurred 30 years
significant place to look for key turning points in give us a forecast price of 385.55.
the future. earlier, using techniques
The highest point at which the Dow Jones sold
 from a book that was
Remember, we are using calculations which to, marking the top of what I consider to be the
called a low in 1953 from a price that occurred 30 greatest stock market high of all time, was 386.10 published in 1949!
years earlier, using techniques from a book that – so our calculations are less than one point out!
was published in 1949!

The next percentage level off our 1921 low is

500% which gives us a price target of 319.5 to
watch. If by now, you are beginning to expect
this tool to call market turning points every single
time, I can understand why, but I think that might
be expecting a little bit too much. In any event,
this price did not produce anything of major
significance, so I have left it off the charts.
450 –

3 SEP 1929
TOP = 386.1
400 –

600%

350 –

300 –

250 – 400% 1946

TOP = 213.4
10 MAR 1937
TOP = 195.6 15 SEP 1953
LOW = 254.4
200 –
300%

150 –

200%

100 –

50 –
8 JUL 1932
24 AUG 1921 LOW = 40.6
LOW = 63.9

19 20 1 922 19 24 192 6 19 28 193 0 1 932 1934 1 93 6 19 38 194 0 1 942 19 44 1 946 19 48 195 0 1 952 195 4

Using previous highs and lows to forecast price – Dow Jones Index example Illustrati on 5.01
Before we go any further, there is something A problem which both Bob and I have found Using the 50% rule to project the
important which I would like to point out from in using so many percentages is that you price of a future top or bottom
chapter IV of 45 Years in Wall Street which I apply end up with too many support or resistance
Before we get on to a present day example
to my own analysis of the markets. In his book, points on your chart. In our experience, this
using the S&P500 index, I would like to revisit
Gann outlined that: overcomplicates the exercise and can cause
a point I made earlier about using the 50%
confusion, making it difficult to know which
i. The most important resistance level is division of a high or low price. One way to apply
price targets to actually trade from.
50% of any high or low price. 1 this technique is simply to take the price of a
If, for example, you are calculating each 25% major market high and divide it by two in order
ii. Second in importance is 100% on the division, you will end up with 4 series of price to calculate the future prices of potential tops or
lowest selling price on the averages or targets before you get to the next multiple. bottoms. Using the 1929 high as an example,
individual stocks. 2 If you are using two or three major lows to 50% of 386.1 equals 193.0 – which is within
calculate your price objectives, then you will three points of the 1937 high of 195.6.
iii. You must also use
use 200%, 300%, 400%,
double or triple the amount of price targets…
500%, 600% or more depending upon Using 50% of a major price range is another
and so on.
the price and the Time Periods from level that should be watched for future price
High and Low. As a basic rule, I stick mainly to exact multiples support and resistance to occur. For example,
of previous highs and lows, and will occasionally following the 1929 high of 386.1, the Dow Jones
1
‘For example 50% x 386.1 High = 193.05’ use 150%, and 250% multiples (and so on) if my made its final Great Depression low in 1932 at
(Which called the 1937 top) analysis can handle it. a price of 40.6 – this gives us a very important
price range of 345.5 to calculate future support
2
‘For example 2 x 63.9 Low = 127.8’ and resistance.
(Which called the 1944 low)
The 50% price retracement point using this
range is 213.3 – within a fraction of the yearly
In the examples earlier, we used exact multiples high in 1946 at 213.4.
only of a significant market low to define future
market support or resistance
resistance points. In his book
however, Gann also referred to the using the
divisions of 25%, 12.5% and even 6. 25% from
major highs and lows as third, fourth and fifth in
importance.
The significance of these 50% points in the 500 –

market after such a major period is immense.

450 –

Following the significant losses made during the 3 SEP 1929

TOP = 386.1
Great Depression, the Dow Jones took over 14 400 –

years to make back half of what was lost, when START

it reached its high in 1937 at a price of 195.6. 350 –

It was almost 20 years until prices were able to

make a clear break of the 50% balancing point 300 –

between the 1929 high and 1932 low, when the

1946
US stock market was finally able to break into a 250 –
TOP = 213.4
new bull market and past the prices reached
50%
in 1929. 200 –

In the case of the Dow Jones, the 50% price 150 –

held for almost 20 years and it was only until

prices were able to make a clear break of that 100 –

balancing point, that the US stock market 8 JUL 1932

LOW = 40.6
eventually went on to break through the high 50 –

that was made in 1929. END

0–

1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956

The 50% Rule – Down Jones Index Illustrati on 5.02

Worked example – S&P 500 index
(1978 low and the 1987 to p) History will go down as showing that the top of the S&P500 before the 1987 crash came in
I now want to demonstrate to you how the at 338 – within a fraction of our forecast resistance points. Incidentally, the date of the high
principles described to you earlier continue to in the S&P500 occurred on 25 August 1987. I hope that date sounds familiar!
work in today’s markets.

The first chart starts with the yearly low in the

400
S&P500 index made on 1 March 1978 at a price
of 86 points. The next multiple of 86 (or 200%
25 AUG 1987
of it) gives us a price target of 172.
172. The yearly TOP = 338
high in October 1983 came in at a price of 173.
Moving on another 86 points gives us a future 86 x 400% = 344

price target of 258. The yearly high in 1986

1986
came in at a price of 254 on 27 August 1986. 300
27 AUG 1986
If you recall, I asked you to remember the date TOP = 254

of the 1921 low we used in the Dow Jones

86 x 300% = 258
example earlier which occurred on 24 August.
This is a very significant time for the Dow Jones,
with many significant turning points in the market
occurring on or around that date – this is a time 10 OCT 1983
200
TOP = 173
you should always watch on the Dow Jones
index. (But more on that later). 86 x 200% = 172

Next we calculate 4 times the low of 86 to give

us a price point of 344. An exact repeat of the
October 1983 high of 173 also gives us a price
target of 346 (173 x 2). By these calculations, 100
we should figure that the area of 344 to 346 1 MAR 1978
LOW = 86
will be met with heavy resistance.

1978 19 80 19 82 198 4 198 6 198 8 199 0

How to forecast future prices using Alternatively, you could use the October 1983 The following chart highlights a series of three
previous highs and lows – S&P 500 high of 173 (which is derived from the 1978 low) lows (or triple bottoms) which occurred following
index (2000 to 2009) and multiply that by 9, which will you a target the tech-wreck bubble in 2000. The first of
price of 1557. In any event, the average of those those significant lows occurred in July 2002 at a
I now want to fast forward a bit in time and look
two prices gives us 1553. The price of the tech- price of 776 –an exact 50% division of the high
at some of the most recent market price action in
bubble high for the S&P500 reached in March which the low was coming from.
the S&P500 to demonstrate that the approach of
2000 was 1553 – exactly.
using previous prices to forecast future tops and The extreme low price in October 2002 occurred
bottoms is still relevant today. Following the high in March 2000, US equities at 769, whilst a subsequent low occurred in
moved into a signficant bear market. Earlier, March 2003 at 789. The average of these three
The following chart of the S&P500 covers the
I highlighted that Gann noted that the most prices was 778. We would then figure that the
price action between 2000 and 2013. We start
important price level to watch out for is 50% of the price average of 778 becomes an important
by taking a look at the tech-bubble high reached
any high or low, so following those principles, we price to work with. A repeat of this range (or
on 24 March 2000 at a price of 1553. In the
would now be looking to see if our 50% price 2 x 778) provides us with a target of 1556.
earlier example, we were using the first three
point can provide any support to the falling The market made a significant high on 16 July
multiples of the 1978 low in the S&P 500 to
stock prices. Calculating that 50% of the 1553 2007 right on 1556 and sold off heavily, before
calculate the yearly highs in 1983, 1986 and
high gives us a price of 776.5, we would be wise recovering to rally to its final high in October
1987. Contiuning the sequence higher,
higher, we
to watch and see what prices do at this point. 2007 at a price of 1576.
would then calculate that 18 x 86 = 1548.

Projecting these numbers for one more

1978 low = 86.0
cycle gives us a future price of 2328
x 18 = 1 54
54 8 (price forecast one) (or 3 x 778) to look out for.
Whenever you see numbers working to provide
19 87 high = 17
173.0
future levels of price support and resistance, it
x9 = 1 55
557 (price forecast two) always pays to keep a close eye on them in the
future. Not only will you notice those numbers
aver
averag
age
e of tw
two
o fo
fore
reca
casts
sts = 15
1553
53 (a
(ave
vera
rage
ge pr
price
ice fo
fore
reca
cast)
st) working to produce future prices, but you will
also see those same numbers appearing as
M ar
ar ch
ch 2 00
00 0 ( te
te ch
ch -b
-b ub
ub bl
bl e h ig
ig h)
h) = 15 53
53 ( ac
ac tu
tu al
al )
significant calendar day time counts in
your analysis.
 789 low x 200% = 1578

1600 – OCT 2007

MAR 2000 JUL 2007 TOP=1576
TOP = 1553 TOP=1556

773 pts DOWN

1400 –

1200 –

1000 –

800 – JUL 2OO2 MAR 2003

LOW=776 LOW=789

OCT 2002
LOW=769

600 – Average of 3 bottoms = 778 MAR 2009

200% x 778 = 1556 LOW=667

400 –
1998 1 99 9 2000 20 0 1 2 00 2 20 0 3 2 0 04 2 0 05 2 00 6 2 0 07 2 00 8 2 00 9 20 1 0

S&P 500 (1998 to 2010) Illustration 5.04

In my view, the brilliance
of the discovery by
Gann that the future
prices of tops and
bottoms are directly
related to previous tops
and bottoms lies in its
simplicity.

There is no need for

a Nobel Prize award
winning mathematical
algorithm to forecast the
price– all it needs is the
use of a simple calculator.
Chapter Six – Price projections

Fibonacci extensions In the next example, our reference range starts Sections of the market and repeating
with the 10 October 2002 low in the S&P500 Fibonacci extensions of price
In the same way, that we use the levels
index, marked “A”,
“A”, to the following cycle high
inspired by Fibonacci in our price retracements, I continue to be amazed by the frequency with
on 11 October 2007 which is marked “B”. We
his sequence can be applied to project future which future movements in price are either an
then calculate our Fibonacci extensions using
movements of price to identify where the next exact repeat of a previous movement of price
the next major low which occurred on 6 March
section of the market is likely to end up. (or very close to it). In his works, R.N. Elliott
2009 marked “C” – or in other words, “start”,
observed that it will often be the case that two
A Fibonacci extension is simply created by “end”, “extend”.
out of the three waves with the trend will be
using a range as a reference point (for example equal in either time or price. I have certainly
As with Fibonacci retracements, extensions of
using the range created by a low to a high), and found this to be true a number of times.
price can be used to work with major, minor
then projecting that same range off the next
and intermediate price ranges. The greater the
major turning point (in this case, the next low). Watching for repeating price movements applies
price range, the more significant is the Fibonacci
The same levels used in your Fibonacci price equally to major ranges which occur over a
extension in calling future support and resistance
retracement sequence are then applied to number of years as well as intra-day movements
points in price. When I see Fibonacci extensions
the extension. which occur over a matter of minutes or hours.
reacting off a 100% level, I will watch these
I have seen markets move with such precision,
The key levels I use in my Fibonacci extension closely to produce a change in trend. This
that sometimes I expect (unreasonably) that each
analysis are as follows: 38.2%, 50.0%, 61.8%, provides me with not only a place to look for
and every move must unfold with such repetition.
market turns, but an excellent opportunity to
100%, and 138.2%, 150% and 161.8% There is certainly a level of restraint required to
hedge an existing position.
ensure you don’t hold out for those extra couple
I do however believe there is validity in exploring of points to achieve perfection.
the 23.6% and 123.6% extensions in your Pay close attention to the 100% extension
analysis if you believe your trading can handle level which is the most important – this is
the additional price levels. where the previous price range (or cycle) will
have repeated itself
 When price ranges repeat in conjunction with our other price
2000
indicators (particularly with a key retracement level), it is a good 161.8%
sign that the price move is over and there will be a change in trend.
150%

138.2%
END

1600
B
100%

1200
61.8%

50.0%

38.2%

800
A

START   C EXTEND

400

2 0 01 2 0 02 2 00 3 20 0 4 20 0 5 2006 2007 2008 2009 2 0 10 2 01 1 2 01 2 20 1 3 2014

6.01 Fibonacci E xtensions Illustration 6.01

Australian SPI futures and repeating Following the 22 September low, the market ran
Fibonacci extensions to a yearly high of 3414 on 7 November 2000.
This completed a larger overall move from a major
The following is an example of the Australian
low which occurred on 22 March 2000 at a price
equities market futures contract known as the
of 2957. The price range between thesethese two
Share Price Index contract, or SPI, for short.
market turns (3414 minus 2957) equalled 457
The reason why I am using this as my first
points – exactly two times the 228 point move
example is because this was my first serious
down which occurred just before it and a repeat of
real time experience observing prices repeating
the all-time low price for the SPI futures market.
in this market.
From the 3414 high, we would then figure that
Illustrations 6.02 and 6.03 represent the daily
the market might have another 228 points of
price action in the SPI over the period between
downside in it. This would give us a target
2000 and 2001. During that time, prices
of 3186 to look out for.
for. Not only would this
essentially traded in a sideways for an extended
represent a repeat in price, but it would also mean
period. I have highlighted three key sections to
the market is finding resistance at the 50% level
demonstrate the price symmetry in each of the
of the range between the 3414 high and the
major moves that occurred in the market over
2957 low.
that period.

The first price movement was the one which saw

a run down from the top of 3398 on 24 August
2000 to the low of 3170 on 22 September 2000 –
a price move of 228 points. The price range 228
was already significant to watch in this market, as
it represented one half of the all-time low that the
SPI futures contract ever traded, which was the
low on 1 March 1983 at a price of 458.
 Star t – 7 Nov 20 0 0 high at 3 414 Star t 7 Nov 20 00 high at 3 414

I can recall very distinctly

Previous major low on 22 March
Previous major range down = 228 points watching this unfold
2000 at 2957
as it did.
did. Not only was
Price target calculation: 3414 minus
price working in exact
Price range = 457 points
228pts proportions, but so too
was time.
50% price retracement

Price forecas t (one ) = 3186 Pri ce forecast ( two) = 3185. 5

The actual price of the 21 December 2000 low was 3186 – exactly!

After the 3186 low, the market continued its (I will show you why in a later chapter where I To finish this analysis of the 2000 and 2001
sideways action and reached a double top in will demonstrate how easy it was to forecast markets, I think it is also important to highlight
February and March of 2001 at a price of 3371. the dates to watch for the changes in trend). that following the 3143 low, the next major price
Once the double tops had confirmed, we would move in the market was a range of 345 points
calculate (yes, you guessed it) that the market The set-ups in this sequence of price up to the 2001 yearly high of 3491 on 29 June.
could move down another 228 points. This movements were simply just too good to be true. Interestingly, the range up of 345 points is almost
would give us a price target of 3143.
3143. The range I remember Bob being so confident that the exactly a 150% repeat of our previous working
marked as section “C” highlights this price action market would reach 3143 that he put a call into range of 228.
and that a low was made on 22 March 2001 at his broker to place a buy order at exactly 3143
exactly 3143. This low was further supported by more than a week before it happened.
a double bottom on 29 March at 3144.
At the time, the market was trading about 3300
I can recall very distinctly watching this unfold and I remember Bob telling me that he was
as it did. Not only was price working in exact laughed at on the other end of the line when he
placed the call.
3600

3500
7 NOV 2000
24 AUG 2000 TOP = 3414
TOP = 3398 1 FEB & 8 MAR 2001
3400 DBL. TOP = 3371

3300

3200

3100
22 SEP 2000 21 DEC 2000 23 MAR 2001
LOW = 3170 LOW = 3186 LOW = 3143

3000 228 pts 228 pts 228 pts

DOWN DOWN DOWN

2900 17 APR 2000 A B C

LOW = 2957

2800
Jan-00 Mar-00 May-00 J ul - 0 0 Se p - 0 0 N ov - 0 0 Jan-01 Mar-01 May-01 Jul-0 1 Sep-01 N ov - 0 1

Repeating Price – ASX SPI 200 Futures Illustration 6.02

3600

228 x 150% =342 29 JUN 2001

TOP=3491
3500
7 NOV 2000
228 x 200% =456
TOP=3414

3400

3300

3200

345 pts UP

3100 23 MAR 2001

LOW=3143

3000
457 pts UP

2900
17 APR 2000
LOW=2957

2800
Jan-00 Mar -0 0 May-00 Jul-0 0 Se p - 0 0 Nov-00 J a n- 0 1 Mar-01 May -01 J ul - 0 1 S e p- 0 1 Nov-01

ASX SPI 200 FUTURES Illustration 6.03

How I forecast the S&P500 top in September 2012 – To the exact point

In late 2011, following the birth of my fir st child, The following chart, which compares the relative As the area of the bank that I was working in did
I spent a considerable amount of time analysing price performance of the S&P500 with the S&P not provide stock specific advice, the piece was
the markets whilst taking some time off work. As ASX 200 illustrates why so many Australian sent out to a number of financial advisers as a
the newborn was keeping both my wife and I up investors were still nervous about buying equities. ‘Thought Leadership’ article. The basis of the
for most of the night, I would often find myself Both the US and Australian markets had analysis was that the premium available from
awake late, giving me time to analyse the market experienced sharp sell-offs from the highs they the dividend yields on the ‘big-four’ Australian
in between the changing of nappies and feeding. had reached earlier in the year following the banking stocks and our two leading mining
European debt crisis. This simply added to the shares, when compared to cash, were near
It was at this stage that I was asked by a close existing investor nervousness here in Australia. historic highs.
friend of mine to provide a forecast for the S&P
500 index. I hadn’t provided a written forecast for Whilst US equities were sitting on gains of over My research had shown that whenever this
a number of years, but both Bob and I were still 60%, Australian equities were trading at just a premium was greater than 500 basis points for
making accurate calls during that time – we just touch over 20% off off their March 2009 low. To banking stocks and 200 basis points in the mining
weren’t going to the effort of putting these calls put all of that into perspective, the all-time high in shares, anyone who invested in those stocks
in writing. the Australian benchmark index before the global and held for a period of twelve months or more,
financial crisis started, occurred at a price around would have seen large gains with a 98% to 100%
I had been watching the price action in the 6850. In October 2011,2011, we were trading back at historical probability of profit.
Australian market very closely, which had traded levels close to 3850, so investors who bought at
nowhere near as strongly as US equities had the top were still nursing losses of almost 50%
over the last two and a half years. I had already four years on.
figured with Bob that the major bear market low
was in. Certainly this was the feeling by the Both the cycle analysis that Bob and I had done
majority over in the United States, but in Australia, had convinced us that October 2011 was the time
our investor base was still very sceptical. Bob to buy. Such was my confidence in this that I
in particular was looking out for the next buying researched and wrote an article on behalf of the
opportunity in the Australian market for a while investment bank I was working for presenting
now, and had pencilled in October to November some fundamental reasons why now was a
2011 as the key time to watch. good time to consider investing in Australian
equities again.
220 Since I wrote that article (up until the end of
2013), the average return on the big-four banking
stocks (including dividends) has been enormous.
Interestingly, the date of the actual market low in
200
2011 was 4 October and my Thought Leadership
S&P 500 article was published only two weeks later on
19 October – maybe it was just lucky timing!
180
Getting back to the main point, following the
birth of my daughter, I began studying where the
S&P500 was likely to be headed next.
next. I had seen
160
that the market had moved up 807.5 points in its
previous run from the 10 October 2002 low to the
ASX 200
11 October 2007 high so I began by using that as
my starting point.
140
The next obvious port of call would then be to
take that major five year range and add it to the
most recent bear market low in March 2009
120 (or in other words, using a Fibonacci extension
OCT 2011 LOWS
of 100%). This gives us a price target of 666.8
+ 807.5 = 1474.3.
1474.3. I had nominated this exact
price to friends and colleagues as an area that I
100
felt the S&P500 was going to reach, well before
N o v 2 0 09 N o v 2 0 10 N o v 2 0 11 N o v 2 0 12
the event. As the following chart will show,
show, on
14 September 2012, the S&P500 market made
a significant high at 1474.5 before a six percent
Why October 2011 was the TIME to buy Illustration 6.04 pull-back.
2000

In my email, I wrote:
1800

11 OCT 2007
TOP = 1576.1
1600 14 SEP 2012 “Now that we are at the 1474
TOP = 1474.5 level], it might be a good time
807.5 pts UP
to take out some put option
807.7 pts UP
1400 protection at these levels given
volatility is cheap to protect the
portfolio from a possible decline”
1200

1000

Although the market had hit my price target

of 1474 exactly, my strength indicators at the
800
time were telling me that it would eventually
10 OCT 2002 6 MAR 2009
trade at higher prices. In the next chapter,
chapter, I
LOW = 768.6 LOW = 666.8 will show you how I was able to determine
600
this and why I was confident higher prices
20 0 1 2003 2 0 05 20 0 7 2 00 9 2 0 11 20 1 3
would follow. In actual fact, I had outlined
this in an email to friends and colleagues only
two trading days following the 1474 high.
Repeating Price – S&P 500 Example one Illustration 6.05
In that
In that same
th same email,
sa email, II also
em also wrote
wrote that:
wr that:
th The FiFibonacci ex
extension at
at 10
10 0%
0% rirightfully In the example earlier, I showed you how I had
proved to be the opportune price to hedge, calculated 1474 as a significant resistance point.
before a six percent fall provided the buying In actual fact, I had initially been looking for the
opportunity I was looking out for. Later on in resistance in the market to occur between 1440
“[Whilst] I have had an overall this course, I will walk you through the series of and 1474 when I first made that forecast in
short bias on the market for a forecasts that I had written at the time, which late 2011,
2011, more than a year in advance. When
little while since the S&P500 hit identified the opportunity to sell at the 1474 top, I saw the price ranges of 108 and 218 points
my 1474 target exactly, I think and the buying opportunity and price targets emerging however, I took the liberty of revising
which soon followed. that forecast to between 1474 1474 and 1485. I had
it is important to realise that
figured that the third range leading up to the 14
when positioning yourself, I am
September 2012 high could end on another price
not expecting the world to cave S&P500 off the 4 Oct 2011 low – minor move up of 218 points, which would take us
in (although it could happen), but price range Fibonacci extensions to 1485. The actual high as we know however
rather I am just waiting for the came in right on 1474, repeating the major price
A final example I would like to share with you to
market to present a good buy range of 807 to the exact point.
demonstrate how price can move in both major
opportunity which will allow many and minor moves again uses the S&P500 index.
people to take a long term buy The series of smaller price ranges starts by using
and hold position and ride things the same 4 Oc tober 2011 low and the 1474 top
higher into 2013. we just described earlier which ended on a major
repeating price range of 807 points.
In other words, I am not a buyer at
these levels (at 1474), but I think In the following chart, I have highlighted the
people will be rewarded if they equal price movements which produced ranges
have the patience to wait for a pull between 107 and 110 110 points. Separately,
back... The market has made some you will see that I have also highlighted three
larger ranges of 218 points, 220 points and 208
strong gains, and this further
points. Just in the case the significance of these
supports the case that we could
numbers is lost to anyone, 50% of 220 equals
be ready for another bull run.”
110.
11 0. So the smaller price ranges and the larger
price ranges are geometrically connected within
the same bull market cycle.
 1500 14 SEP 2012
208 pts

220 pts

1400 108 pts

1300
218pts
108pts

110pts

1200 107pts

1100

4 OCT 2011

1000
Jun 11 A ug 11 O ct 1 1 Dec 11 Feb 12 Apr 12 Ju n 12 A ug 12 Oct 12 Dec 12

Repeating Price – S&P 500 Example two Illustration 6.06

Repeating ranges in percentage terms S&P500 repeats in price range
It would be remiss of me to not to mention that percentage
repeats in price can occur not only in terms of Notwithstanding the above, to keep things
the number of points moved up or down, but also consistent, the example below illustrates how
by the percentage change in price off a high or a repeating percentage ranges have occurred in
low. I have found that repeats in terms of points the S&P500 market. The following chart reflects
(or ticks) are more common in stocks, stock the price movements in the bear market from
indices and commodities, so I tend not to focus the March 2000 tech-bubble top to the following
on repeating percentages when conducting my October 2002 low. I have identified three
analysis on those markets. significant counter-trend rallies in this analysis.

One observation that both Bob and I have found The first rally culminated in a move of 235 points,
however over the years, is that some markets which was repeated in price by the second
tend to favour repeating ranges in percentage counter rally of 232 points.
points. The third range up
terms more so than they do in points. A prime however is repeated in terms of percentages,
example of this is the Australian to US dollar with an almost exact counter-trend rally between
foreign exchange market, where I have seldom the second and third moves of 24.6% and 24.4%,
seen repeating price moves when measured respectively.
in points.
Relating this analysis back to our earlier
discussion on overbalancing price, once we saw
the market rallying off the October 2002 low by
more than 24.6%, it was a sign that the trend
had changed and the bear market was over.
1600 MAR 2000

1500

21.7% or
1400
235 pts

1300
24.6% or
232 pts

1200

1100
24.4% or
189 pts
1000

900

800

OCT 2002
700

600
Nov-99 A p r -0 0 Sep-00 Feb-01 J u l -0 1 D ec-01 M a y -0 2 O c t -0 2

Repeating Price (Percentages)

(Percentages) – S&P 500 Illustration 6.07
Chapter Seven – how to determine the strength of a move

In chapter six when we discussed how to use Boxing a price move and the use
price retracements in our analysis, we discussed of pitch lines
the concept of using the 50% level as a balancing
point to determine the underlying strength behind
One of the techniques which I rely on quite Important note:
frequently in my analysis is to compare the
the market and whether one could expect a
current move in the direction of the market to the
resumption of the trend to continue.
one which just preceded it. To do this, I simply
In the previous chapter, we discussed how the create a box over the most recently completed
use of Fibonacci price extensions in your analysis move, and duplicate it onto the start of the next Knowing whether a move is going
could allow you to not only project future market move so that I can watch it unfold. be larger or smaller than the
tops and bottom, but more importantly to use one before it can certainly add
In the following example, I am using the first
those levels as an area to take out profits or some value to your trading and
major section of the market that was completed
hedge your position. investment decisions.
off the October 2002 low of 769 (marked as
In this chapter, I will share with you the simple point A) which ran to the March 2004 top of 1163
tools I have adapted to determine whether a (marked as point B). The actual move between
repeat of a previous r ange is likely or unlikely. the high and the low was 394 points in 512 days.
This allows you to create a box over this price
movement with a diagonal line across.

To measure the next section of the market, we

simply duplicate the original box using the next
significant low which occurred in August 2004 at
1061 (which is our starting point, marked as point
C). In other words, we simply create another box
that measures 512 days across and 394 points up
in price off our new starting base.
1500
394 pts

1400 Pitch Line

1300

END
1200
394 pts 5 MAR 20 04 B

1100 “fall away”

C 512 days
1000
13 AUG 2004
START
NEW BOX
900

800

10 OCT 2 002
START A 512 days
700
Jun -02 No v - 0 2 Apr-03 Sep-03 Feb-04 Jul- 04 Dec-04 May-05 Oc t - 0 5

Determining the strength of a move –S&P 500 Example one Illustration 7.01
When constructing the new box as illustrated in When I see a fall away beginning to occur, it is
the previous example, I also measure the diagonal an early warning sign that the 100% Fibonacci
line across within the box. This is represented by extension level is not likely to be achieved, and a
the thick dark blue lines. This is what I refer to as reason to revise your trading strategy and profit Important note:
the “pitch line”.
line”. The pitch line is very useful, as targets.
it tells you the velocity in which the first section
of the market ran (in this case it ran at 0.77 points The same fall away pattern occurred again in the A “fall away” move like the one in
per day = 394 pts / 512 days). I will nearly always S&P 500 in 2010. Whilst the following chart looks the example earlier, occurs when
compare what the next move is doing against the very similar to the one preceding it, I can assure a move is running at or above
same pitch line in the new box. you that they represent two completely different
the original pitch line early on
periods of time in the market.
in the box, but then trades for
If the market is trading at or above the pitch line
a number of consecutive days
in the next box, it is indicating that it has enough
momentum behind it to repeat the price range
below the pitch line, before losing
of the original move and within the same original momentum altogether and fading
time frame (in this case 512 days). If the market below it.
is having difficulty trending consistently above
the pitch line (as it was in the previous example),
it suggests that a repeat in the previous range of
394 points is unlikely to be achieved within the
512 day time from off the p oint C low.

I also like to pay close attention to identify any

“fall away” moves when conducting my box
analysis.
1600
553 pts

1500
Pitch Line

1400

1300 END
26 APR 2010 TOP = 1220
553 pts
1200
“fall away”

1100

416 days

1000
1 JUL 2010 LOW = 1011
START
900 NEW BOX

800

416 days
700

START 6 MAR 2009 LOW = 667

600
Jan-09 Jun- 09 Nov-09 Apr -10 S ep-10 Feb-11 Jul -11 Dec-11

Determining
Determining the strength of a move –S&P 500 Example two Illustration 7.02
The Barillaro Angle 1. Firstly, if a market
market is consistently trending The following example uses sections of the
One of my own adaptations of market boxes is at or above the Barillaro Angle, it is market which occurred during the bull market
to use them to determine overbought or oversold suggesting that it will ultimately complete between October 2002 and October 2007. It
situations. In the examples above, I referred to more than 100% of the previous range uses the 13 August 2004 low to the 8 May 2006
the Pitch Line as the diagonal line between the top as the reference point to create the box, and
in price within the original time frame
start and end of the box. In the case of the first then duplicates it from the 14 June 2006 low.
(in a number of cases, much sooner)
example, the Pitch Line running from the October You will see that the market spent a considerable
2002 low ran at 0.77 points per day. 2. Secondly, I often find that the Barillaro amount of time trading above the Barillaro Angle
Angle will be a useful angle to call a early on in the movement, suggesting that it
In my experience, I have found that creating a significant top or bottom within the move. was going to achieve more than 100% of the
line to follow twice the angle of the Pitch Line I am therefore always on the lookout for previous range.
(or what Bob began to refer to as the “Barillaro the market making a turning point on
Angle”) has been a very
very useful tool. We have This it most certainly did, achieving that price
this angle in conjunction with one of my within a much shorter period of time than it took
both found that it is a useful tool which can
other indicators. to complete the first reference range. Note also,
allow you on a regular basis to determine the
following things: how the Barillaro Angle also called the significant
top which occurred on 16 July 2007, before a
sharp retracement. This is just one of many
examples, where I have seen the market behave
in this manner.
 BARILLARO ANGLE
1600
forecasted the Jul 2007 TOP

Price above the BARILLARO ANGLE early in the move

indicates move likely to exceed 100% of previous range

1500

1400
END

8 MAY 20 06 TOP = 1327

1327

1300

1200
14 JUN 2006
START
NEW BOX

1100

START 13 AUG 2004 LOW = 1061

1000
Jan- 04 Jun- 04 Nov-04 Ap r - 0 5 Sep- 05 Feb-06 Jul-06 De c - 0 6 May-07 Oc t - 0 7 Mar- 08

The Barillaro Angle Illustration 7.03

The Barillaro Box – Once I have crossed the box, you are left with As the March 2009 was well and truly by then,
My own trend tracking indicator four distinct sections in the box formation. I have a major reference point, it therefore became
labelled these in the following chart to illustrate the low to use in order to re-create the box of
Over the years, both Bob and I have
the point. From there, I then like to draw in my 807.5 points in 1827 days. You can see how the
experimented with various forms of repeating
Barillaro Angle as my future guide to watch out Barillaro Angle again called a significant market
boxes (or squares) over the market. The
for an overbought situation. This should then top which occurred at 1371 – almost to the
objective, was to find something which we felt
create two new zones – one above the Barillaro exact point.
worked consistently but was also simple to apply.
Angle, which I refer to as the “Profit Zone” and
In the end, we found that using a simple ‘crossed The previous chart also shows why it was
one below it, which I refer to as the “Fall Away
box’ in conjunction with the Barillaro Angles, apparent to me in 2011 that the mar ket looked like
Zone”.. This can be seen in the following
Zone”
created a fairly reliable method to measure the it was eventually going to exceed the bull market
chart illustration.
strength of a market and identify zones for taking range of 807.5 points (made in 2002 to 2007)
profit (or identifying overbought situations).
situations). As I will always check the market when it begins and move towards muchmuch higher prices. The fact
neither of us are the creative type, we started trading into the Profit Zone to look for an area to that it had spent almost the entire time trading
referring to these as Barillaro Boxes. hedge a position or lock in some profits on an above the original Pitch Line indicated that it was
existing position. What the Profit Zone is telling going to run more than the 807 point range which
To construct a Barillaro Box, I simply repeat a
you, is that the market is running at more than preceded it.
previous box (or square) in the same manner
twice the speed of its previous move and within
which I described earlier. Once your new box is The power of the Barillaro Box can also be seen
less than half the time period. The Profit Zone
in, I then create a diagonal line running from the by creating one over
over the current market. Using
therefore gives you a ready-made tool which
top left hand side of the box to the bottom right, the March 2009 low and the May 2011 high as
can identify areas to take some quick profits off
which, when drawn in conjunction with the Pitch the reference point, you should go and create a
the table. It also pays to keep close attention
Line, leaves you with a ‘crossed box’.
box’. There is a Barillaro Box using the October 2011
2011 low. As at
once the market crosses over from the Profit
degree of simplicity when using a crossed box, the time of writing (January 2014), the S&P500
Zone into the Fall Away Zone. Once price moves
as the very mid-point of the cross gives you the has incredibly spent most of its current move
into the Fall Away Zone, you should stay on guard
exact point where both time and price in the Box trading right along the Barillaro Angle in this
and look out for a counter-trend reaction.
are at their 50% level, or balancing point. In this new box, almost as if the angle was acting as a
case it really is a matter of ‘X marks the spot’. When I analysed the US equity markets in 2011, predictive flight path for the current market.
one of the very first things I did was create a
I think it is a useful habit to get into to always
Barillaro Box to compare the October 2002 and
check where the market is at this 50% point – if
the March 2009 lows.
the market is trading above this point, you can
expect it to go further. If the market is at or about I used the S&P500 October 2002 low as my
this point, it is in balance and the second half of starting point, and boxed the move to the October
the box needs to be watched. If the market is 2007 high. Earlier, we described how this market
trading well below this point, it is indicating that a moved upward to complete a major range of
2000

significant tops and bottoms forecast by the BARILLARO BOX

1800

OCT 2007
1600
BARILLARO
Pitch Line
ANGLE

1400 2 “PROFIT ZONE”

1200
1 3 “fall away zone”

1000

800

OCT 2002
MAR 2009
600
2 00 2 2 0 03 2004 20 0 5 2 00 6 2 0 07 20 0 8 2 00 9 2 0 10 20 1 1 2 01 2 2 0 13

The Barillaro Angle – S&P E xample Illustration 7.04

Chapter Eight – Time and price angles

Up until now, the previous sections of this How to construct a Time and Price Angle
course have focussed on how to incorporate A Time and Price Angle is simply created by
price  into your market analysis. In this chapter, drawing a line up or down from a major top or
we begin our first introduction to the use of bottom using a defined movement in price for
time in your analysis. We discuss the many each individual time period. For example, a 1x1 1x1
other powerful uses of time in Volume 2 of Time and Price Angle would represent one unit of
this course. price (eg a point, cent or tick) for one unit of time.
A series of angles can be created by varying the
One of the tools which Gann is most famous price and/or time movement. A 2x1 angle for
for is the discovery of his “Gann Angles” or example would represent two units of price for
what many refer to as “Gann Fans”.
Fans”. I prefer to each unit in time. Likewise, a 1x21x2 angle would
describe this tool as Time and Price Angles, as represent one unit in price for two units in time.
that is exactly what they are.
Generally, I use the following price unit ratios
Gann had discovered that the use of fixed angles for different markets when constructing my
could be projected into the future at a pre-defined
rate. The use of these angles allows you to
identify significant points in the market where Time and Price Angles:
both price and time are in a direct geometric
relationship. However, what is truly powerful Stoc
Stock
k ind
indic
ices
es 1 ful
fulll ind
index
ex po
poin
intt = 1 uni
unitt
about the discovery of this tool, is that unlike
trend lines or Pitch Lines which require two
Stocks 1 cent = 1 unit
points in the market to calculate the angle, Time
and Price Angles can be calculated to determine
Currencies 1 pip = 1 unit
future points of support and resistance as soon
as a significant top or bottom has been formed.
 2x1
1x1
How to construct Time and Price Angles
112
- Example
In the graphic below, the solid line represents
a 1x1 angle moving 12 units up in p rice over
a period of 12 units in time. Notice how this
creates a horizontal angle which is in exact
proportion across the chart, making it an exact
45 degrees. In his writing, Gann often referred to
108
this angle as the “45 degree angle” – it was just
his way of describing a 1x1 line. The line above
the 45 degree angle represents a 2x1 Time and       E
       C
      I 1x2
Price angle as it has moved up 12 units in price       R
      P
over only 6 units in time. Similarly, the line below
the 45 degree line is a 1x2 angle, moving only 6
units in price over 12 units in time. Each unit in
time can represent either a trading day, a calendar 104
day, a week, a month, an hour or even a minute if
you are planning to do intra-day analysis.

100

1 2 3 4 5 6 7 8 9 10 11 12

TIME

Time & Price angles Illustration 8.01

How to know which high or low to start 2000

the angle from

In my opinion, there is a very basic rule to
1800
determine which point to start your angle from.

The more significant the high or low, the

more significant is the angle that it creates. 1600
Cycle High

I like to use the major cyclical highs and lows

which occur at the start and end of a bull or bear
1400
campaign as my Price and Time Angle starting
points. Next I like to work off any significant tops
which occurred immediately before the final high,
1200
or any significant bottom which occurred before
an extreme low was reached.
reached. Thirdly, I will
always keep an eye out on other significant tops
and bottoms within a major cycle and look to see 1000

if the market is working to a particular

Time & Price angle off those reference points. Significant highs and lows
800
Top before the Cycle High

Bottom before the Cycle Low

Cycle Low
600
D ec-05 Oc t - 0 6 Aug-07 Jun-08 Apr- 09 Feb-10 D e c- 1 0 O ct - 1 1 Aug-12 J un - 1 3

Where to start your Time & Price Angles – S&P500 (2006 to 2013) Illustration 8.02
How to know which type of angle to use 2000

The next important factor to determine is which

angle out of the multiple combinations of time
and price to use. As I like to keep my analysis 1800

simple, I stick predominantly to the 1x1 angles,

which means that each unit in price is in equal 1x 1 calendar da
days 1x1 tr
trading da
days

proportion to time. My general rule is therefore: 1600

Start your analysis using the 1x1 angles –

this represents a 100% geometric relationship 1400
between price and time which is the most
important.
1200
In some situations, the use of a 1x1 angle might
be impractical, particularly if it moves too quickly
for the market you are analysing. This has been
my experience in the S&P500 index, where the 1000
1x2 trading days
use of a 1x1 angle will often move too quickly
for prices to keep
keep up. In these situations, I use 1x2 calendar days

the next most significant angle which is the 1x2 800

as this represents a 50% geometric relationship

between time and price.
600
A further point which you will need to determine D e c- 0 5 O ct - 0 6 Aug-07 J un - 0 8 Apr-09 Feb-10 Dec- 10 Oct-11 Aug-12 Jun-13
is whether to use a calendar day count or a
trading day count. A calendar day count means
that the Time & Price Angle will move one unit
Time and Price Angles – trading day v calendar day angles (S&P500 index) Illustration 8.03
in price for each calendar day, so it will continue
to rise even on weekends. A trading day Time
& Price Angle on the other hand will only move
up in price whenever the market trades on a
particular day, so they will move slower than a
calendar day angle. The following example of of the
most recent market action in the S&P500 index
will show this.
Time & Price Angles – working 1800
examples S&P500 (2006 to 2013)
In an earlier illustration, I provided you with a
series of points which are useful starting points 1600
to run your Time and Price Angle analysis.

The following chart should demonstrate to

1400
you how powerful Time & Price Angles can be
in forecasting future points where prices will
meet support and resistance. I have used both
calendar day angles (represented by the solid 1200
lines) and trading day angles (represented by
the dotted lines).
1000
Notice how in a number of situations, a Time
and Price Angle off one of our starting points Market Turning Point
provided support or resistance to call a future
1x1 Calendar Days
market top or bottom. Additionally, in a number
number 800
1x1 Trading Days
of cases, both the trading day angle and the
calendar day angle produced results. 1x2 Calendar Days
600 1x2 Trading Days

Dec-05 Oct-06 Aug-07 Jun-08 Apr-09 Feb-10 Dec-10 Oct-11 Aug-12 Jun-13

Time & Price Angles – working examples S&P500 (2006 to 2013) Illustration 8.04

Always run your Time and Price Angles off major yearly tops and bottoms and continue to
watch these angles years into the future to provide future support and resistance.
Active angles 2000

An active angle is what I refer to when a Time &

Price angle has worked to produce a significant
top or bottom. Whenever you see an active 1800
angle working, it is worthwhile to keep running
this angle into the future. Often you will find that
a series of turning points will occur at different 1600
points on these active angles. I will rarely look to
use angles outside the 1x1, 1x2
1x2 or 2 x1 in a market
unless I have identified an active angle working
1400
in some other geometric relationship
(eg 1x4 or 4x1).

1200

Active angles in the S&P500 market

between 2009 and 2013 – example
1000
The following chart is a 1x1 trading day angle OCT 2011 LOW
illustration, highlighting how intermediate turning
points within a market can be used to run Time
& Price Angles that will determine future support 800

and resistance and other minor tops and bottoms.

I have simply chosen this time frame as it is 1x1 trading days
MAR 2009 LOW
the most recent and reflects the movement in 600
the market up to the time of writing. There are D e c- 0 5 Oc t - 0 6 Aug- 07 Jun -08 A pr-09 Feb- 10 Dec-10 Oct-11 Au g-12 Jun-13
countless examples from a number of different
markets which I could have used to demonstrate
the power of this tool. Notice that there are a Active angles in the S&P50 0 market between 2009 and 2013 – example Illustrati on 8.05
number of active angles within the bull market run
off the March 2009 low and the next major low
within that cycle in October 2011.
2011. These active
angles should therefore continue to be watched
into the future.
Master Square Calculators These Calculators would have saved Gann an You can use any range of price or period of time
enormous amount of time back in his day, and it to construct the Square calculator.
calculator. Gann often
Before completing this section on Time and Price
is one of the reasons why I believe he discussed referred to the Master Squares of 52, 90 and 144
Angles, I want to provide a brief overview on the
them so often - simply because he would have – as these can be applied to any market.
market. Equally
Gann Master Square Calculators. I am aware
used them so frequently. however, you can create a Master Square using
that Gann used these Master Squares in his own
the price of a major high or low for a particular
analysis and that a number of Gann traders use The second point I wish to make is this. Each market. For example, the March 2009 low of
them as a primary tool in their trading decisions. of the Master Calculators are constructed to 667 could be used to create a Master Square
Both Bob and I have spent considerable amounts geometric proportions of time and price reflecting measuring 667 days across and 667 points up.
of time studying these Master Squares. We have the way Gann looked at the markets and the
seen them work in the markets therefore neither many tools he used.
of us would deny they are a valid tool. Personally
however, neither Bob nor I explicitly use these The Master Calculators actually analyse a market
Master Squares when constructing a forecast. using Gann Angles, divisionsof time and price,
repeating time frames, repeating price ranges,
There are a few reasons why I make that and even Gann’s fourth dimension – all in the
statement and why I have qualified it with the one box! Although Bob and I won’t actually use
word ‘explicitly’. a Master Square overlay in our analysis, we are
in fact using many of the tools embedded within
Firstly, there is no denying that Gann did in fact them to perform our forecasting.
use these Master Squares extensively in his
analysis. This is one of the primary reasons I To illustrate the point, the following chart is the
believe they get so much ‘air time’ in many of the Master Square of 52 which Gann commonly used
current books written about Gann theory. At this on his weekly
weekly charts. This Square allowed Gann
point, I think it is worthwhile remembering that to divide up the year into the key geometrical
when Gann operated in the markets, he did so proportions that he thought were the most
without the aid of computers and this was a key important – in particularly divisions by halves and
reason why he was so meticulous about keeping quarters. Each week represented
represented one unit of
his charts to the same time and price scale. time in the Square of 52 – and naturally, as there
are 52 weeks in one year, this Square was how
Gann created templates of these Master Squares Gann divided up the year.
on transparent pieces of paper so that he could
apply them over all of his charts. By drawing A Master Square is simply constructed by moving
these Master Squares on a transparent sheet, up one unit of price and across one unit in time
Gann had a ready-made tool that he could simply and connecting the dots to create a Square.
re-use over and over in his analysis – hence, why
How to create a Master Square        2
       5
       1

The following diagram highlights the construction

       5

       0
       5

of a Square of 52 and how it moves up 52 units

       9
       4

       8
       4

in price (on the y-axis) and 52 units across in        7

       4

       6
       4

time (on the x-axis). Gann then created diagonal        5

       4

       4
       4

lines to create the Calculator within by linking up        3

       4

       2

key points within the Square that had significant

       4

       1
       4

       0

geometric proportion. Essentially, these were        4

       9
3        3

done by drawing horizontal lines linking:  4        8

       3

       7
       3

       6
       3

i. The zero point (or

(or start) of the square
       5
       3

       4
       3

to the end points in the Square – these        3

       3

       2
       3

create the thick horizontal red lines        1

       3

       0
       3

(or “cross”) within the Square        9

       2

       8
       2

       7
1        2

 2        6

ii. Each half-way point to its next half        2

       5
       2

way point – these are seen by the thick        4

       2

       3
       2

horizontal blue lines in Calculator,        2

       2

       1
       2

creating a “square” within the Square        0

       2

       9
       1

(or divisions of price and time in        8

       1

       7
       1

quarters); and        6

       1

       5
       1

       4
1        1

 4
iii. Each half-way point to an end point in
       3
       1

       2
       1

the Square – these are seen by the black        1

       1

       0
       1

horizontal lines, creating “triangles”        9

       8

within the Square (or divisions in thirds).        7

       6

       5

       4

       3

       2

       1

13 14 2 5  26 27 3 8  39 40

0 52
1 2 3 4 5 6 7 8 9 10 11 12   15
15 16 17 18 19 20 21 22 23 24   28
28 29 30 31 32 33 34 35 36 37   41
41 42 43 44 45 46 47 48 49 50 51

1 1 3
 4  2  4

The Master Square of 52. Illustrati on 8.06

How to use the Master Squares
Gann would normally overlay these Master
Squares by placing the “zero” point over a major
Important note:
top or bottom. In the case of a low, this would
be by placing the bottom left hand corner of the
Square over the low price, and in the case of a
top, by placing the top left hand corner over the A full and proper appreciation
price of a top. The Square would then give you of all of the Gann tools will help
the key Gann Time & Price Angles and divisions you enormously if you wish to
of time and price to look out for.
for. Once you have incorporate Master Squares in
come to the end of the Square (for example, your analysis.
52 weeks across), you simply duplicate a new
square starting from the point where it ends, and Once you have completed the
repeating this into the future. remaining chapters of this course,
you may then wish to revisit this
The Square of 52 was made for a weekly chart,
section on Master Squares – I am
and this is where it works best. The Square of
sure by then you will be able to
90 is good to use for forecasting longer term
cycles via monthly chart, and the Square of 144
look at these Master Calculators
for shorter time periods (for example, on a in a much different light!
daily chart).
 TRADING TOOL BOX TWO HOW TO FORECAST PRICE

1. Price retracements 2. Using a previous high or a 3. Price projections

low to forecast price

• Always calculate your

your price • The price of a previous major • Price extensions are calculated by
retracements using the major, market top and bottom will often using a previous price range as a
minor and intermediate price calculate support and resistance reference point and repeating that
ranges levels for future tops and bottoms. price range from the following
market top or bottom...
– Major price ranges – use the • Use exact multiples of a previous
Start. End. Extend.
cyclical or yearly highs and lows low to calculate future prices –
(from a weekly chart) 100%, 200%, 300% and so on. • The 100% Fibonaccci extension
(or a repeat of the price range) is
– Minor price ranges – use the • Calculate 50% of the price of a
the most important.
minor tops and bottoms that previous major top to determine
occur within an overall section of levels of support for market • Often watch for a change in trend
the market (from a daily chart) bottoms on the way down. to take place once 100% of the
previous range has been reached.
• Simplify your analysis. Use the
This is particularly important if it
38.2%, 50.0% and 61.8% as the
coincides with a major price
three key levels to determine your
retracement level.
price retracement points.
Keep the analysis simple. Use the major divisions of price – 50% and 100%
100% are the most
important. Fewer tools will simplify your analysis and give you a higher probability
probability of
determining a change in trend when you see them working together.

4. Strength
Strength ind icators 5. The
The Baril laro Box  6. Time & Pr ice angles

• Always watch the 50.0% price • Use the Barillaro Box and • Begin your
your Time & Price angles
retracement level as a guide of establish the Barillaro Angle. off significant market tops and
strength in the market. If a market is consistently trending bottoms – the extreme high and
above the Barillaro Angle, it is low are the best places to start.
• Retracement s that are less than
likely to exceed 100% of the
50.0% indicate the trend is strong. • The more significant the top or
previous range and within a
bottom, the more significant is the
• Retracement s of more than shorter time frame.
Time & Price angle.
61.8% suggest the main trend
• Keep an eye on the Barillaro
is weakening. • Start your analysis using 1x1
Angle in a fast moving market.
angles only.
only. These represent
• Use your
your Pitch Lines to determine It will sometimes create an
a 100% geometric relationship
the likelihood of a market angle for significant market tops
between time and price which is
exceeding 100% of the previous or bottoms to form.
the most important
range.
• Identify your Profit Zone and Fall
 • Always watch your Active Angles
• Markets trading above the Pitch Away Zones. The Profit Zone is
as they will often call other future
Line are more likely to exceed a good place to take early profits
tops and bottoms
100% of the previous moves than or hedge your position.
those which don’t.
S E C T I O N T H R EE The best rules for trading

In this section of the course I will share with

In my view, making fewer you some mechanical points of entry and exit
but longer term trades to make your trading decisions more clinical, as
well as five simple rules for trade psychology
is the easiest and most and risk management.
profitable way to trade the
Up until now, we have focussed on how to put
markets. – It also requires together a very accurate forecast using price
 far less work! techniques. This should, by now, have armed
you with the tools to identify “where” is the
best price to buy or sell. Putting together a
price forecast however, is only one part of the
equation. How you go about trading it is a
completely different story!

In my view, making fewer but longer term trades

is the easiest and the most profitable way to
trade the markets. It also requires far less
work. Trading the markets however
however is a skill
that requires you to master the techniques of
trade entry and exit, as well as the psychology
associated with each of those steps and
everything else that happens in between.
Chapter Nine – Trading psychology and risk management

I am confident, that with practice, the techniques Five simple rules for risk management In addition, each individual person has their own
I have shown you in this course can make you a temperament, their own risk appetite and their
Most of the trading books and courses which I
much better trader. But make no mistake,
mistake, there own differing desires for profit. And whilst I
have read (the good ones at least, that is) include
is no single system or no single trader who has am more than happy to share my own personal
a section on trading psychology and how human
a fool proof system for trading. The reason for experiences with anyone who asks, just because
emotion has such a large impact on actual trading
this is that markets are essentially made up by that was my experience, it does not necessarily
decisions. Make no mistake, this is certainly
an aggregate of human emotion. When people mean it will be the same as yours. At the end of
true. Putting your own money at risk will affect
are feeling good about things, the markets will the day, the objective in trading should be getting
your trading decisions in a way that you simply
generally trade up. When things are not looking yourself profitable.
cannot simulate through paper trading a market.
so optimistic, human emotion will tend to see
I have found however, that to properly learn To do this, you need to make sure you have more
markets trade down.
how to control your emotions in your trading winning trades than losers, and that your winners
Human emotion however is the one element and investment decision-making, you need to are bigger than your losing ones. Having said
that not even the most sophisticated computer experience the process first of making an actual all of that, there are a few simple rules that you
algorithms or ‘black box’ market systems have trade. You will never
never fully prepare yourself for the should know which I do think are absolutely
been able to predict. This is particularly so near rollercoaster ride of emotions that go with trading necessary to control your trade decisions and
market tops and bottoms where human emotion no matter how many trading psychology books keep your investment capital intact.
is at its greatest, whether it be the irrational you read.
exuberance at a market top or the fear and panic
Please do not interpret that as me dismissing
that often ensues at a market low.
the need to have the right trading psychology
Whilst winning trades will provide you with a to beat the markets. It is absolutely necessary.
huge adrenalin rush, it is important too to realise In my view however, the subject matter of
that losing trades are also inevitable. And it is psychology is something best left The greatest lesson
the losing trades that will test your mettle. If you to be explained by an expert in psychology.  you will ever get about
about
do however find yourself on the end of a losing
streak, then my advice would be to come back
trading psychology will
Don’t worry, there are plenty of books out
and visit this section of the course first before there on the subject. come from your own
any of the others.
others. I can almost guarantee that experience in trading
the five rules I am about to describe below will
take on a whole, new meaning.
the market.
Rule 1: Rule 3:
Never enter a trade without placing a Don’t be greedy when it is time to
STOP LOSS order take profits
Entering a trade without a stop loss is the Identify where you want to take your profits at
cardinal sin in trading. ALWAYS identify your the beginning of the trade and do not change
stop loss position before you enter a trade and your mind unless the market is giving you a very
stick to that price level religiously.
religiously. Your stop loss good reason to do so. The trick here is to avoid
is not only there to quarantine your risk, but it getting emotionally attached to a winning trade.
represents the point where the market is telling Not wanting a good feeling to end when you
you that you are
are wrong. As the saying goes, should in fact be taking your money and banking
‘don’t leave home without it’! it is a common trap. Avoid the expectation that
you need to get every last cent out of a move
– even though your forecasting will at times pin
point turning points to the exact price – as trying
Rule 2:
to squeeze out the last cent will often be the
Hope is for dopes most costly.
If you are uncertain about a trade and begin to
“hope” that you are right, reassess your position Rule 4:
as it is probably a good indicator that it is time Minimise your risk wherever possible
to get out. This is particularly so if you are still The market will often give you an opportunity to
holding on to a position even though your Stop take some profit off the table and reduce your
Loss indicator has been reached. exposure. One of the lessons
lessons Bob learned in
his trading was to take profits at points where
it either covered his position or significantly
minimised his risk. Not only will this help you
sleep better at night, but it will allow you to
execute your trade decisions in a much more
clinical manner and with less emotion. It also
has the added benefit of significantly improving
your strike rate between your winning trades and
losing ones.
For example, assume that you are looking to The effect of this strategy on your trading For example, if you made 5 winning trades where
trade a recent low in your favourite stock after it decisions can be enormous, as it can completely the average profit was $2.10 per share (or $10.50
reached your price target of $20.00. Your price change your trading psychology. By booking in total profits) and you made 5 losing trades
forecast is now suggesting that the stock may profits on half your position, you are minimising where the average loss was $0.50 per share
make a move up to $22.50 per share. Let’s then your potential for loss, and putting yourself in (or $2.50 in total losses), on an overall basis, from
say that you entered your trade by purchasing a position to hold on to your trade for further your 10 trades you will have made an $8.00 gain.
2000 shares of stock at $20.40 after your signals upside with significantly reduced risk. In the
confirmed that a potential low was in place. Your example above, if the stock ultimately does move Now that might sound to you like it is absurdly
identified stop loss should now be underneath higher to hit your price target of $22.50, it would simple, but that’s because it actually is!
that low of $20.00 – for this example, let’s call it mean that you would stand to make a $2.10 per
$19.90. That gives your trade a risk of $0.50 per share profit on the remaining 1000 shares long
share if you are wrong, or a total risk exposure on position you hold (or $2100 gain) in addition to
your 2000 shares of $1000. (Note, we will cover the $500 profit you booked earlier. Not only have
trade entry and exit points, as well as stop loss you made a healthy profit, but you have done so
positions in the next chapter). by minimising your risk.

If the stock then makes a move to $20.90, you The other significant advantage of this type of
would be sitting on a paper profit of 50 cents per strategy is that it can significantly reduce your
share, or $1000. By using this price level as an number of losing trades, thereby improving your
opportunity to take profits on half your position overall win to loss ratio. In the next chapter, we
(ie by selling 1000 shares), you can book the 50 will discuss how to identify price entry and exit
cent gain (or a $500 profit) and keep a remaining levels that allow you to identify trades where
1000 shares long position in the stock. At this your potential for profits is greater than your
point, even if the stock trades back down and potential risk. The benefit of this approach is
triggers your original stop loss position at $19.90 that by taking trades where your average profits
(or creating a $500 loss), you have put yourself are greater than your average losses, even if you
in a position where overall, you will not lose on have a win to loss ratio of 50:50, on an overall
the trade (putting aside for the moment any basis you will still be profitable.
brokerage or trade commissions).
Sounds simple, right!?
Rule 5: Only once you have built up some considerable
profits, would I suggest that you start thinking
Keep your trade sizes consistent
about increasing your contract sizes. For
Another one of the easiest mistakes to make is example, if you are starting with a trading Important note:
to increase the amount of capital you are putting account of $10,000 and are taking trade sizes of
at risk on a single trade. Whilst this might sound 10 contracts for each trade, maintain those trade
obvious, breaking this rule is actually easy to do, sizes until your trading account hits a milestone
Keep your trade sizes consistent
particularly when you have all of your Trading of (say) $20,000. At that point, you could look
to increase your trade sizes to 15 or 20 contracts and avoid the temptation from
Tools confirming your market top or bottom
and you have convinced yourself that there is as this would be proportionate to your account over trading. Once you have built
no other possible outcome other than for your balance. The worst thing to do is to take a 20 up considerable profits, then start
forecast to be right! contract position if your account has gone from thinking about increasing the size
$10,000 to $5,000 as that is just amplifying of your trades.
There is no worse feeling than to have made your risk.
four or five profits in a row, and then doubling or
tripling up your bets only to have all those profits
wiped out by the next
next trade. Equally, you will
need to avoid this temptation if you have been
on a bit of a losing streak and you are looking to
make up all those previous losses on the next
trade. A word of advice – Don’t try it.

Taking on trade positions that are too large and

that will end up causing you to be hurting badly
(emotionally) if you take a loss is something that
you should avoid at all costs. Trading is a tough
enough game emotionally and psychologically
as it is. There is no need to give yourself added
pressure on a single trade by over committing
yourself to one particular trade or position.
My advice – AVOID THE TEMPTATION
TEMPTATION FROM
OVERTRADING.
Chapter Ten – The best trading entry and exit points

Earlier I mentioned, that in my view, making Rules for trading with the trend
fewer but longer term trades is the easiest and The following levels should be used as a guide to
most profitable way to trade the markets. I determine your points of exit and entry when you
simply cannot emphasise the relevance of that are taking trades that are in the same direction
statement, and this is certainly what Gann meant as the main trend. The percentage levels below
when he described trading the “long swings” as refer to the expected price range for each section
the most profitable way to trade. of the market you are trying to trade using our
Fibonacci Extensions discussed in an earlier
In an earlier section of this course, we
chapter. The same principles can be applied to
discussed how to identify the definable waves
make shorter term trades over a smaller time
or sections of a market that all major bull or
frame, including intra-day trades.
bear campaigns move to. Whilst it may have
appeared unassuming at the time, that chapter of
the book is actually one of the most important.
When trading, your primary objective should
be to ensure you are trading with the trend and
capturing as much of the move in each of those
sections as possible. Put simply, if the market is
in a major bull campaign, you should be looking
for one or two buying opportunities to trade each
section using your Trading Tools – this is where
you will make the most profit with fewer trades
and the least amount of work.

The Trading Tools however are also useful

indicators to identify counter-trend trades within
a major bull or bear market. As highlighted in
earlier chapters, you can also use your Trading
Tools to determine points in price and time where
you can either hedge your longer term position
with the trend, or for the more aggressive trader,
to actually take an against the trend position.
In this chapter, we describe how to do both.
Rule 1: When to enter Rule 2: Reduce your position Rule 3: Risk management
• 0% to 38.2% Is the place where you (the ‘break-even’ rule) • At 61.8% consider moving your stops
should look to initially enter your trade • At ‘break-even’
‘break-even’ consider reducing your higher/lower to 38.2%
• Consider placing your stops 2.0% position to minimise risk
above / below
below the market top/bottom you Once the trade has crossed and reached the
are trading. 61.8% mark, you typically do not like to see it
Traders who have a lower risk appetite may look
to use this area as a place to reduce their position moving back below the first of our key Fibonacci
or cover their trade to avoid a loss. For example, levels. By moving your stops to to 38.2% (which
Trades entered within this point will give you a is the place at which you should have entered
if the range you are seeking to trade is 100
profit to risk ratio of approximately 2 to 1.
1. For your trade), you should no longer be in a losing
points, and you entered at the 23% point in the
example, if we are looking to trade a price range position. Not only will this help improve your
range, then you would have a total risk position of
of 100 points, then we ideally want to have winning average, but it should help you mentally
25 points (including 2 points for your stop).
entered before the 38.2 point mark is reached. If to stick with the trend and ride the winning
the price move hits our profit target of 100, then Once the market reaches the 50% level, by
trades.
we have made a 61.8 point profit on a risk of only reducing half your position, you will have taken
38.2. In an ideal situation, trades entered into profit of 25 points on half your trade, whilst
before the 23.6% Fibonacci level provide the best maintaining a risk exposure of 25 points on the
set-ups as they come with a much lower level of remaining position. At this point, your overall
overall
risk and a higher profit to risk ratio of more than position is at a ‘break-even’. For those who
3 to 1. have a lower tolerance for risk, the break-even
point will mean you should end up having more
winning trades. The flip side to this is that you
may see yourself taking profit off the table too
early and missing out on some further gains.
Using the break-even rule therefore will depend
on each individual trader and their own desired
level of risk appetite.
Rule 4: Profit taking levels Rule 5: Additional profit taking levels
• At 100% consider taking profits or hedge • At 123.6%, 138.2%, 150.0% and 161.8%
your position consider these as areas for taking profits,
if the indicators are telling you a move of
more than 100% is likely
The 100% level marks our trade objective, and
is where we should look to thank the market
and take profits off the table. The exception to Markets will often give you clear signals when a
this rule is if your indicators are telling you that a new move is more likely to exceed the previous
move beyond 100% is likely (see rule five). move in terms of price. In situations like this
If this is the case, you can then use the 100% when a market is trending strongly, you will leave
level as a place to hedge your position – for some considerable upside profit on the table
example through a put option strategy or writing by exiting completely at the 100% level. You
some covered calls if you are long the market. should refer to the Barillaro Box and the Price
Retracement trading tools as your gauges of
strength to determine if such a move is likely.
In these situations you can use a trailing stop
strategy under each Fibonacci level to lock in
profits. This will allow to continue riding the
market for further gains until your trailing stop
is hit.
2000
WITH THE TREND TRADE (LONG POSITION)

Risk (38.2%) = 975 Minus 667 (or 208pts)

Reward (100%) = 1474
1474 minus 975 (or 499pts)
Reward to risk ratio: 2.4x
1750

OCT 2007
TOP = 1576

1500

100% = 1474
(PROFIT TARGET)
PROFIT RANGE

1250

61.8% = 1166
(MOVE STOPS)

1000
38.2% = 975
(ENTER TRADE BY HERE)

750
TRADE ENTRY RANGE
OCT 2002 MAR 2009
0.0% = 667
LOW = 768 LOW
(INITIAL STOP LOSS)

500
2 00 1 2 00 2 2 00 3 2 0 04 2 00 5 2 00 6 2 0 07 2 0 08 2 00 9 2 0 10 2 0 11 2012 2 0 13

The best trade and exit points (trading with the trend) Illustration 10.01
Rules for trading against the trend Rule 2: Covering risk A final word
(counter-trend trades) • At ‘break-even’
‘break-even’ reduce your position
The trade entry and exit techniques described
and use the ‘break-even’ rule where above are designed to make your trade decisions
A more cautious approach should be adopted
when attempting to take a trade against the possible. more clinical and to develop areas that allow you
main direction of the trend – after all, in these an opportunity to ensure that your gains from
The half-way point of any price retracement is
situations you really are attempting to swim winning trades are greater than the losses on
the most important area where price support
against the tide. A counter-trend trade occurs your losing ones.
or resistance will occur. This level should
when you are looking to trade short off a top
therefore be used as an area of caution and This will mean that even if you have a 50:50
in the middle of a bull market or go long off a
monitored closely to either cover risk or reduce it. win ratio, you should still end up being a
bottom in a bear run. The latter in particular can
profitable trader!
be a hair-raising experience – particularly in a fast
moving bear market, as you don’t want to be
caught out trying to catch the falling knife. Rule 3: Risk management
I therefore adopt a slightly different approach • At 61.8% retracement or 100% of the
when determining rules to follow for against the previous counter trend move
trend exit and entry points than those used for
‘with the trend’ trades. The price levels below • Aim to take profits at these levels where
refer to moves using Fibonacci Retracement possible.
levels of the previous ‘with the trend’ range.
When taking a counter-trend trade, I will often
look at the 61.8% price retracement level as an
area to take profit or exit the trade. Equally, I will
Rule 1: When to enter use 100% of the previous counter-trend move as
• 0% to 23.6% is where you you should look an area to set exit targets.

to initially enter your trade For example, if I am trading short in a bull market,
and the previous price reaction down was 50
• You can place your stops 2.0% above/below points, I will also look to see a repeat of that
the market top/bottom you are trading. move off the current top I am trying to trade as a
potential exit level. I will pay particular attention
Notice how the entry point for a counter-trend to this level when it also converges with either a
trade is tighter than that of a with the trend trade. 50% or 61.8% retracement.
This is purely designed to minimise your risk from
the outset.
1550
COUNTER-TREND TRADE (SHORT POSITION)

Risk (23.6%) =1474 Minus 1425 (or 49pts)

1500 Reward (61.8%) = 1425 Minus 1346 (or 79pts) END = 1474

0.0%
(INITIAL STOPS)
1450 TRADE ENTRY RANGE
23.6% = 1425
PROFIT RANGE (TRADE ENTRY)
1400

50.0% = 1371

1350
61.8% =1346
(PROFIT TARGET)

1300

1250
START = 1267

1200

1150

TRADE ENTRY RANGE

1100

1050
A pr -11 Jun-11 Aug-11 Oct - 1 1 Dec-11 Feb-12 Apr-12 Jun- 12 A ug - 1 2 O ct - 1 2 D ec-12

The best trade entry and exit points (counter-trend trading) Illustration 10.02
CONCLUSION Congratulations, you’ve made it!

I am genuinely thrilled to have shared this

If you’ve made it this far, you journey with you and I hope that you have had
have now been privy to the a bit of fun along the way.

most consistent and reliable Whilst the Trading with the Time Factor course
price forecasting techniques comes in two parts, each part is designed to
standalone from the other. If volume one of this
that I have discovered
course has been of interest, then I can assure
working in financial markets. you that volume two will absolutely blow your
mind. Whilst our focus up until
until now has been
about price, volume two continues our journey
into time, and teaches you the techniques that
will help you identify “when”
is the best place to buy and sell the markets.

In volume two, I reveal some of the most

practical, but powerful techniques for
forecasting the exact date and time of future
market tops and bottoms. I hope you decide to
continue on the journey
journey with me. It will, without
doubt, change the way you look at financial
markets.

Until next time.