Just like most traders, I started out trading Stocks, Futures and Commodities by way of the news, Government reports, crop reports, the occasional tip, and a gut feel. Needless to say, these were not very effective.
But then, during the late 1980′s, I became more aware of price charts and a few chart indicators.
The chart indicators got me excited, as I thought at the time that I had stumbled upon a way to know in advance what the market was going to do next. The Stochastic oscillator was really intriguing, and it almost appeared to predict when the market would move up or down.
But again, like most have discovered, these indicators don’t really predict. How can they, when they are simply based on averages, or volume, or a slew of other historical data backward monitoring divide by two forward projecting algorithm that has no more connection to the future than five dice in a shaker cup!
Now don’t get me wrong. Chart indicators are pretty useful and I continue to use them today (now 3 decades later). However, market forecasting is NOT what these indicators do best. They do, however, give us a lot of useful information that has its place even among those of us who rely mostly on market forecasting methods.
That’s right. I said “market forecasting methods”.
By the start of the 1990′s, I came upon the knowledge of applying Fibonacci ratios to market price action. The idea seemed a bit strange to me back then, until I decided to give it a try on my favorite Pork Bellies market. For the next 6 weeks, I would virtually catch every bottom or top within just a few ticks, turning a small amount of money into a larger small amount of money (I was using borrowed funds). Eureka!
But it soon became my undoing. Because of my initial long stretch of catching every new market move, often within just a couple of ticks of the very bottom or top, I started to think I could do no wrong. Wrong! I made a trade in the Live Cattle futures that I was so sure had to turn, but didn’t. I held onto the losing trade because it was impossible for me to be wrong. It wasn’t until I was wiped out that I had to admit that I’m human after all. My golden goose had become my golden ticket to bust-ville.
A lesson was learned back then that set me on a course to greater enlightenment. Market forecasting was in fact possible. However, market forecasting required incorporating discipline and confirmation, and that you can never be 100% accurate 100% of the time.
It also became quite apparent to me that the path to greater market forecasting would require digging deeper into the reasons why Fibonacci can be effective at times, and at other times not so much. This led me to realize that it all revolves around ‘natural laws’, that which Fibonacci is a part.
My search into the realm of natural laws brought me to the teachings of W. D. Gann. With Gann, I came to find value in the calculating of time and price squares (Gann Wheel also known as the Square of Nine), angles, ratios, market geometry, and much more.
Armed with Fibonacci and Gann and all the variations that comes with a deep understanding of these, my research pushed me out beyond the stars. Yes, the effect of the Sun and Moon, and a few of the neighboring planets on our planet Earth. It just made sense!
Now I’m not referring to Astrology. That is simply not my cup of tea. I’m a man of science, not mysticism or divination. What I am referring to is Astronomy, and the gravitational and seasonal effects that come with planetary motion and interactive influences.
So let me simplify this.
As the moon circles the Earth, it has an effect on bodies of water as well as the electromagnetic field of the Earth. We have tide charts as a result of this, and it has been proven humans tend to act differently (as a group) during full moons. The term ‘lunatic’ comes from the latin “Luna”, which is ‘moon’.
While the Earth turns once every 24 hours (giving us days), it revolves around the Sun once every 365 days approximately (a year). Since the Earth is in an elliptical orbit around the Sun, it will move closer or farther away, resulting in what we see as ‘seasons’.
Now think about how these ‘seasons’ affect our markets and you’ll start to see the relationship.
Once I came to see the connection between the Fibonacci, the Gann, the geometric price patterns, the effects of the Moon and Sun, it all came together in what is known as CYCLES!
The 24-hour cycle (day), the 90-day cycle (season), the 365-day cycle (year), the moon cycle, and all kinds of other cycles happening at the same time but at varying degrees with different effects on different markets!
Market price action is affected by human behavior (we are the buyers/sellers), which is affected by supply and demand, which is affected by seasons, which is a cycle, and human behavior can be affected by the moon, which is also a cycle, and on and on.
With all this understanding about what affects the markets, and realizing that much of this can be exposed by way of a price chart and a few different approaches, market forecasting became even more effective than the simple Fibonacci model. That model only looked at the markets in a narrow way, thus effective at times and lacking at other times. True market forecasting requires having a grasp of several different techniques that address different aspects of price behavior.
It is when the avid chart reader goes forth to learn about these influences to price action that the proclamation of “market forecasting really works” becomes a forgone conclusion and part of the daily chart reading ritual.