...are without doubt the fabulous innovators of the past, Fibonacci and W.D.Gann.

These two elemental mathematical theorists have been the backbone of some wonderful trades.  After admittedly many years of study and research, these techniques still work for me some 20 years after my initial venture into stock market trading.

In my journey I have seen quite a few new innovations: foreign exchange or currency trading is probably the most important change I have seen, followed closely by highly leveraged CFD markets. Both of these have major repercussions for trading in today’s world, yet funnily enough they both remain subject to and conditional upon the foundations that Fibonacci and Gann introduced.I have attached a recent example of the XJO chart, the S&P index of the top 200 Australian stocks which I trade via the Futures market.Firstly, let’s introduce Gann into the equation. Gann found that when markets create price movements where time and price are equal, it often produces a reversal in trend or direction.  Today, we use the Gann fan for our reproduction of this technique, and below I have a simple diagram to explain this tool.

On my simple diagram, imagine we have a stock which made a low on a Monday.  This may have been a double bottom or simply a low point in the stock.  I have reproduced a Gann fan from this low counting Time and Price from this Monday low, and here you can see that the next Monday has produced a low that is 5 days across from the starting point (we don’t count the actual starting day of Monday) and the low of the second Monday is 5 cents higher than the starting point.  In other words, the Time (5 days) and the Price (5 cents higher) are equal; a direct relationship exists between Time and Price.  Gann called this a 1 x 1 line equating equal time and equal price.

Now we look at the XJO daily chart and with the aid of Market Analyst 6, I have drawn a Gann fan from the last major low May 20, 2010.  From this May 20 low a red dotted line travels up 1 point per day, halting the decline on June 21.  You can see from the Time Price labels that the distance between the May 20 low and the June 21 low is 273 trading days, and the June 21 low is 276 points higher than the May 20 low.  Whilst this is 3 points out, I would point out that it is only 3 points over 273 days, a minor error we can accept knowing that rarely are markets ever perfect.  This to me is as good as a direct hit so it means that with the inside bar pattern the next day, the market is much more likely to travel higher before it goes any lower.  This would mean the end for me to any short trade I have in place and I would position a long trade with a stop underneath the 1 x 1 line.

(Click to enlarge)

Once in a trade the trader must now remain vigilant to any signal of threat or danger to the position.

Here we introduce the Fibonacci sequence into our calculations.  Fibonacci correctly noted that a distinct mathematical relationship exists in all things.  The stock market which is traded by human beings, of themselves products of Natures harmonic laws, is bound to react to this natural law, and by placing a Fibonacci retracement tool on the chart from the last significant top to the most recent low we see the Fibonacci ratios.  I simply watch for direct or almost exact hits on these lines and then, if the market shows weakness as it does in this case at the 61.8% level, it is a signal that the market is now likely to fall before it goes higher.

When you have seen these types of moves consistently over 20 years of trading, it becomes almost second nature to dedicate a small amount of your trading capital towards a trade, allowing the market to progress.  With your trading plan in mind we then manage the trade according to our plan.

Interestingly at this time the market has fallen to again retest the 1 x 1 line and the last major low. The next campaign will be very interesting as the chart clearly shows that the previous low in May 2010 of 4175 could be the next potential target if the market fails to find support here at 4450 again.

Given the US state of financial affairs with debt ceiling talks faltering, the ongoing European bailouts and default concerns, falling Australian real estate values which are highly leveraged and frighteningly vulnerable, increasingly nervous consumer sentiment and new taxes being introduced into Australia, my suspicions are that the market is more likely to fall before going higher.

Time will tell, but the Fibonacci and Gann signals will be my guiding light and despite my suspicions and impressions I will follow the charts and the signals thereon as this is the only truth I can rely on.

My very best wishes to all,

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