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I was reading through the Number One Trading Plan again on the weekend, and revisiting Section 11 – Price Forecasting, which is one of my favourite sections. This lesson draws on some of the essentials you learn in the Smarter Starter Pack, which you should have well in hand before tackling Price Forecasting.
It amazes me when people tell me they have read the Number One Trading Plan, sometimes even twice, but they haven’t done any work on Price Forecasting. There is plenty of good stuff in here!
I wrote in a recent Platinum Newsletter article about some work I did on the Euro (EC-Spotv in Profitsource) using “The Power of the First Range Out”. David teaches us this technique using a great example on page 149 of the Number One Trading Plan. Another great example of Price Forecasting is the QANTAS example at the end of the chapter. For students who have not done this work, there’s no time like today!
In this article, I’m going to look at the beginning of the Price Forecasting Chapter, where David talks about Bottoms Calling Future Tops. This lesson is straight from Gann, and tells us that a 50% or 100% advance from any bottom is an important level to watch for Resistance.
Looking at the Euro, we have the All Time Low of 0.8245 on October 26th, 2000. A 100% advance gives us 1.6490 to watch (0.8245 + 0.8245 = 1.6490). This is a bigger picture forecast, and tells us that 1.6490 is an important level to watch for resistance.
However, this doesn’t mean we just sit back, and wait for the Euro to hit 1.6490 so we can short it! It may hit 1.6490 in August this year, or next year, or it may not hit it for five years – so we need to treat this as simply one part of our analysis. Chart 1 below (from ProfitSource) shows us the current market action of the Euro, and focuses on the big picture ranges.
Chart 1
click chart to enlarge
We can see from this chart that the market completed 100% of this major range. Now that we know this range is important, it makes sense to use this range as a guide moving forward. So, we left click our mouse on Point C, and drag this range to the next major low, coming in at 1.5255 on May 8th. Chart 2 below shows this.
Chart 2
click chart to enlarge
We can see that 75% of this range comes out at 1.6460, very close to our 1.6490 target. This should have us a little more interested, as we are now dealing with a Price Cluster. These are two simple pieces of analysis that over time have given powerful results. But don’t take my word for it – I have a challenge for all keen students.
On Page 132 of the Number One Trading Plan, David refers you to page 94 of How to Make Profits in Commodities, where Gann gives you 100 years worth of Wheat data. As David said, “He is just showing you that the same thing happens again and again and again”. Gann didn’t put this information in the book to make it look thicker, or to confuse students. He did it so that the students who did the work, like David Bowden did, would see that not only do these rules work, they have worked consistently over long periods of time.
My challenge to all students would be to take this lesson and work it through from start to finish. You have all the information you need. As I said earlier, don’t just take my word for it – prove it to yourself. I urge you to accept the challenge and look forward to hearing about your successes.
As an added bonus for Master Forecasting Students, have a look at the low on the Euro on November 17th, 2005, at 1.1661. Then take out your lessons on Gann’s Fourth Dimension, and get to work!
Be Prepared!
Mathew Barnes
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