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Mikula Forecasting
Company: Trading Strategy #6 Break and Return
Pattern
====================
Written by: Patrick Mikula CTA
Copyright (c)2003-06 by Patrick Mikula All Rights Reserved.
(Please to not copy or foreword this article).
Mikula Forecasting Company
P.O. Box 152672
Austin, TX 78715-2672
USA
www.MikulaForecasting.com
support@MikulaForecasting.com
====================
The MarketWarrior Break and Return
Pattern.
An old technique for trading are W.D. Gann's Price and Time
angles. These lines are drawn based on a fixed price and
time relationship. A price step must be set for each market
and each time frame. For example a common price step for
daily stocks is five cents 0.05 or ten cents 0.10. Once the
price step is set the angles are drawn so they represent a
ratio between the price step and the amount of time
movement. The common lines used by W.D. Gann were 1 price
step to 1 time increment. This would be a 1 x 1 line. Other
lines are the 1x2 line and 2x1 line. The traditional problem
for traders when using the Gann Angles is figuring out how
to make buy and sell decisions with them. In this article I
am going to show you how to do that. The answer to this
problem is to combined the Gann angles with patterns. The
pattern in this article I have named the "Break and Return"
pattern.
First Example:
The first three charts are all showing the March 2004 Crude
Oil futures contract. These three charts will show three
Break and Return patterns all in a row. For the daily crude
Oil market a price step of 10 cents or 0.10 is being used
for the Gann Angles. On the first chart below there is a
Gann Angle Fan drawn from a pivot top in September. The
angles used are an upward sloping 2x1, 1x1, 1x2 and a
downward sloping 2x1, 1x1, 1x2. The starting point of the
angles is point A. After point A the market falls. The
market then turns up and breaks above the downward sloping
2x1, 1x1 and 1x2. These are the first to characteristics of
the pattern. The final part of the pattern is to wait for
the market to return to one of the Gann angles that the
market just broke above. At point C the market has returned
to the downward sloping 1x2 Gann Angle. As soon as the
market turns up from point C on the 1x2 angle the Break and
Return pattern is complete and we buy the market.
.gif)
Second Example:
The chart below is the next Crude Oil chart and we are using
the same Gann angles seen in the previous chart but now they
are drawn from a pivot top in October. The starting point
for the angles is point A. After point A the market falls.
Next the market rallies and breaks above the 2x1, 1x1 and
1x2. Point B is identifying where the market breaks above
the 1x1 angle. The final part of the Break and Return
patterns is to wait for the market to return to one of the
angles previously broken. At point C the market returns to
the 1x1 angle. At this time the market would be bought as
soon as an indication of an up move appears.
.gif)
Third Example:
The chart below is the third and final chart for Crude Oil.
This chart uses the same Gann Angles but now they are drawn
from the top in November. The pattern is the same as on the
previous two charts. The pattern starts at point A where the
angles start. The market falls from point A. The second part
of the pattern occurs when the market turns up and breaks
above the 2x1, 1x1 and 1x2 angles. Point B identifies where
the market breaks the 1x2 line. The final part of the
pattern is to wait for the market to return to one of the
broken angles. When the market return to the 1x2 angle and
then shows a sign of an up turn the pattern is complete and
we would buy the market. This is identified as point C. This
shows three similar patterns in a row in one market. This
pattern does in fact occur quite frequently in many
markets.
.gif)
Fourth Example:
The two charts below for stock symbol AMTD are both part of
the fourth example. The Gann angles are using a price step
of 5 cents or 0.05. On the first AMTD chart below the Break
and Return pattern is hard to see. This is a daily bar chart
setup as a trading day chart. The second AMTD chart is set
up to show calendar bars.
.gif)
The chart below shows the AMTD chart as a calendar bar chart
this means the chart now shows a space for Saturday and
Sunday. Now the Break and Return pattern is easy to see. The
market started down at point A which is where the angles
started. The market then broke above the 1x1 angle at point
B. Finally the market made a bottom pivot right on top the
1x1 angle at point C and the pattern was complete. When the
market moved up from point C we would buy the market.
Switching between trading day charts and calendar day chart
is an advanced trading strategy. There are often patterns
visible on a trading day chart that do not show up on the
calendar day chart and visa versa.
.gif)
Fifth Example:
The chart below is a 15 minute chart for the stock symbol
MRK. The price step for the Gann angles is one cent or 0.01.
This pattern will work the same for intraday charts as it
does for daily charts. The angles start from the top at
point A and the price falls. At point B the market breaks
above the 2x1 angle. At point C the market returns to the
2x1 angle and the first buy opportunity is found. Next the
market breaks above the 1x1 angle. Finally the market
returns to the 1x1 angle at point E and a second buy
opportunity is found.
MORE:
To see more patterns and setups see the
version of this article on the MarketWarrior
owners page.
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Mikula
Forecasting Company: Trading Strategy #6