Mikula Forecasting Company

Mikula Forecasting Company: Strategy #25: Practical Tips for Using The Square of Nine

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MarketWarrior 3.2

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
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W.D. Gann's Square of Nine has some basic applications that work very well to find a market's support and resistance levels. In this article I will provide two tips to help make a simple Square of Nine method practical and easy to use. A sample Square of Nine can be seen in Figure 1. Figure 1 is intended only to show how the Square of Nine looks. The construction of the Square of Nine will not be discussed in this article as it is assumed that readers already understand the basics for the Square of Nine. The shaded vertical and horizontal cells identify the cardinal cross. The shaded diagonal cells form the diagonal cross.



One method for using the Square of Nine is to locate the cell numbers on the cardinal cross and diagonal cross that fall within the price range for a selected commodity. The cell numbers are used to draw support and resistance lines. At first glance this seems like a one size fits all method that is too simple to be valuable but this is not the case. With the addition of two tips, this method will prove to be very helpful in your trading.

Figure 2 shows a daily chart for wheat futures covering the period March to September 2004. It has prices ranging from a low of 310 to a high of 440. This price scale is listed on the left of the chart. The horizontal lines on Figure 2 are support and resistance lines. They are created by finding the Square of Nine cell numbers that are within the price range and also located on the cardinal cross and diagonal cross.

For example cell number 381 from the diagonal cross becomes a wheat price 381. Notice on the wheat chart in Figure 2 that there are fifteen horizontal lines marking support and resistance levels. This is too many lines to be useful in any real trading situation.



The first tip I want to share can solve this problem. Move the decimal point one place to the left in the wheat prices. Use this smaller number when looking up the support and resistance price on the Square of Nine. It will create fewer support and resistance levels.

Figure 3 shows the same wheat data as Figure 2, but now we have moved the decimal point to the left in the wheat prices before looking up the support and resistance levels on the Square of Nine. This means the Square of Nine cell numbers 31, 34, 37, 40 and 43 become wheat support and resistance price levels 310, 340, 370, 40, and 430. This creates only seven support and resistance levels which are much easier for a trader to work with than the previous fifteen. Notice on Figure 3, the wheat market made tops at A, B and C against a Square of Nine level and then fell to point D where wheat made a bottom against another Square of Nine level. This simple Square of Nine method identified the high and low price levels in this wheat market fairly well.



On Figure 4, the Square of Nine support and resistance levels have been added to the chart for General Electric (GE). This chart shows only two Square of Nine levels which does not provide a trader enough information to be of help. On this chart the Square of Nine cell number 31 and 34 become price levels $31 and $34. To address this problem we can again move the decimal point but this time we can make the prices larger by moving the decimal point to the right before we look up the support and resistance levels on the Square of Nine.



The result of doing this is shown on Figure 5. There are now seven Square of Nine levels on the same GE chart. The Square of Nine cell numbers 289, 298, 307, 316, 325, 334 and 343 become GE support and resistance prices $28.9, $29.8, $30.7, $31.6, $32.5, $33.4 and $34.3 This provides a trader a much better set of support and resistance levels to analyze. These first two examples for wheat and GE demonstrate the first tip I want to share.



Tip 1: When using the cell numbers from the Square of Nine cardinal cross and diagonal cross for support and resistance levels, moving the price decimal point can create a more useful set of price levels.

When using this method to calculate support and resistance levels, traders always want to know the answer to one question: How do you know which price level will see the market form a pivot? Answering this question starts with the observation that the Square of Nine price levels almost always correspond to more than one pivot.

On Figure 5, I have added B1 to mark a pivot top that occurred on the Square of Nine price level 31.6. This first occurrence of a pivot on this Square of Nine price level shows us that this price level is active. We do not want to trade the first pivot that occurs on a Square of Nine price level. This first pivot simply shows us that this price level is active. Once we know this Square of Nine level is active, we can predict that there will be another pivot on this price level sometime in the near future. It is the second or third pivot on the same Square of Nine level that we would use to trade.

On figure 5 I have added the labels B2 and B3 which correspond to the second and third pivot that occurred on the same Square of Nine price level 31.6 soon after the pivot at B1. Also on Figure 5, I have added the label A1 to mark the first pivot that occurred on the Square of Nine level 33.4. This first pivot against this level shows us that this Square of Nine level is now active and we can predict that there will be another pivot against this Square of Nine level in the near future. See the labels A2 and A3 on Figure 5 which mark the second and third pivot against the same line as pivot A1. It is the second and third pivots against the same line that we want to use for trading. This is tip #2.




Tip 2: Square of Nine levels which see one pivot form, usually will see additional pivots form on the same level. Use the first occurrence of a pivot on a Square of Nine level as an indication that the Square of Nine level is active and watch for more pivots on that same level in the near future. Look for trading opportunities using a Square of Nine level only after the level has shown itself to be active.

Finally see Figure 6. This is an example of Tip #2. This chart shows live cattle futures. The Square of Nine levels have been drawn on this chart with no changes to the decimal point. I have added the label A1 above a top pivot that formed against the Square of Nine level 91. This is the first pivot to form against this Square of Nine level and shows us that the Square of Nine level is now active. In the near future there should be another pivot against this same Square of Nine level. Soon after the top at A1, the market moved back up to the same Square of Nine level. This second pivot is labeled A2 and is the pivot for which we would have been waiting and we would have been able to use this pivot to make a trade.

Also on Figure 6, I added label B1 which marks a pivot bottom on the Square of Nine level 86. This is the first pivot on the Square of Nine level 86 and shows us this Square of Nine level is now active. After B1 we would expect another pivot to form on this same line in the near future. And yes, after B1 the market returned to this Square of Nine level at B2 and made another bottom pivot. Because of the previous pivot at B1 we would have been ready for this second pivot at B2 and would have been watching to make a trade using the pivot at B2. This demonstrates tip #2 and shows that waiting for the second or third pivot against the same Square of Nine level can be a great assistance to any swing trader.