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