V.6:4 (136-137): Price reactions within a trend by Bill McLaren

Price reactions within a trend by Bill McLaren

I have, in the past decade, taught trading techniques to many students. Recently, most of my students have entered the markets after purchasing a personal computer and a technical analysis software package. These tools can be quite helpful but they are not the Holy Grail. A majority of my students' losses are related to one major weakness: little understanding of basic price movement.

Understanding price movement is the foundation of profitable trading and all else must be built on that foundation. Very simplistically, both stock and commodity markets move in only two ways—they trend or consolidate. You can view this from three perspectives: short-term (daily charts), intermediate-term (weekly charts) and long-term (monthly charts).

First, though, you need a discipline to measure short-term trends. In a powerful, short-term trend, the normal correction against that trend is three to four days, or 90 hours, which is one of the natural time cycle harmonics proposed by W. D. Gann. A movement that falls within the three- to four-day period is assumed to keep the strong trend intact. A shorter correction then indicates a stronger-than-normal trend, and a movement exceeding the fourth day indicates the trend may go into a consolidation or reversal. (This concept of normal movement against a powerful trend can be applied to weekly and monthly charts by using three to four weeks and three to four months as the normal lifespans of intermediate and long-term corrections.)