December 2004

Trading Tip:
The Geometry of Draw Tools
by Howard Arrington

Draw tools are used by technicians to analyze chart patterns.   They are a convenient way to measure price and time relationships and embody such characteristics as slope, parallelism, channeling, and retracement percentages.  Many tools are related to each other with just a slight variation in a construction principle.  Seminars, trading systems, and books are frequently based upon draw tools wherein the author expounds his special insight as to their use in trading the markets.  I have used the name of the tool that I am familiar with, and apologize if you recognize the draw tool by some other name.   The draw tools are simply geometrical constructions, and this article will show how they are constructed. 

 

  Trend Lines
Trend Lines are the fundamental construction tool.   They are drawn most often between two significant turning points.  This type of trend line is often called a swing line.

  Variation:  A Linear Regression trend line is determined mathematically so that it is a 'best fit' line.  The least squares method plots the line through the prices so as to minimize the distances between the prices and the trend line.

Variation:  Extend the lines forward and/or backward in time.
  Channel Lines
Channel Lines are constructed parallel to a Trend Line with a spacing that contains the highest high and lowest low of the chart bars.

Variation:  The spacing is based on the Standard Deviation of the prices.

Variation:  The spacing is based on a percentage of the price.

  Variation:  Raff Regression Channel lines are equidistant channel lines drawn parallel to a Linear Regression trend line.
  Pesavento Patterns
This draw tool is named after Larry Pesavento, who popularized this analysis method in his book 'Profitable Patterns for Stock Trading'.  The technique labels the X-B line with the price percentage relationship of A-B compared to X-A.

In the example:   (Price A - Price B) / (Price A - Price X) = 0.618
  Support and Resistance Lines
Support trend lines are drawn underneath chart bars by connecting swing lows.   Resistance trend lines are drawn above chart bars by connecting swing highs.  The most popular use of such lines is to watch for the trend to break through the trend line, at which time a position is taken in the direction of the new trend.

Variation:  Add a channel line parallel to a Support or Resistance trend line.  For example, a channel line could be drawn through point A that is parallel to the X-B line.
  Fibonacci Extension
The X-A-B pattern is often used to forecast future price action.  The Fibonacci Extension technique constructs the next trend line B-C parallel to the X-A trend line.   The length of B-C will be a Fibonacci percentage of the length of the X-A line.   The three most common lengths considered are 0.618, 1.000 and 1.618.   The example shows these three target price levels.

  Variation:  Point C (the 1.000 Fibonacci Extension) can be obtained by moving the X-B line to point A.  The line A-C is equal in length to X-B and parallel to X-B.  The A-C line is a measured move to the Price Time Target. The expression Price Time Target (PTT) comes from the book 'Precision Trading with Stevenson Price and Time Targets'.
  Parallel Lines
A line is drawn parallel to the X-A line to create a channel through point B.   The channel is sub-divided with more lines that are equally spaced.

Variation:  Use different percentages to sub-divide the A-B line, such as the Fibonacci percentages of 0.214, 0.382, 0.50, 0.618, and 0.7856

Variation:  Use larger percentages to draw additional parallel lines outside of the A-B channel.

Variation:  Draw the X-B leg first, and then move to point A.  This will draw the lines parallel to the X-B line instead of parallel to the X-A line.
  Andrews Pitchfork
The Andrews Pitchfork is constructed using parallel lines using three points labeled X-A-B.   X, A, and B are typically swing peaks.   The pitchfork handle is constructed from point X through the midpoint of the A-B trend line.  Two lines (tines) are drawn parallel to the handle from points A and B.

Variation:  Addition lines (tines) are drawn at the quarter and eighth points along the A-B trend line, i.e.. at 0.125, 0.25, 0.375, 0.625, 0.75, and 0.875.

Variation:  Fibonacci percentages are used instead of the eighth points, i.e.. 0.214, 0.382, 0.618, and 0.786.

Variation:  Draw tines outside of A-B by using higher percentage levels.
  Schiff Lines
Schiff Lines are constructed like the Andrews Pitchfork.  The difference is the end of the pitchfork handle begins at the midpoint of the X-A line instead of from point X.  Thus, the tines are parallel to the X-B line. 
  Speed Lines (general form)
Speed Lines are another variation of the Andrews Pitchfork.   All lines (rays) are drawn from point X.   The rays pass through sub-division points on the A-B line.  A-B may be sub-divided into eighths or Fibonacci percentages.
  Fibonacci Levels
Fibonacci Levels is one of the most popular tools.  It is basically the Schiff Lines variation of the Andrews Pitchfork with point B relocated to form a right triangle with the X-A line.  This is a two point construction because point B is automatically aligned horizontally with point A and vertically with point X.

The A-B line is sub-divided using Fibonacci percentage levels of  0.382, 0.50, 0.618, and 0.786.

Variation:  Add Fibonacci extension levels at 1.272, 1.618, 2.00, etc.

Variation:  Sub-divide A-B into eighths: 0.25, 0.375, 0.50, 0.625, 0.75, etc.
  Speed Lines (Fibonacci form)
Speed Lines are a variation of the Fibonacci Levels tool.  Instead of horizontal lines being drawn at the sub-division points on the A-B line, rays are drawn from point X through the sub-division points on the A-B line.   This is the special case where point B forms a right triangle with the X-A line.

Variation:  Sub-divide A-B into eighths: 0.25, 0.375, 0.50, 0.625, 0.75, etc.
  Gann Fan
The Gann Fan was a primary construction technique used by the famous trader W. D. Gann.  The A-B line is divided into eighths (or thirds), and rays are drawn from point X to or through the A-B sub-division points.   Likewise, the horizontal distance is sub-divided into eighths (or thirds), and rays are drawn from point X to the horizontal division points.

The unique characteristic is that the A-B length should equal the X-B length.  This means there is a specific relationship between price (A-B line) and time (X-B line).   Therefore, some unit of price equals some unit of time.

The 1x4 label means the line moves 1 unit of price in 4 units of time.  This is 25 percent of the A-B height.   The 1x2 line passes through the A-B midpoint.
  Gann Square
The Gann Square is created by drawing a Gann Fan from each of the four corners of a square.  The example shows the 3 primary fan lines of 2x1, 1x1, and 1x2 drawn from each corner.

Variation:  Draw additional fan lines for the quarter point sub-divisions.

Variation:  Arrange additional Gann Squares to be adjacent to each other to form a grid for the chart bars to overlay.
  Pyrapoint
Pyrapoint is an automation of the Gann Square principle.   A unit of time is automatically derived from a price to create a square.   The 1x1 fan lines are drawn from corner to corner to create the ascending and descending channels.

Variation:  The tool is based on degrees of rotation around Gann's Square of Nine.   Larger or smaller squares can be selected by changing the parameter for the degrees of rotation.

Pyrapoint is copyrighted by Don E. Hall and discussed in detail in his book titled 'Pyrapoint'.
  Fibonacci Retracement
Fibonacci Retracement combines a Gann Fan being drawn from point A and Fibonacci Levels drawn between the fan lines.   The tool draws the 2x1, 1x1, and 1x2 fan lines.   The 1x1 line in the retracement fan is a mirror image of the X-A line reflected about point A.

Variation:  Draw an inverted fan from point B, which is the point that forms a right triangle with the X-A line.

Variation:  Draw the retracement fan from the midpoint of the A-B line.

Variation:  Use eighth division levels:  0.25, 0.375, 0.50, 0.625, 0.75, etc.
Trading Tip:
Friday Statistics
by Donald Dix

Trading Tip:
Volume Alert
by Howard Arrington

The following chart shows when the volume is above the average volume.

The visual shows volume with the Blue histogram bars, and a 10 period simple average of volume plotted as the Red line curve.  When the volume moves above the average volume, a fat Green histogram bar is plotted through the height of the average volume curve.  The following study alert was used to create this visual effect.

Panel A returns a 10 period simple average of the volume.  The period for the average function is the Number field, which can be changed to plot a different average volume.  The alert test is True when the average volume is below the panel B value which returns the bar's volume.  When the condition is True, the Green histogram is plotted.  When the condition is False, the Red curve is plotted.   The value plotted is the average volume calculated by panel A

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