Within David’s Ultimate Gann Course and Master Forecasting Course, there’s not a lot of mention of ABC trades, except when David mentions that he would often put his Super Traders on a ‘Starter Pack Diet’ if they were having a series of losses. To David, ABC trades were a beginner’s trading method, and hence why they are taught in the first book of the Safety in the Market educational series, the Smarter Starter Pack.
David’s real focus was on ‘Seasonal ABC Trading’. David purposely established our thinking from an early start, using the ABC trading methodology in the Smarter Starter Pack to build the foundation around the ‘Seasonal ABC Trade’, which in turn would develop our understanding of the bigger picture or ‘Seasonality of the Trend’. It is through the use of seasonal trading that we progress our knowledge about how price and time forecasting is formulated.
With this in mind, this article is going to explore the seasonality of the bigger picture on RIO on the Australian Stock Exchange (ASX: RIO). To make this a practical exercise for you, the article will explore the seasonal trend of the 2016 bull market. We will focus on the ‘obvious’ turning points and measure them in time and price and take note of the repeating patterns.
While we are only dissecting the 2016 bull market period, this will leave you to pull apart the bear market in early 2011. You can apply the same process to any cyclical period.
The first part of the process is to use a ‘Wheels within Wheels’ approach. We are measuring the bigger picture and breaking down the seasonality of the trend so the best place to start is the major trend (the weekly or monthly chart). We are watching for the spring, summer, autumn and winter of the trend.
Gann suggests that there are often three sections and sometimes a fourth. If we use this as the basis for measuring the initial sections, you can apply the ABC Pressure Point Tool in the ProfitSource software to start pulling apart the sections.
Often the market will not always produce three or four obvious sections. As David suggests, you should wear the market like a ‘loose garment’, so whether there are two, three or four sections it doesn’t necessarily change the outcome of looking for the seasonality of the trend.
The charts below break down the ‘Wheels within Wheels’ approach into colours. The larger section is blue. The sections within the blue sections are pink and the sections within them are green. We will even go as far as breaking the green down further into light blue. The process of breaking these sections down starts with the ‘First Range Out’ (FRO) and using the FRO to break down each sequential section. The ABC Pressure Point Tool in the ProfitSource software will allow you to explore the sections as previously mentioned.
If we initially focus on the pink sections you can see there are three ‘obvious’ sections. If we use the range from the 3 February 2016 low to the 21 April 2016 high as the FRO it gives you a price range of $16.82 in 78 calendar days. If we project this range from the 24 June 2016 low, 150% comes in at $66.74, however, the market topped at $69.80 in 235 calendar days (which is 3 times 78). In saying so, this is an example of wearing the market like a ‘loose garment’.
If we project the FRO from the May 2017 low, which was coined the start of the third section, 150% calls for the top at $81.95. While the market topped at $82.46 in 256 calendar days, it still overshot, making this yet another non-accurate forecast. The real question here is how close do you need the forecast to make money from the move? As you can see the market fell away from here and there was money to be made.
Now that we have the basis of the three sections, which are relatively equal in time and price, we can start to pull the market apart a little further. At this point, you might be thinking this is not accurate or close enough for your liking – and that is a very fair assumption, however we cannot make any conclusions until we have the whole picture. We are only assuming at this point that these are the three sections. In fact, in 12 months from now, maybe all of these sections make up one bigger section, or as time evolves the sections could be measured differently.
If we start to break down the FRO, we can start looking for structure. This is a typical question of ‘what are the correct ranges to use?’ Do we look to measure the three green sections or do we measure the two light blue sections? The correct answer is we measure both. As time progresses, similar time and price patterns may appear, and you can refer back to these sections. As David says, hindsight becomes foresight if looked at often enough.
The first light blue range was $11.27 in 34 calendar days. If this range was projected from the 5 April low at $41.73 you get a 100% target at $53.00. The market topped at $53.35 in 16 days, which is 50% in time. The first green section showed a price range of $7.74 in 19 days, and projected from the 26 February low, 100% comes in at $47.48 and the market topped at $47.80 in 11 days. The third range is 16 days and repeated 150%. From a little form reading perspective when the third range repeats 150% it is a good time to start watching signs for the winter of the trade.
While we are still in the analytical stage, you can notice that the FRO was made up of two initial sections which were equal in price, followed by a third range which repeated 150%. On top of that, there were also two equal ranges which had similar harmony. The reason I am focusing on this is because it is the FRO or the spring of the trend. There is a lot of information gathered in the FRO which will likely provide ‘DNA’ amongst the rest of the trend.
Let’s move onto the second section and start to break this down. I was able to break it down into three sections. There is an argument that a few additional sections could be broken down, which is acceptable. I suggest you should break down the sections within these sections as an exercise.
If we do the exact same thing to Section Three, you will see that the FRO of section three was 17 days. Section Two repeated 100% in price in 48 days, section three repeated 100% in price in 62 days and Section Four repeated 150% in 84 days. By the fourth section, seeing a 150% repeat you would start to think that you were seeing the winter of the trade. Either looking to tighten stops or thinking about Type 2 trades out of here. The swing charts will be most valuable at this point.
While, I have painted a rough picture of some sectional analysis, by making your way through the seasonality of a trend the real art comes in taking this information and pulling it apart further. To give you an example of this, we’ll look at Section Three. The fourth section within Section Three gave us 84 calendar days. If we simply take this exact range and apply it to the fourth section within Section Two you will see that the market did 89 days with 100% repeat in price. In terms of what that means – it goes back to the DNA of the market. Obviously, what has happened before seems to happen again. Give it a go yourself. Try measuring the FRO of Section One and apply it to every first range of each section – they all repeat 100% as well. This is why it is so important to know your market like a cow knows its calf.
In closing, learning how to trade ABC’s is a big part of the Safety in the Market journey, but it’s only the beginning. The real art of David’s material is in the ‘Seasonal Trading’ chapter from the Number One Trading Plan. By considering multiple timeframes on the swing charts, combined with bigger picture price and time forecasting such as the ‘First Range Out’, it will start to unlock a market, and allow further techniques to be applied such as Time by Degrees, Squares, Road Maps and Rating the Market.
It’s Your Perception