December 2004Trading 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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