CHARTING
Remember When
Affine Geometry Of The Markets
by Viktor Likhovidov
Think the market doesn't have a memory? Think again.
About five years ago, I came across an interesting
article concerning the channeling behavior of market charts. I don't remember
much about the article anymore, except for a method using "magic"
parallel lines that seemed promising. I decided to try to derive useful
trading signals from the idea with some simple geometric transformations.
PRICE CHANNELS AND MARKET MEMORY
In a nutshell, the premise is based on the following recommendation:
When you find a good channel on a price chart, don't forget about it, because
the market remembers such channels for a long time. At some point in the
future, your chart will likely return to that same channel. But how can
you "save" these channels effectively? One simple way is to plot
parallel lines, setting the distance between them equal to the width of
the channel.
In Figure 1 you see a display of two channels on the hourly chart of
the spot yen. The first channel was formed in a rising market and is represented
by two green lines; the vertical green segment denoted as R measures the
height. The red channels mark falling prices and have a height of F. These
parallel green and red lines (the distance between the green lines is determined
by segment R, and between the red lines by F) form the consolidation lines
that the market is going to "remember." This means that sometime
in the future, even possibly quite distant from today's channels, the chart
will meet one of those lines.
FIGURE 1: HOURLY CHART OF THE SPOT YEN. Two channels, January
2-February 7, 2001.
...Continued in the November 2002 issue of Technical Analysis of
STOCKS & COMMODITIES
Excerpted from an article originally published in the November 2002
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2002, Technical Analysis, Inc.
