Measured Moves: Simple, Powerful and Profitable Trading Tools (Part 1)
05/05/2008 12:00 am EST
Using 'measured moves' when trading is very popular and best known by traders that use them as 'Fibonacci' ratios, even though the ratios they are using were actually first described in a mathematics treatise written by Euclid around 300 BC. The early Greek mathematicians and architects had an eye for beauty and symmetry and built pleasing ratios into their designs well before Euclid was born. Although many traders have heard of, and use 38.2, 61.8 and 1.618 ratios, even earlier Greek and Egyptian scholars and artists found beauty, form and function using 1:1 ratios. An early mystic book whose roots goes back to 2500 BC, The Emerald Tablet, refers to 'That which is below is like that which is above', a passage not only known by but studied by Sir Isaac Newton, the father of modern physics; in fact, many scholars believe his Third Law of Motion, 'For every action, there is an equal and opposite reaction', has its roots directly in this passage from this work done roughly 4000 years before Newton was born.
One of the earliest known groups of traders was the Phoenicians and they flourished in the same area as the early Greek civilization around 1200 BC. Modern day archaeologists have found clay and lead 'trading slips' and even what appear to be graphic representations of prices over periods of time of certain commodities that the Phoenicians traded on a regular basis-in other words, the Phoenicians were one of the world's first hand chartists! One of the inscriptions on these particular clay charts reads 'There is a time to buy and a time to sell'. Though the Phoenicians are credited with creating today's written alphabet [theirs featured twenty-two characters that were used in combinations to form words, much like twenty-six characters are used in the English language to form specific words], it's unlikely they used technical analysis tools like MACD and RSI to time their buying and selling. What, then, would the Phoenicians have used to determine when to buy and when to sell?
Let me show you a simple set of charts that illustrate the types of measured moves that the Phoenicians may have used:
On this chart, you can see that corn prices have been in a wide trading range for quite some time. You can see that as price approaches the bottom area of congestion, it has been profitable to enter into long corn positions and as price nears the upper portion of the area of congestion, it has paid to lock in profits.
More in part 2 tomorrow.