Price Time Volume Investing

The square of nine is often referred to in writings of and about WD Gann. Based on the books I have read, the actual square traces back to the pyramids and Gann learned of it at some point in his life. He did not invent the square nor the mathematics derived from it’s use. You can use Google (GOOG) to find out all the information you want (though not necessarily what you need).

From what I can tell, the basic use of the tool was as a square root calculator and a calendar. Market prices tend to move according to a square root algorithm. This occurs over and over again and can be found on the SP500 Index (SPX) without trying very hard. Gann did not have access to an electronic calculator, spreadsheets, computers, or anything we take for granted today. In his day, the square of 9 was an amazing tool for finding natural price resistance and time cycles from a specific point. It continues to work today. But I prefer a computer and software that goes far beyond the square of nine.

The following is my take on the Gann Square of Nine and how I use it here.

• Price does move in intervals based on the square root of the previous price. Some use the square root of a high or low and continuously add this to price. Each addition of the square root is considered 90 degrees. A complete move is 360 degrees or four additions of the square root to a high or low.
• A method to calculate these intervals is to do the following: Square(SQRT(num) + 0.5) for 90 degrees. Square(SQRT(num) + 1.0) for 180 degrees. Square(SQRT(num) + 1.5) for 270 degrees. Square(SQRT(num) + 2.0) for 360 degrees.
• An alternate method in Excel is to use the square root of the previous number to generate the next number. The results of this methods are within a point or two of the previous method at 360 degrees and is much easier to implement. My theory is that this is more accurate for moves over several years and several 360 degree cycles. Example: A2=SQRT(A1)+A1, A3=SQRT(A2)+A2, A4=SQRT(A3)+A3, etc…
• The dates of the four sides of the square are 91.25 calendar days (times four equals 365 days). If a move starts on day X, then 90 days is a good place to watch for a change. Square of 9 gurus often draw a cross through the starting number and show price and time levels to watch for a move. This is nothing more than using the square root price progression and 90 day cycles. It looks magical on the square, but it isn’t all that mystical in Excel. And it does work…

One more topic is of interest to me and that is the scaling of numbers “too big” or “too small” to fit the square. If you use Excel or some other computer tool, there is no problem with trying to fit the square. The SPX is at 1400 and the DOW is at 14,000. Some like to divide the DOW (INDU) by 10 so that it looks like the SPX at 1400. I wonder what will happen if/when the SPX gets to 14000 or maybe 7000? Do we scale by 5 instead of 10?

I hate arbitrary scaling in angles and squares. It is not rigorous and, in my opinion, a waste of time. I can scale any chart to fit whatever line I want it to “fit” to make my point. How is this useful to anyone?

Another reason I do not scale the square of nine by 10 is that it produces very different results than the original number. The results are not scaled by 10. All the original levels from the real numbers are lost and the new 90 degree increments have nothing to do with a square root progression of price.

Read part 2 of this discussion in which I show how mathematically incorrect scaling price on the square of 9 can be. And I show a method of scaling that preserves the square root price progression.

Post Modified: July 3rd, 2008 at 12:28 am

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