## Saturday, November 3, 2007

### MurreyMath - Gann ... More details

This article was previously included within a RUT commented chart on the Market Snapshot blog.

MM Line Interpretation

Murrey Math is a trading system for all equities. This includes stocks, bonds, futures (index, commodities, and currencies), and options. The main assumption in Murrey Math is that all markets behave in the same manner (i.e. all markets are traded by a mob and hence have similar characteristics.). The Murrey Math trading system is primarily based upon the observations made by W.D. Gann in the first half of the 20th century. While Gann was purported to be a brilliant trader in any market his techniques have been regarded as complex and difficult to implement. The great contribution of Murrey Math (T. H. Murrey) was the creation of a system of geometry that can be used to describe market price movements in time. This geometry facilitates the use of Gann's trading techniques.

The Murrey Math trading system is composed of two main components; the geometry used to gauge the price movements of a given market and a set of rules that are based upon Gann and Japanese candlestick formations. The Murrey Math system is not a crystal ball, but when implemented properly, it can have predictive capabilities. Because the Murrey Math rules are tied to the Murrey Math geometry, a trader can expect certain pre-defined behaviours in price movement. By recognizing these behaviours, a trader has greatly improved odds of being on the correct side of a trade. The overriding principle of the Murrey Math trading system is to recognize the trend of a market, trade with the trend, and exit the trade quickly with a profit (since trends are fleeting). In short, "No one ever went broke taking a profit".

The Murrey Math geometry mentioned above is "elegant in its simplicity". Murrey describes it by saying, "This is a perfect mathematical fractal trading system". An understanding of the concept of a fractal is important in understanding the foundation of Murrey Math. For readers interested in knowing more about fractals I would recommend the first 100 pages of the book,"The Science of Fractal Images" edited by Heinz-Otto Peitgen and Dietmar Saupe. The book was published by Springer-Verlag, copyright 1988. An in depth understanding of fractals requires more than "8'th grade math", but an in depth understanding is not necessary (just looking at the diagrams can be useful).

The size (scale) of basic geometric shapes are characterized by one or two parameters. The scale of a circle is specified by its diameter, the scale of a square is given by the length of one of its sides, and the scale of a triangle is specified by the length of its three sides. In contrast, a fractal is a self similar shape that is independent of scale or scaling. Fractals are often constructed by repeating a process recursively over and over.

The next question, of course is, "What does a fractal have to do with trading in equity markets?" Imagine if someone presented you with a collection of price-time charts of many different equities and indices from many different markets. Each of these charts has been drawn using different time scales. Some are intraday, some are daily, and some are weekly. None of these charts, however, is labelled. Without labels, could you or anyone else distinguish a daily chart of the Dow from a weekly chart of IBM, or from an intraday chart of wheat prices. Not very likely. All of these charts, while not identical, appear to have the same general appearance. Within a given time period the price moves some amount, then reverses direction and retraces some of its prior movement. So, no matter what price-time scales we use for our charts they all look pretty much the same (just like a fractal). The "sameness" of these various charts can be formally characterized mathematically (but this requires more that 8th grade math and is left as an exercise to the interested reader).

Gann was a proponent of "the squaring of price and time", and the use of trend lines and various geometric angles to study price-time behavior.Gann also divided price action into eighths. Gann then assigned certain importance to markets moving along trendlines of some given angle. Gann also assigned importance to price retracements that were some multiple of one eighth of some prior price movement. For example, Gann referred to movement along the 45 degree line on a price-time chart as being significant. He also assigned great significance to 50% retracements in the price of a commodity. The question is, "A 45 degree angle measured relative to what?" "A 50% retracement relative to what prior price?"

These angle or retracement measurements are made relative to Gann's square of price and time. Gann's square acted as a coordinate system or reference frame from which price movement could be measured. The problem is that as the price of a commodity changes in time, so must the reference frame we are using to gauge it. How should the square of price and time (the reference frame) be changed so that angles and retracements are measured consistently?
This question is one of the key frustrations in trying to implement Gann's methods. One could argue that Gann recognized the fractal nature of market prices changing in time. Gann's squaring of price and time, however, did not provide an objective way of quantifying these market price movements. If one could construct a consistent reference frame that allowed price movement to be measured objectively at all price-time scales, then one could implement Gann's methods more effectively.

This is exactly what Murrey Math has accomplished.For more details, it is recommended to study Murrey Math literature etc (http://www.murreymath.com/)
Here below is a short description extracted from a document published a few years ago by Tim Kruzel , which since seems to have disappeared from the face of the WWW.·