What is Market Geometry?
Market geometry is the old way of doing technical analysis, and it goes way back in time when indicators and other trading tools fashionable these days were not so popular.
The principle of market geometry is based on identifying consolidation areas on the left side of the screen and projecting them on the right side with the sole purpose of finding strong support/resistance levels.
However, market geometry can be used also in finding identical moves in terms of the amplitude price is traveling when compared with a specific line. More on this in the two recordings that are coming with this educational series.
There is a way of saying that future price action is based on past market behavior. Well, if that is true, there is nothing of more value for a trader than market geometry.
Projecting Future Values
It is not about Elliott Waves, not about counting waves or looking at indicators, but solely at looking how price reacted in the past and having an educated guess about how it will react in the future.
There is a saying that what’s on the left side of the chart is free information and that information needs to be projected on the right side in order to make a forecast regarding where price is supposed to go. That is totally true and it cannot be more valid than in the case of market geometry field.
If you want, market geometry is the old way traders were looking at prices trying to predict changes to come and technical analysis it is often being said that it is guided more by price action than a specific indicator traders are using.
One more thing to consider when looking at charts from a geometrical point of view is that support and resistance areas are not only horizontal as they can form also dynamic areas. We’ve covered this subject here many times and Binary Options Academy has even a dedicated article on it.
The way to look at markets from a market geometry point of view is to start by identifying isolated spikes price is forming and then to look for a pivotal area. These spikes can be spotted, for example, using the Andrew’s Pitchfork tool.
Forex Trading: Using the Pitchfork Tool for Market Geometry
Starting from the lows in any time frame and finding two more pivot points will give traders a bullish Pitchfork and this means that the median line of the bullish Pitchfork should attract price. That should act as a pivotal area from a market geometry point of view.
Looking for a spike above the median line offers us the possibility to measure it and then project the outcome on future prices, on the right side of the chart, and when market is reaching that level, we should go and buy call options with expiration date according to the time frame the analysis is made on.
This is just an example, a bullish one, and this is why we refer to call options, but in the case that the analysis starts from the top and the Pitchfork is a bearish one, we should consider put options of course.
Market geometry refers to patterns as well and patterns can be projected on the right side of the chart as well.
If, for example, measuring the time taken for a specific pattern to form and project it on the right side of the chart is the way to trade a counter trend if the previous one was, say bearish. After time expires and levels are reached, options in the opposite direction can be traded.
Another way to use market geometry is to try to trade when market is reaching round numbers. The so called “quarters theory” is saying that any range can be split into for smaller ones and the outcome represents strong support/resistance levels.
For example, let’s take the case of the eurusd currency pair and divide the distance from 1.10 to 1.00 into four different ranges. This makes 1.0250, 1.05 and 1.0750 as the boundaries or edges of those areas while 1.00 and 1.10 the extremes.
Find Support and Resistance
It is only normal that price will react at those levels and act like support/resistance. For example, assume market is falling from 1.05 and targets the 1.0250. The last one should act as support and by the time support is broken, it should act as a resistance.
The way to trade this is to look for a bounce by the time 1.0250 comes, so call options, and then on a retrace to 1.03-1.0350 to trade put options on expectations that the round number/level will be eventually broken.
During the two video analysis we’re having here I will look at the different possibilities market geometry can be traded, including the ranging subject as well as using the pitchfork to identify spikes that can be projected on the right side of the chart.