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Ralph Russell's Math of the Markets Spreadsheet
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Markets are Mathematical
By Ralph Russell

When we drive around in our cars, most of the time we know where we are because we are going back and forth to work or taking the kids here or there. We are in a familiar environment. The challenge comes when we travel to new places that we are not familiar with.

What do we do? We get out the map!

It is not shocking that we can get on the Ohio Turnpike and drive across Ohio from east to west or west to east without a map. It is not shocking information that a train stays on the track most of the time.

But when we get that car off the turnpike and turn into Cleveland for example, we have major problems finding our way around. The train also has trouble in the "yard" where trains are made up finding its way around. And an airplane is constantly under guidance by Air Traffic Controllers if it is a commercial plane carrying passengers.

We must at times "get out the map" that is appropriate for what we are doing.

We offer to you for purchase our version of the map we use to find our way through the markets. It is indispensable in my opinion, if we are trading financial securities of any kind. Stocks, Bonds, Currencies, and Futures contracts all respond in similar manners to what I call simply "The Math of the Markets."

Many centuries ago, Leonardo de Fibonacci was an Italian mathematician and astronomer. He traveled the known world at that point in time looking at and inquiring about various things he saw.

For example:

  • Why is the Pyramid of Giza .618 as high as its width and length at the base?
  • Why is it that navels (and I am not referring to oranges) are about .618 of a person's height from the ground?
  • What caused a seashell to grow at the spiraling rate of 1.618 its last spiral rate?

As a former farmer I can tell you a great crop of wheat in the Midwest has 55 kernels approximately in each head and 1 head per stem. A poor crop will only muster up 34 kernels. A great corn crop had 55 kernels per row on the ear. Many times I have had corn crops of near 200 bushel per acre almost 3 decades ago and 55 kernels per row was a good indication of a good crop. What has all this to do with the markets?

Fibonacci is credited with the founding of a mathematical series named after him. The series of numbers begins with 1 which is then added to itself and is 2 and then the former number is added to the latter and we have 3 and the 3+2=5 (Current +Former=New number in series), 5+3=8, 8+5=13, and so on.

Thus we form the series, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597 and so on.

  • If we examine these numbers for relationships we see that 987/1597 = .6180338.

  • We see that 610/1597 = .3819662 or .382 approx.

  • We see that 1597/987 = 1.6189344.

  • We also see 1597/610 = 2.6180328.

  • We see that .618 X .618 = .382 approx.

  • We also see square root of 1.618 = 1.272.

  • We see also that square root of 2.618 = 1.618 and so on.

  • We can see 1/1.272 = .786. 1597/377 = 4.236 and on and on and on.

Math of the Markets is a spreadsheet that allows us to almost instantly know what these various relational equivalents might be for any traded high and low point in any liquid market.

No, I do not recommend trying to make Orange Juice conform to these numbers. It is too commercial and used for hedging activity unless a frost is forecast.

At this point the discussion might become "Why all these numbers? What good are they in the market? How would we apply this information to the market place? What do you mean when you refer to trying to make a market conform to these numbers."

It is important to now discuss briefly "Wave Theory" or what is known to many as "Elliott Wave Theory." I do know if the waves of motion in the markets outlined by various time period graphs are "Elliott" or "Jones" or "Smith" waves but Ralph Elliott is generally given the most credit for the Elliott Wave Theory.

Elliott said that markets actively traded in an impulsive direction in a five wave impulse pattern of three impulse waves and two reactionary waves to the impulses.

He then said a correction could be expected consisting of three waves in various patterns could before the impulse began again.

The purpose of Math of the Markets is to determine where the end of these various wave forms may be found mathematically.

Click for Full-sized Image

Using this portion of the Math of the Markets spreadsheet in Microsoft Excel we can visualize a picture of the future possibilities.

In the left column we see 145500 which is an entry typed in by the user representing a low pivot point in the market. In Column two, up about 7 rows above 145500 we see an entry that is typed in as 146350 and this represents the high of an impulsive wave.

We then see various boxes that have computed values automatically upon making the last entry at 146350 cell. The spreadsheet is telling us from the values in non-bold print the various retracement levels that we might expect as possible. These values descend downward from .214= to the lower right at .786= as the last computed value from our input of the high and low.

The information we are provided in this portion of Math of the Markets is:

"If we do not go lower than "X" we will make "Y." If we get above or "see" trades above certain levels which are computed in the row two rows below the high input that we entered.

If that upward trading is taking place we then see a great deal of numbers above the word "then" in 5 columns and it is these objectives that are possible for the market to make as a point to take a profit on the trade we entered above the "see" line numbers.

In the next to last column on the right we see the value 145550 which again is a value we type into the program once its value is known or suspected to be known. The word "actual" is to the left of this input value.

This is where we would enter the actual low achieved by the markets retracement and above this number we see the computed value of 146179 which we would mentally round to 146180.

To the left 5 columns we see the words "if we see" and that is exactly what it means. "If we see" 146180 or higher we are probably going to test our high at 146350 and exceed it Probably making a high price that would be found among the possible expectations computed and outlined above the word "then" above 146350.

We can see in this example we might buy a contract at 146200 or a bit higher and take profits at 146800 or so for 6 tics of profit as there are two numbers at 1468+ as possibilities for a high.

There are four areas representing both up movement and down movement in this portion of our Math of the Markets spreadsheet that should not only give you objectives but also give you a visual concept of what is going on.

Continue to Part Two >>>>>>>>

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