Prime Number Bands

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Introduction

Determining market trends has become a science even though a high number or people still believe it’s a gambling game. Mathematicians, technicians, brokers and investors have worked together in developing quite several indicators to help them better understand and forecast market movements.The Prime Number Bands indicator was developed by Modulus Financial Engineering Inc. and it shows the nearest prime numbers, both highs and lows and plots the difference between them as bands, on a chart.

Essential assumptions

We call prime an integer positive number that has no positive integer divisors other than 1 and itself, so it is a positive integer (p>1) that has exactly one divisor other than 1 (17 can be divided by 1 and 17 – it’s prime; 18 can be divided by 1, 2, 3, 6, 9 and 18 – it’s not prime).Numbers that appear in a specific order are said to create a sequence. Similar to a set, a sequence contains elements (terms), but unlike a set, the terms of a sequence follow a specific rule, are situated in a certain order.

In mathematics, the Fibonacci numbers create the following integer sequence : 0,1,1,2,3,5,8,13,21…. . Traders use this sequence to determine future market movements. The Fibonacci sequence is applied in trading through several methods and they are comprised in the Fibonacci Box. The box contains: the Fibonacci extensions, retracements, circles, fan and time methods. Using the numbers in this sequence and sometimes the sequence itself, investors manage to time certain turns in the financial market movements.

Another widely used trading strategy is the Darvas Box, developed in 1956 by former ballroom dancer Nicolas Darvas.  His trading method was to buy stocks that reached a higher value than the highest value they had in the past 52 weeks. The volumes he would buy would match the value prices extended to. In this manner, Darvas made a lot of profit in 1956, transforming $10,000 into $2 million in just 18 months. Skeptics say he only managed to be successful with his method because he was trading in a bullish market and that the same technique would not work in a bearish market. On the other hand, his strategy asserts you should only buy when the price has surpassed highest price of the past 52 weeks, as long as that price doesn’t fall too much, because in this case it could be the sign of a false breakout.The prime number bands indicator is a new approach to Darvas’ box and is used to forecast market trend reversals.

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Calculation

This indicator is charted by indentifying the highest and lowest prime number in the neighborhood and plotting the two series as a band.

Interpretation

Similar to Darvas’ box, the prime number bands indicator shows the space range where a market price moves into. Darvas’ range is the top and the bottom of the box, and in this case the blue line in Figure 1 identifies the price tops and the white line, the bottoms, designing the band where the price moves. Modulus Financial Engineering Inc. has created another indicator that uses prime numbers. The Prime Number Oscillator Indicator identifies the closest high and low prime numbers and plots the difference between the value at this moment and the next prime number.

The Prime number bands indicator is different from the prime number oscillator indicator, as the first one indicates a broader area where the values move. The oscillator only plots a line on the graph, but the two basically have the same purpose in forecasting the market trend turn. So basically if a constant upward movement is determined on the chart, the signal of a bullish market is present and therefore the market is safe, flourishing; contrarily, as prime number bands move constantly downwards, a bearish market is following and the market becomes unstable and volatile.

Conclusion

Prime numbers have always been somewhat of a mystery in the mathematics world. People have tried to use their awkward disposal in the design of financial indicators, thus taking advantage of their magical purpose to better predict market movements, trends and consequently, to successfully plan their next moves. As previously described in this article, many mathematics tools have become financial indicators over time, or have helped in their development. So in the end, stock market speculation is clearly a science, and a very exact one at that, since all the indicators have been developed through mathematics, statistics, geometry and sometimes physics.