Quadrant Lines
What Are Quadrant Lines?
Quadrant Lines divide the high-low range into four equal sections. There are five lines and four quadrants. The top line marks the high, the bottom line marks the low, and the other three lines form the quadrants. The middle line marks the midpoint of the range. Quadrant Lines are not an indicator as such. Instead, they are used as a measuring stick for price action. Quadrant Lines allow you to visually quantify price levels relative to the defined range.
Calculating Quadrant Lines
Interpreting Quadrant Lines
Quadrant Lines visually reference current prices relative to the defined high-low range. As you can see from the formula, quadrants are the same size because each equals 1/4 or 25% of the high-low range. After an advance, Quadrant Lines allow you to quickly identify price points that retrace 25%, 50%, and 75%. Prices have retraced 50% when they reach the middle quadrant line. Corresponding retracements can also be seen when drawing Quadrant Lines over a decline. These lines help you quickly identify advances that retrace 25%, 50%, or 75% of the defined decline.
Log Scaling
Quadrant Lines might not look equidistant on the log scale, but they are equidistant in absolute terms. Log scaling shows price movements in percentage terms. An advance from $65 to $75 is 10 points in absolute terms or 15.3% in percentage terms. An advance from $100 to $110 is also 10 points, but much less in percentage terms (just 10%).
A 10-point 15.3% move on a log scale will appear bigger than a 10-point 10% move. A 10-point move on an arithmetic scale will look the same regardless of the starting point ($65 or $100). For this reason, the bottom quadrant may appear bigger than the top quadrant when using log scaling. Even though the point moves are equal, an equal advance from a lower starting point produces a bigger percentage gain, which is reflected in the log chart. You can see the difference in the charts below.
Quadrant Lines To Identify Pullback Depths
The chart below shows IBM with the Quadrant Lines covering an advance from late October to mid-January. The stock firmed near the 75% retracement, the top of the lowest quadrant. This is not an argument for 75% as a key retracement that you should watch carefully. Quadrant Lines simply help quantify the depth of the pullback.
The chart below shows Google (GOOG) with the Quadrant Lines covering the decline from early January to late February. GOOG exceeded the 25% and 50% retracements with the advance above $590 but did not exceed the 75% retracement.
The Bottom Line
Quadrant Lines can identify retracements or determine the relative location of current prices within a given high-low range. Even though these lines are not indicators per se, there are some similarities with the Fibonacci Retracements Tool, which uses 38.2%, 50%, and 61.8% retracements. After an advance, a decline that retraces only 25% would be deemed shallow and could be used as a sign of strength. A decline that retraces 75% could be deemed excessive, and the most one could expect from a correction. This could be viewed as the last reversal point before the move returns back to the original low. As with all indicators and line studies, Quadrant Lines should be used in conjunction with other aspects of technical analysis.
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