Article: Square Root Theory

William Dunnigan did extensive research in the early 1950's and published in 1954 and 1955. He used the square root theory as part of his calculation of a profit objective. He considered this method a 'golden' key and received recognition for his work in various journals. The square root theory is that prices move in units of the square root, meaning prices at $64 (8 squared) would move to $49 (7 squared) or to $81 (9 squared). The forecast price is one point up or down, based on the square root. The theory says a price may move to a level that is a multiple of the square root.

Since LC1G was used as an illustration in the first article, I thought you might be interested to see the square root theory applied to the cattle chart. Nothing is a better teacher of a principle than an example.

Let's forecast a price based on the Sept 13th low of $70.050. The first step is to normalize the price to the range of 100 to 1000 by adjusting the decimal point. Find the square root of the normalized value, add 1 point or a multiple number of points, and square this value to obtain the forecast price.

1) Normalize 70050 to be 700.50
2) Square root of 700.50 is 26.467
2) Adding 1 gives a value of 27.467
3) 27.467 squared is 754.43, which is the midpoint of the up move in the middle of November.
4) Adding 2 gives a value of 28.467
5) 28.467 squared is 810.37. So 81037 is a forecast price. The Jan 16th high was 81075!!!!

Now, is it just a coincidence that a major high is within 4 cents of a price calculated from a major low price? Or, does that make you want to look for this principle in other charts?

Tip: A price may move to a level that is a multiple of the square root.

As I studied the LC1G daily chart some more, I see that there is a significant high of $75.500 on Jan 7th, 2000 (not shown in the chart above. However, Jan 7th is shown in the next chart). It can be used to forecast the Sept 13th low as follows.

1) Normalize 75500 to be 755.00
2) Square root of 700.50 is 27.477
2) Subtract 1 gives a value of 26.477
3) 26.477 squared is 70105. So 70105 is a forecast price. The Sept 13th low was 70050, or just a 5 cent difference!