William Delbert Gann (1878-1955), built a reputation as one of the most successful stock and commodities traders of his era. He has also gained a legendary status with many being impressed not only by Gann’s legendary trading abilities, but also with his spectacular record when it came to making financial market forecasts. Gann started trading Stocks in 1902 before moving to New York in 1908 where he promptly opened up his own brokerage firm. However his early trading career was far from successful leading to Gann going bust more than once. Undeterred by these early failures, Gann carried on studying the markets and his research led to him making some startling conclusions. Their to this day remains great controversy regarding the extent of his trading successes and whether he did fully reveal his trading secrets before his death.
Gann reportedly made a total of $50 million dollars from his market forecasting and trading activities, at the time this was a very significant fortune. If we were to factor in inflation Gann’s 1950 fortune is equivalent to having to a $482 million dollar fortune today. After having traded the markets successfully for 50 years Gann retired to Florida where he wrote, published and taught on the subject of financial markets until is his death in 1955.
Basic Assumptions Made By Gann
Gann based his theory of price prediction on the following three assumptions:
- Price, time frame and range are the only relevant factors one needs to consider.
- Markets are cyclical in nature.
- Financial Markets are geometric in design and function.
According to Gann, by studying the past we are able to predict the future. It is also important to note that Gann though human nature was unchanging over time and therefore showed up in repetitive price patterns. Those of you who have studied Elliot Wave Theory, should not that Elliot Wave Theory makes the same assumption regarding the idea that human nature is fixed and thus we can establish and trade based on certain repeating Wave patterns. If assumptions like this are in fact true, it should be possible to identify repetitive price patterns and act upon them making significant profits. Some of the assumptions that underpin Gann’s theory have been challenged in recent times and thus their is an active debate regarding the usefulness of Gann Angles.
|Significant Gann Angles|
Central to Gann’s charting studies was the concept of geometric angles in conjunction with price and time. It was Gann’s believe that certain geometric patterns and angles had unique characteristics which could be used predict price action. Therefore all of Gann’s techniques require equal price and time intervals are used, to ensure that a rise of 1×1 will always equal a 45 degree geometric angle. In MetaTrader this can be achieved changing the scale ratio 1 to 1, or you alternatively use the Gann line, fan and grid tools built into the program. Which are added to charts and can be found under the insert tab.
Gann believed that the ideal balance between price and time exists when price either rises or falls at 45 degree angle, relative to the time access. Again to get accurate Gann angles you have to have charts setup to a 1 to 1 ratio. In the literature surrounding Gann Angles this magic 45 degree angle is often referred to 1×1 angle, this is due to the fact the price rises one unit for each time unit.
Gann angles are to be drawn between a significant bottom and top, or vice versa. 1×1 angle which was deemed must important by Gann signifies a bull market if prices are above the 45 degree line and bear market if prices are below. Gann also felt that the 1×1 trend line provided significant support during an uptrend and when the trend line is broken signifies a major reversal in the trend. Gann identified a total of nine important geometric angles, however he always held the 1×1 angle to be the most important.
Gann’s observations led him to conclude that each of the significant Gann angles can provide support or resistance depending on the trend. During a strong uptrend it is the 1×1 angle that tends to provide major support, with a major reversal being signaled when the price falls through the 1×1 trend line. Gann believed that prices would then fall to the next trend line, so if for instance the 1×1 trend was broken prices would fall down in line with the 2×1 angle. As one angle is broken through we can expect prices to consolidate around the next significant Gann angle. Gann developed several techniques for studying such market action, including Gann fans, Gann grids and cardinal squares.
The Importance of Time
Gann based his trading and forecasting methods on time used alongside price action, stressing the importance of determining not only the price which would signify a turning point but also the time at which it would happen. Being able to forecast both the time and price points at which reversals and trend changes will happen is the ultimate goal of technical analysis. It is debatable whether Gann revealed his real techniques in regards to identifying the time at which reversals and trend changes happen, however it is sometimes considered that his book Tunnel Through the Air contained his techniques in a concealed form. Some of Gann’s public statements regarding his methods can be summarized thus:
- According to Gann, time and price are the same. Hence the use of Gann angles to determine reversals and changes in trend.
- Time is the most important factor. Gann suggested that traders do day/week counts of 30, 45, 60, 90 and 180.
- Resistance levels in both time and price are 25, 33, 50, 66 and 75 percent of the previous range. These can also be extroplated out to 100, 150, 200.
- Trend lines work.
The Use of Gann Angles
Gann Angles aren’t used by many traders with opinions sharply divided about the relevance of his work. The most common use for Gann Angles these days is to indicate support and resistance levels. As there are many different methods to use to identify support and resistance levels, why use Gann Angles? Gann Angles add a new dimension to support and resistance studies, as both resistance and support levels can be diagonal.