Gann Theory - Gann analysis

Gann Theory

 Investment strategy developed by W D Gann, a successful twentieth century Wall Street trader, using continuous detailed analysis of the rate of change of stockmarket prices and applying strict trading rules, especially stop-loss levels.  The Gann analysis is based on Natural Law, geometrical proportions, and the Gann’s law of vibration, where every asset has its own vibration according to its individual energy.

Gann analysis

William Delbert Gann, was the creator of the  very popular Gann analysis, which includes such tools as  the Gann Fan, Gann Trend and Gann Grid. Gann used Natural Law (the usage of reason to analyse human nature and its moral acts) and geometric proportions based on the circle, square and triangle, to forecast prices and to provide a base for his theories. His analyses were based only on the relationship between time and price. 

Another theory  which the general Gann analysis is based on is the Law of Vibration. The principles of  Gann’s Law of Vibration, applied to the capital markets, were first presented to the public in his interview in 1909 to the “Ticker and investment digest”, and may be summarised as follows:

Each stock has its own distinctive path and range of activities based on trade volume, direction and others. All of them  move according to their individual patterns or as defined by Gann “Vibrations”. Gann also compared the stocks to atoms by stating that the first are also a kind of centre of energy which may also be defined mathematically. Another interesting statement from Gann is the opinion that stocks possess powers just as magnets do - they can attract and repel - meaning that sometimes they may be leaders in a market for a moment, and in the next, just stagnate.

 

Together with the above theories, Gann concepts were mostly based on mathematics, and its numbers retrieved from ancient history, like egyptology or even the bible. Some numbers had special meaning in his concepts of price forecasting, the most significant being 16, 25, 36, 49, 64, 121 and 144. According to Gann, these numbers together with geometry and  natural law have provided the proposed tools with a very significant forecasting ability.

Rule of thumb

• Gann's theoretical approach may seem to be rather enigmatic, however its practical application on financial markets comes down to usage of a number of tools
• The  most important are described within this section, and it can be quite simple

Gann Line

Gann Line is a simple tool indicating the direction of a current market tendency and its possible points of reversal.
The Gann Line is the most basic tool among the array of forecasting instruments based upon the theory created by W.D. Gann. The method is constituted by a line, drawn at an angle of 45 degrees, either ascending or descending. According to Gann’s theory, the trendline at 45 degrees represents a long-term trendline.

In the case of an ascending line, as long as prices remain above the trendline, the market is considered to be bullish. A fall of a price below that level may indicate a discontinuation of  a rising trend. On the other hand, prices below the descending line signal a significant downward market trend.

Rule of thumb

• The Gann Line is based on the theory that the long-term trends follow a 45 degree line

• As long as the prices remain above this line, the market tendency is considered to be bullish

Gann Grid

 
The Gann Grid may appear to be chaotic at first glance, however once properly set, it may provide insight into the development of the situation on the market.

Gan Grid is a variation of the 45 degrees Gann’s Line.

The 45 degree trendline is considered a long term trend, and prices  above that line are considered to be bullish. A situation when the market prices remain under the 45 degree line is considered to be bearish. Instead of having only one 45 degree trendline, the grid compiles a set of 45 degree lines plotted over a price chart. Whenever the price stays above one of the ascending lines, the asset is considered to be in a bullish movement.

On the other hand, whenever the price stays below one of the descending lines, the asset is considered to be in a bearish movement.

Rule of thumb

• Gann Grids implement the Gann’s theory, where a grid of lines at 45 degrees indicates  possible market patterns.

Gann Fan

 
Gann Fan is based on the theory that the relationship between time and prices follows certain patterns, and the tool is aimed at the separation of bullish from bearish prices.

The Gann Fan is one of the many techniques W.D. Gann developed to study price movements.

For the Gann Fan, it is required for charts to be drawn with equal time and price intervals, so that a price movement for each time interval equals a 45 degree angle. Gann believed that the ideal balance between time and price exists when prices move at a 45 degree angle, relative to the time axis.

Based on Gann theories, the Gann Fan is made up of 9 trendlines, which function as  support and resistance lines. When a price breaks one line, it should move to another line. The most important line in the Gann Fan is the 1x1 trendline (based on the 45 degree Gann line). Depending on the price being above or below this line, it will indicate a bull  or bear market. Besides this major trendline, Gann indicates 8 other minor trendlines, with angles greater/less than 45 degrees (4 greater and 4 less than 45 degrees). These minor trendlines are 1x2, 1x3, 1x4, and 1x8.

Rule of thumb

• The Gann Fan is generally used to determine trends - general market directions and potential support and resistance lines.