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Old 10-03-2012, 08:18 PM   #1

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The Basics of Gann Analysis

Successful trading requires some way of accurately forecasting how prices will move in the future and in most cases, this can prove to be even more difficult than it seems. Technical indicators that make the attempt actually forecast price activity (rather than to simply measure the performances seen in prior price history) might seem like an impossibility but there are examples of indicators that seek to do just that. One example of this can be seen in the work of W.D. Gann, an early 20th century intellectual whose models attempted to forecast the outcome of a variety of world events (from the end of World War I to the outcome of the Stock Market Crash).

One of Gann’s earliest discoveries was the”Market Time Factor,” which earned him a position in the history of technical price analysis. Essentially, Gann’s techniques base price forecasts on three factors (Range, Price, and Time) and operate on the assumption that markets are cyclical in nature.

Viewing the markets geometrically (in function and design), Gann was able to arrive at three critical areas for determining what is likely to occur in future price activity: Price Studies (based on support and resistance levels, price angles and pivot points), Time Studies (which focus on broad social patterns to discover potential recurrences), and Pattern Studies (which use reversal patterns and trend lines to isolate swings in the market). These central areas form the basis of Gann’s Studies.

Measuring Gann Angles

While Gann Analysis does have many unique features, one similarity its has with other forms of technical analysis is that empirical approaches will outweigh any “hard and fast” rules in place at the early stages. But with that said, there are important rules and techniques that set Gann Analysis apart from other trading methods. When constructing Gann Angles, part of the empirical approach comes from identifying time units, which is done by studying price action and measuring the distances between significant price movements. Gann angles are then viewed in relation to these areas (often in medium term time frames) for accuracy.

The second step, (also empirical) is to identify the highs and lows where the Gann Lines will be drawn. This is often done using other forms of analysis (for example, pivot points or Fibonacci), and is done to construct what Gann termed “price swings” and “vibrations.” The third step, is to select which pattern is best for your analysis. The attached pictures show the Gann options, which are variations on line slopes. In these examples, the slope of the blue picture is half of that seen in the red picture.

Next, patterns should be drawn, and this will either be drawn downward and to the right (starting from the high point), or move upward and move right (from the low point). Finally, pattern repetition should be identified (if present), as Gann Analysis is based heavily on the cyclicality of price movements. While some of these steps are subjective in nature, following these steps and optimal requirements are found, the analysis can be a valuable tool for forecasting potential price movements.

Gann Angles Put to Use

Gann angles are often used to mark support and resistance areas, but one differentiating factor is that Gann found these lines could actually be diagonal in nature, which puts a very different twist on the ways support and resistance is viewed by most active traders. One benefit of diagonal trend lines is that they can be used to determine areas where position sizes can be increased, locations of new highs and lows, and as a means for quickly discerning the wider trend that is in place.

Overall, the use of Gann Angles is simple to implement but can take time to successfully master on a consistent basis. The technique, when used in conjunction with other forms of indicator analysis, can offer traders a new way of looking at support and resistance areas (and market trends in general) but can take time to perfect given the subjective nature of some of its elements.
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The Basics of Gann Analysis-gann-1.png   The Basics of Gann Analysis-gann-2.png  
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