Chapter 2 Gann Theory in a Nutshell
Gann Theory can be described as the study of pattern, price, and time relationships and how these relationships affect the market. Gann Theory looks at pattern, price, and time as the key important elements in forecasting the future movement of the market. While each element has its own characteristics, each also has a unique, overlapping quality.
The focus of Gann Theory is to find the interlocking relationship between these three primary indicators of changes in trend and market direction. In other words, in certain instances a pattern has a large influence on the market, while at other times price and time exert their dominance. It is the balance of these three elements, especially price and time that creates the best trading opportunities that can lead to more success in the market. Gann Theory helps the trader to determine the best combinations of pattern, price and time to initiate successful trades. While trades can be triggered by each element individually, a trader who weights his signal too much toward one of these elements may experience a large number of losses, whereas a trader who is patient enough to wait for a proper balancing of pattern, price and time may experience a large number of looses, whereas a trader who is patient enough to wait for a proper balancing of pattern, price, and time may experience more success.
Pattern study consists of the proper construction of minor, intermediate, and main trend-indicator swing charts and closing-price reversal patterns. Price study consists of Gann angle analysis and percentage retracements. Time study looks at swing timing, cycle timing, and historical dates. The combination of these there time factors helps the trader decide when and where to buy or sell. In this book, I describe techniques that help the trader determine how to discover these elements through proper chart construction and how they are related in trading activity.
While there is much material available about Gann Theory, very little of it explains how to put the Gann tools to practical use in a trading system. I used to think that this sort of material was valuable until I placed a stop according to some huge astrophysical law. In other words, information about the origins of cycles and price and time relationships is very interesting, but if it cannot be converted to practical use in a trading system then I consider it essentially useless. Research that reveals that a sixty-year cycle bottom is due in 1998 plus or minus two years does not help you trade soybeans profitably today. This is why you have to focus your attention on the market and what pattern, price, and time are telling you at the present.
It is my intention to focus you on the portions of Gann Theory that can be used to create a profitable trading system. My studies of Gann’s original work show that he primarily used swing charts, Gann angle clusters, and cycle counts from former tops and bottoms. There is also evidence that he used astrology to initiate some trades. This latter topic is not discussed in great detail; however, as it involves a great deal of background research before it can be utilized. Since it does fall under the concept of time, which is a key element of Gann analysis, I do discuss some simple examples of how Gann applied financial astrology to the markets. In addition, Gann created and used a series a master price and time charts, which he used to determine current and future support and resistance points.
Many of his writings contain rules for trading hypothetical examples. The only evidence I found of an actual trade recommendation was in his Master Egg Course. This information, however, became the basis for my research, as it made clear to me what was important and what was not in developing a Gann-based trading system. Each paragraph highlighted how Gann combined pattern, price, and time into a trading strategy. In the following paragraph, he speaks of his use of the Master Chart:
Example: May 3, 1949, October Eggs high 5025. This was on the timing of 168, which is 14 years, and 169 is the square of 13. Note that the price of 5010 hits 7/16 point of the circle at 5010, which would make this a resistance and selling level based on the Master Square Chart. See notes and time periods on the right hand of this Master Chart.
This example concerns his use of support and resistance angles:
I wired Chicago last night that October Eggs was a sure sale today. The reasons were as follows: Based on the angles on the daily high and low chart, the angle of 4x1, which moves 2 ½ points per day from the first top at 4760 made December 6, 1948, crossed at 5020. The 45 degree angle moving up from the low of 4685 on March 16, 1949, crossed at 5020. The angle of 67 ½ degrees, which moves up 20 points per day from the low of 4785 on April 18, crossed at 5020 and the angle moving up from 4735 on February 14 crossed at 5005, making 4 important angles coming out at this high point. A sure point for great resistance because the time from the starting of the option was over 6 months. The time from the first important top on December 6, 1948, was close to 5 months and the angle from this top called the top exactly.
In the next example, Gann speaks of the importance of a price scale:
Since receiving 1 letter stating that the contracts of Eggs were changed on February 1 and that 1 point now equals $1.44, I did some experimenting to adjust angles to the money value because that is very important. I wanted to get something that would work to an angle of 11 ¼ angle and by multiplying 144 x 8 it gave 1152 or $11.52 profit on 8 points. This would give an angle 5 x 4 or about 39 degrees, moving up at the rate of 8 points per day, instead of the 45 degree angle which moves 10 points per day.
A discussion of the swing chart and angles appears in the following paragraph:
Years of this research and experience have proved that the first advance from which a reaction runs more than 3 days will set an angle for an important top later. This rule works on weekly and monthly charts also. After there is a second or third top and when there is a greater decline from the third top, an angle from that bottom must call bottoms and tops of the next advance. You will note that on the greatest decline from January 24 to February 8, the price declined to the angle from the extreme low of 4485, and the angle of 2 x 1 from the third top called the second and also the last bottom at 4560. From this low of 4560 we start the angle moving up at the rate of 8 points per day. It calls the low for March 2, next it called the top at 4850 on March 30 from which a 2-day reaction followed, and finally on May 3 this angle in green crossed the first top angle at 5020, on May 3, 1949.
In the next paragraph, Gann combines a percentage retracement point, the swing chart, and angles:
The market closed at the halfway [of] the range on May 3. May 4 was signal day. The opening was at 50 cents; the high was 5005; the low for the day was 4980; the market closed at 4985. This was the first day since April 18 that the market had broken the low of the previous day and closed under. The total time from 4560 to 5025 was 58 market days in view of the fact that the option is over 6 months old a greater reaction can be expected. The 45 degree angle from the last low of 4795 is the most important one to watch for support and a secondary rally. The decline should run at least 5 days with not more than 1 day rally.
He then interprets the data obtained from the swing chart:
Other reasons for the top on May 3 were as follows:
First move up from 4485 to 4760-total gain 275 points.
First move down 215 points.
Second move up from 4560 to 4850-total gain 290 points.
Second move down 4850 to 4775-loss 75 points.
Third move up 4775 to 5025-total gain 250 points. This was 25 points less
than the first gain and 40 points less than the second gain up.
In this paragraph, Gann discusses the importance of timing using the swing chart:
The greatest time period from January 24 to February 28 to February 8 was 11 market days. And the last advance from April 18 was 11 market days; therefore, when the market declines more than 11 days, it will overbalance the greatest time period. When it declines more than 75 points it will overbalance the last price declines or space reversal, and indicate lower prices.
The next four paragraphs use the Master Chart to interpret the market. Also, time and price are discussed in geometric terms.
Study the Master Chart against previous tops and bottoms and you will see how it confirms the geometrical angles on other charts.
Example: 5010 is opposite 180 degrees from 60 cents, 4890 is on a 45 degree angle from 1050, the extreme low price. 4950 is 180 degrees from 45 cents. From 30 cents, which is half of 60, the 45 degree angle crosses at 48 cents. This is why the market made 3 bottoms around 48 cents on April 13 to 18. The Master Chart shows the same resistance levels and by using the time period with it, you will learn the basic mathematical and geometrical law for market movement.
By going over back records and carefully studying all the important tops and bottoms you will see the working of the law.
Since the fluctuation of Eggs on the minimum of 5 points now equals $7.20 which is 2 circles of 360 degrees, ½ of this is 360 and makes an angle moving at the rate of 2 ½ points per day very important. The fluctuations will now work better to the circle of 360 degrees. In a few days I will send you another Master Chart showing each 15 degree angle and the resistance levels which will help you to determine resistance and turning points.
Finally, after analyzing swing charts, percentage retracements, support and resistance angles, and the Master Chart, he is able to reach a conclusion and executes the trade.
Example: The range in fluctuations and the life of the present option of October Eggs is 4485 low and 5025 high, making a range of 540 points. Subtract from 540 and we have the balance of 180. This means that the market had advanced 1 ½ circles or cycles and was at a 180 degree angle on May 3, 1949. The writer sold October Eggs at 5015 on May 3, 1949.
Although the trade failed to live up to its expectations, I was more interested in the thought process that led to determining the entry level. Studying Gann’s first-person account, I discovered the trading techniques that he considered important in determining a trade. When Gann started trading seriously, he used a combination of swing charts, percentage retracements, and angles to determine price support, and swing charts and anniversary (cycle) dates to determine timing. Later, he developed master charts of price and time to trade. This technique is beyond the scope of this introductory book because the more simple techniques need to be mastered before they can be used successfully. In addition, specific analysis tools are required that are only available through the Lambert-Gann Publishing Company. Additionally, a deep understanding of cycles and their causes is required.
Generally speaking, however, Gann used a combination of pattern, price, and time to generate his trades. As I said earlier, these are the main parts of Gann analysis that I consider important in developing a trading system. Therefore, although Gann demonstrated an interest and proficiency in many other areas dealing with price and time analysis, pattern, price, and time are the major themes of this book.
[1] All quotations in this chapter about the Master Egg Course are from the W.D. Gann Commodities Course, and are reprinted with permission per Nikki Jones of Lambert-Gann Publishing Co., Box O, Pomeroy, Washington 99347
[2] As reprinted in the W. D. Gann Technical Review, vol. 1, no. 11, p.1, November 12, 1982
[3] From a missive on Gann letterhead with the title, “Soy Beans: Price Resistance Levels,” which originally came with the W. D. Gann Commodities Course, but which was left out of later reprints of the course.
Gann Theory can be described as the study of pattern, price, and time relationships and how these relationships affect the market. Gann Theory looks at pattern, price, and time as the key important elements in forecasting the future movement of the market. While each element has its own characteristics, each also has a unique, overlapping quality.
The focus of Gann Theory is to find the interlocking relationship between these three primary indicators of changes in trend and market direction. In other words, in certain instances a pattern has a large influence on the market, while at other times price and time exert their dominance. It is the balance of these three elements, especially price and time that creates the best trading opportunities that can lead to more success in the market. Gann Theory helps the trader to determine the best combinations of pattern, price and time to initiate successful trades. While trades can be triggered by each element individually, a trader who weights his signal too much toward one of these elements may experience a large number of losses, whereas a trader who is patient enough to wait for a proper balancing of pattern, price and time may experience a large number of looses, whereas a trader who is patient enough to wait for a proper balancing of pattern, price, and time may experience more success.
Pattern study consists of the proper construction of minor, intermediate, and main trend-indicator swing charts and closing-price reversal patterns. Price study consists of Gann angle analysis and percentage retracements. Time study looks at swing timing, cycle timing, and historical dates. The combination of these there time factors helps the trader decide when and where to buy or sell. In this book, I describe techniques that help the trader determine how to discover these elements through proper chart construction and how they are related in trading activity.
While there is much material available about Gann Theory, very little of it explains how to put the Gann tools to practical use in a trading system. I used to think that this sort of material was valuable until I placed a stop according to some huge astrophysical law. In other words, information about the origins of cycles and price and time relationships is very interesting, but if it cannot be converted to practical use in a trading system then I consider it essentially useless. Research that reveals that a sixty-year cycle bottom is due in 1998 plus or minus two years does not help you trade soybeans profitably today. This is why you have to focus your attention on the market and what pattern, price, and time are telling you at the present.
It is my intention to focus you on the portions of Gann Theory that can be used to create a profitable trading system. My studies of Gann’s original work show that he primarily used swing charts, Gann angle clusters, and cycle counts from former tops and bottoms. There is also evidence that he used astrology to initiate some trades. This latter topic is not discussed in great detail; however, as it involves a great deal of background research before it can be utilized. Since it does fall under the concept of time, which is a key element of Gann analysis, I do discuss some simple examples of how Gann applied financial astrology to the markets. In addition, Gann created and used a series a master price and time charts, which he used to determine current and future support and resistance points.
Many of his writings contain rules for trading hypothetical examples. The only evidence I found of an actual trade recommendation was in his Master Egg Course. This information, however, became the basis for my research, as it made clear to me what was important and what was not in developing a Gann-based trading system. Each paragraph highlighted how Gann combined pattern, price, and time into a trading strategy. In the following paragraph, he speaks of his use of the Master Chart:
Example: May 3, 1949, October Eggs high 5025. This was on the timing of 168, which is 14 years, and 169 is the square of 13. Note that the price of 5010 hits 7/16 point of the circle at 5010, which would make this a resistance and selling level based on the Master Square Chart. See notes and time periods on the right hand of this Master Chart.
This example concerns his use of support and resistance angles:
I wired Chicago last night that October Eggs was a sure sale today. The reasons were as follows: Based on the angles on the daily high and low chart, the angle of 4x1, which moves 2 ½ points per day from the first top at 4760 made December 6, 1948, crossed at 5020. The 45 degree angle moving up from the low of 4685 on March 16, 1949, crossed at 5020. The angle of 67 ½ degrees, which moves up 20 points per day from the low of 4785 on April 18, crossed at 5020 and the angle moving up from 4735 on February 14 crossed at 5005, making 4 important angles coming out at this high point. A sure point for great resistance because the time from the starting of the option was over 6 months. The time from the first important top on December 6, 1948, was close to 5 months and the angle from this top called the top exactly.
In the next example, Gann speaks of the importance of a price scale:
Since receiving 1 letter stating that the contracts of Eggs were changed on February 1 and that 1 point now equals $1.44, I did some experimenting to adjust angles to the money value because that is very important. I wanted to get something that would work to an angle of 11 ¼ angle and by multiplying 144 x 8 it gave 1152 or $11.52 profit on 8 points. This would give an angle 5 x 4 or about 39 degrees, moving up at the rate of 8 points per day, instead of the 45 degree angle which moves 10 points per day.
A discussion of the swing chart and angles appears in the following paragraph:
Years of this research and experience have proved that the first advance from which a reaction runs more than 3 days will set an angle for an important top later. This rule works on weekly and monthly charts also. After there is a second or third top and when there is a greater decline from the third top, an angle from that bottom must call bottoms and tops of the next advance. You will note that on the greatest decline from January 24 to February 8, the price declined to the angle from the extreme low of 4485, and the angle of 2 x 1 from the third top called the second and also the last bottom at 4560. From this low of 4560 we start the angle moving up at the rate of 8 points per day. It calls the low for March 2, next it called the top at 4850 on March 30 from which a 2-day reaction followed, and finally on May 3 this angle in green crossed the first top angle at 5020, on May 3, 1949.
In the next paragraph, Gann combines a percentage retracement point, the swing chart, and angles:
The market closed at the halfway [of] the range on May 3. May 4 was signal day. The opening was at 50 cents; the high was 5005; the low for the day was 4980; the market closed at 4985. This was the first day since April 18 that the market had broken the low of the previous day and closed under. The total time from 4560 to 5025 was 58 market days in view of the fact that the option is over 6 months old a greater reaction can be expected. The 45 degree angle from the last low of 4795 is the most important one to watch for support and a secondary rally. The decline should run at least 5 days with not more than 1 day rally.
He then interprets the data obtained from the swing chart:
Other reasons for the top on May 3 were as follows:
First move up from 4485 to 4760-total gain 275 points.
First move down 215 points.
Second move up from 4560 to 4850-total gain 290 points.
Second move down 4850 to 4775-loss 75 points.
Third move up 4775 to 5025-total gain 250 points. This was 25 points less
than the first gain and 40 points less than the second gain up.
In this paragraph, Gann discusses the importance of timing using the swing chart:
The greatest time period from January 24 to February 28 to February 8 was 11 market days. And the last advance from April 18 was 11 market days; therefore, when the market declines more than 11 days, it will overbalance the greatest time period. When it declines more than 75 points it will overbalance the last price declines or space reversal, and indicate lower prices.
The next four paragraphs use the Master Chart to interpret the market. Also, time and price are discussed in geometric terms.
Study the Master Chart against previous tops and bottoms and you will see how it confirms the geometrical angles on other charts.
Example: 5010 is opposite 180 degrees from 60 cents, 4890 is on a 45 degree angle from 1050, the extreme low price. 4950 is 180 degrees from 45 cents. From 30 cents, which is half of 60, the 45 degree angle crosses at 48 cents. This is why the market made 3 bottoms around 48 cents on April 13 to 18. The Master Chart shows the same resistance levels and by using the time period with it, you will learn the basic mathematical and geometrical law for market movement.
By going over back records and carefully studying all the important tops and bottoms you will see the working of the law.
Since the fluctuation of Eggs on the minimum of 5 points now equals $7.20 which is 2 circles of 360 degrees, ½ of this is 360 and makes an angle moving at the rate of 2 ½ points per day very important. The fluctuations will now work better to the circle of 360 degrees. In a few days I will send you another Master Chart showing each 15 degree angle and the resistance levels which will help you to determine resistance and turning points.
Finally, after analyzing swing charts, percentage retracements, support and resistance angles, and the Master Chart, he is able to reach a conclusion and executes the trade.
Example: The range in fluctuations and the life of the present option of October Eggs is 4485 low and 5025 high, making a range of 540 points. Subtract from 540 and we have the balance of 180. This means that the market had advanced 1 ½ circles or cycles and was at a 180 degree angle on May 3, 1949. The writer sold October Eggs at 5015 on May 3, 1949.
Although the trade failed to live up to its expectations, I was more interested in the thought process that led to determining the entry level. Studying Gann’s first-person account, I discovered the trading techniques that he considered important in determining a trade. When Gann started trading seriously, he used a combination of swing charts, percentage retracements, and angles to determine price support, and swing charts and anniversary (cycle) dates to determine timing. Later, he developed master charts of price and time to trade. This technique is beyond the scope of this introductory book because the more simple techniques need to be mastered before they can be used successfully. In addition, specific analysis tools are required that are only available through the Lambert-Gann Publishing Company. Additionally, a deep understanding of cycles and their causes is required.
Generally speaking, however, Gann used a combination of pattern, price, and time to generate his trades. As I said earlier, these are the main parts of Gann analysis that I consider important in developing a trading system. Therefore, although Gann demonstrated an interest and proficiency in many other areas dealing with price and time analysis, pattern, price, and time are the major themes of this book.
[1] All quotations in this chapter about the Master Egg Course are from the W.D. Gann Commodities Course, and are reprinted with permission per Nikki Jones of Lambert-Gann Publishing Co., Box O, Pomeroy, Washington 99347
[2] As reprinted in the W. D. Gann Technical Review, vol. 1, no. 11, p.1, November 12, 1982
[3] From a missive on Gann letterhead with the title, “Soy Beans: Price Resistance Levels,” which originally came with the W. D. Gann Commodities Course, but which was left out of later reprints of the course.
