Gann theory was developed by W.D. Gann in the 1900s. His innovative approach involved using geometric constructions to divide time and price into proportionate parts, known as Gann angles. These, along with other Gann indicators, are used by traders to predict areas of support and resistance, price moves, and tops and bottoms. We explore why these decades-old methods of analyzing an asset’s direction remain popular.
How to understand Gann indicators
Gann indicators are based on the idea that markets rotate from angle to angle. Once an angle is broken, the theory goes, the price moves towards the next one. Individually, these are known as Gann angles, and together they’re called a Gann fan. Traders choose a starting point and then map out extending lines into the future, attempting to predict how the market will perform.
Calculating Gann fans
Gann fans don’t need a formula to use but an understanding of slope degrees. The best way to visualize this relationship between time and price is to think of a piece of graph paper filled with squares or grids.
If the price increases the height of a square within a one square time frame, a line from the bottom left to the top right of the square will have a 45-degree slope. If the price increases at a slower rate, the angle of ascent will be flatter than 45 degrees. Should the inverse be true, the angle will be steeper than 45 degrees. Gann thought 45 degrees was the ideal angle for charting, but his theory incorporated the following ratios between price and time when plotting trends: 1:8, 1:4, 1:3, 1:2, 1:1, 2:1, 3:1, 4:1, and 8:1.
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How to read Gann fans
Mapping a fan to a chart attempts to forecast the implications of a variety of price rises relative to the passage of time. All Gann fans are drawn from a central 45-degree angle that extends from a specific trend reversal line. This is called the 1:1 line because the price will rise or fall at either side of it. Here's a step-by-step guide on how to read and use a Gann fan:
1. Identify the key high or low point
Start by identifying a significant high or low point on your price chart. This will be the anchor point from which the Gann Fan will be drawn. This point should be a prominent peak or trough that marks a clear change in the price trend.
2. Plotting the Gann fan
Most charting software provides a tool for drawing Gann Fans. Select the tool and click on the identified high or low point to anchor the fan.
The fan will automatically draw several lines extending from the anchor point at different angles.
3. Understanding the angles
Each angle represents a different rate of price change. For instance, a 1:1 angle suggests a balanced rate where price moves one unit for every unit of time, while a 2:1 angle indicates a steeper rate of ascent (price moves two units for every unit of time).
4. Interpreting the Gann fan
Support and Resistance: The lines of the Gann Fan act as dynamic support and resistance levels. Price movements will often pause, reverse, or accelerate near these lines.
Trend identification: The angle at which price moves relative to the fan lines can indicate the strength and direction of the trend. A price movement staying above a 1x1 angle is considered bullish, while a movement below it is bearish.
Breakouts: When the price breaks above or below one of the fan lines, it often signals a potential change in trend or an acceleration/deceleration in the current trend.
5. Using Gann fan with other tools
The Gann Fan can also be combined with other technical analysis tools such as moving averages, trend lines, and volume indicators. This can provide confirmation of signals and help limit the likelihood of false signals.
6. Adjusting for different time frames
Gann Fans can be applied to various time frames, from intraday charts to long-term charts. Ensure that the time scale and price scale are appropriately adjusted for the time frame you are analysing.
An example of applying a Gann fan to financial trading
Suppose you're analysing a daily chart of a stock and identify a significant low point. You anchor the Gann Fan at this low. The 1:1 line angles upwards, and you notice that the stock's price often pulls back to this line before continuing higher. This suggests that the 1:1 line is acting as a strong support level, and the stock is in a bullish trend as long as it remains above this line.
Gann theory: a range of technical analysis tools used by traders to predict price movements
Gann Theory provides a novel approach to reading the stock market through by using geometric angles, time cycles, and price levels. Tools like Gann Fans help identify key support and resistance points, predict trend reversals, and assess trend strength.
Despite its complexity, Gann's techniques can offer valuable market insights, especially when combined with other technical analysis tools, offering traders a deeper understanding of market dynamics.
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