W.D. Gann, both a keen trader and a workaholic,
published many
books the titles were:
-
The Truth of the Stock Tape
-
How to Make Profits from Puts and Calls
-
Tunnel through the Air
-
Magic Word
-
How to Make Profits in Commodities
-
45 Years In Wall Street and New Stock Trend Detector As well he
produced
many instructional courses on trading later compiled by Billy Jones
into
2 trading courses; The W.D. Gann Commodity Course and the W.D. Gann
Stock
Market Course.
Gann was a prolific researcher throughout his lifetime with interests
in
numerology, weather forecasting and astrology. A very religious man and
a 33rd degree mason, Gann claimed he learnt about forecasting price
movements
from the Bible. His knowledge of mathematical and astrological
relationships
was very advanced. He used this knowledge to formulate trading and
technical
analysis techniques which students could follow to identify support and
resistance levels for most free trading markets.
Gann and the creator of Elliott Wave theory - R.N. Elliott -
shared
some similar beliefs about market activity. Gann believed that Bull or
Bear campaigns took 3 or 4 sections to complete the move. Elliott
believed
that there were 3 impulse waves in a Bull or Bear trend, with the
possibility
of an extended 5th Wave to give Gann’s 4th section. Gann believed that
markets most commonly retraced 1/2 (50%), 5/8s (62.5%) or 3/8s (37.5%)
of the previous range. Elliott believed that markets most commonly
retraced
61.8%, 50 % or 38.2% of the previous range.
Gann had an arsenal of price tools he taught students and it
was reputed
he charged $5000 for a weekend course in the early 1950’s, before his
death
in 1955. This article will cover many of Gann’s important time and
price
tools. Other tools such as The Square of Nine, Square of 144, Square of
90, Hexagon Chart and Gann’s various Master Calculators will be covered
in future articles
Gann's books are required reading for any trader or analyst
who wishes
to understand the basic ways to view any market. The knowledge outlined
in his works can easily be overlooked due to the abundance of
information
he presented. Just the same the pattern of information remains
identical
throughout all of his published work. Gann always said "History
Repeats"
and repetition was his way for students to get the message.
Gann’s work included Money Management Rules and Trading
Psychology concepts
expounded by many of today's top traders. He believed that you did not
have to be in the market all the time to make money. Here are some
quotes
from W.D. Gann taken from his last book, How
to Make Profits in Commodities. Page 11. Published by
Lambert-Gann.
-
"TIME TO STAY OUT OF THE MARKET: This is something important for
everyone
to know. You cannot make money by trading in the market every day or by
getting in and out every day. There comes a time when you should stay
out,
WATCH and WAIT until you determine a DEFINITE CHANGE IN TREND. Long
periods
of rest and relaxation protect your health and help your judgment which
will result in profits later."
"THE BEST WAY TO TRADE: The most money is made by swing trading, or
in the long pull trades, that is following a definite trend as long as
the market trend is up or down, you must learn by rules to wait until
the
market gets out of a rut or a trading range. Wait for a definite
indication
that it is going higher or lower, before you take a position for a long
pull trade. Always figure that YOU CAN BE WRONG and that the market
could
reverse. Therefore, follow your profits up with a STOP LOSS ORDER, or
get
out when you get a definite indication that the market has reached a
turning
point and that the trend is changing."
As a picture is worth a thousand words we will now look at some charts.
Please examine each chart closely as there are some important points on
them.
Gann's main trading philosophy was to trade with a close stop
loss and
select the most opportune trades in the direction of the main trend. To
confirm a trend was in progress, he would look for lower highs and
higher
lows to form after a major reversal in trend. The method he used to
monitor
trends and filter out any random market noise was the Swing Chart.
Figure
1 shows an example of a Swing chart. After July 30 1996 Gann would have
said the trend in the SPI was up as it was making higher lows and
higher
highs. Gann would be a buyer of the SPI from 2170.
Gann placed a lot of importance on the daily price patterns.
He talked
at length on the different types of reversal patterns you can use to
identify
an imbalance between supply and demand.
Figure - 2 shows some of the bar chart patterns Gann looked
for to confirm
turning points or to get him out of trades quickly with minimal
loss.
Gann taught students to face the facts and eliminate hope and
fear.
For instance, if a trader receives a margin call, he should close the
position
immediately, for the chances are he is wrong. He also taught that a
successful
trader studies human nature and does the opposite of what the general
public
does. Most traders lose money because they are too greedy, they over
trade,
they expect abnormal profits in normal markets.
Gann's analysis techniques for predicting major market tops
and bottoms
were based on cycles. Gann believed that the future was only a
repetition
of the past. Gann maintained that as each new generation exerted
its
influence on the markets similar bull and bear markets would
unfold.
Gann's 20 year cycle relies on the fact that human nature never
changes.
Therefore as each new generation came to power they would behave
similarly.
Their inexperience in speculation would cause markets to rise and fall
to prices unwarranted by supply and demand. The result is that when the
BOOM is over, the young generation suffer severe losses, get some
valuable
experience and are not eager to try it again. To predict a top or
bottom
for the year Gann would look at the market activity in the years
back 10, 20, 30, 40, 50, 60 and 100 years for similar conditions.
The first basic technique Gann taught students was to watch
anniversary
dates with past market tops and bottoms for a change in trend. When it
came to shorter term analysis of time, Gann devised a system of
counting
off time in solar degrees of a year from past market tops and bottoms.
He counted divisions of the year in eighths and thirds. When clusters
of
time counts from past tops and bottoms highlighted a future date, that
date was significant for a reversal of trend.
Figure -3 shows the major anniversaries in the All
Ordinaries
The cycle of one year has 365 days. The circle of one year has
360 degrees.
The Earth revolves around the Sun in an elliptical path moving closer
to
and away from the Sun during its orbit. This is the reason the days and
degrees relationships speed up and slow down. To explain, there are 4
cardinal
points in the circle, 90, 180, 270 and 360 degrees.
As the Earth moves around the Sun the daylight hours progressively
get longer and shorter every six months. The shortest day of the year
in
the Southern hemisphere is June 21, (in the Northern
hemisphere
it's the longest day), the shortest day is known as the Winter Solstice
(this is 270o). The longest day of the year is December 22,
90o, the summer solstice. September 21 (360o) and
March 21 (180o) are the days when daylight and darkness are
equal, these are the Equinoxes.
........
The four seasons of the year evolve around these 4 points. Some
people may recognise these cardinal points at angles 180 degrees
opposed
to this explanation.
Refer to Figure - 4 and note that the 2310 high in late August
96 came
on 1.75 (1 and 3/4 years) x 360o or 630o solar
degrees
from the November 23 1994 Low at 1793.
.
It is important to realize that the Earth takes 179 days to
move from
0o to 180o around the Sun. Yet, it takes 186 days
to move from 180o to 360o around the Sun.
The two points in the circle, of one year, where the relationships
between days and degrees begin speeding up and slowing down are the perigee
and the apogee. The perigee (distance to the Sun is closest)
occurs
about January 3 each year, the apogee (distance to the Sun is
furthermost)
occurs July 4 each year.
When comparing cycles it is preferable to work in degrees for
greater
accuracy, for this you need to use an ephemeris or a computer program,
such as CycleTrader, capable of calculating degrees precisely.
Gann developed a unique method of squaring price to time and
time to
price. He taught that every stock or commodity maintained a vibration
where
there was a relationship between 1 degree of price to 1 degree of time.
The difficulty with many stocks and commodities is in finding what
value
represents 1 degree of price. For the purposes of this demonstration I
have used the All Ordinaries Index and used 1 unit of price to 1 unit
of
time.
A market can square price to time in several different
ways.
1. Price units in a trend equal time units in a trend.
2. Base price equals time units to a new change in trend.
3. Prior price range equals times units to a new change in trend.
4. Prior time units equals next price range to a new change in
trend.
5. Current price equals time units from a prior change in trend. (zero
angle).
To keep a track of the position of his price to time he would
draw GANN
ANGLES up from lows and down from highs. He also used 4 to 1, 2 to 1, 1
to 2 and 1 to 4 angles. 1-4 means 1 unit of time to 1/4 unit of
price.
If you study Figure 5 carefully you will see an example of
each of the
methods Gann used to determine when a change in trend could
eventuate.
Gann placed extreme importance on squaring between price
ranges, these
could be retracement levels or alternating campaigns. The All
Ordinaries
Index between 1991 and 1994 is a perfect example of squaring between
price
ranges.
See Figure - 6. Range 2 is 2 times range 1.
The example in Figure - 7 epitomizes everything about Gann's
knowledge
of order within the market. The time by degrees in each alternate trend
"squared" between extreme tops and bottoms. This example should get any
trader's or analyst's attention.
When I first read Gann's words, "Time is the most important
indicator.
When time is up the
market must change trend." I crossed the threshold of market knowledge,
inspired to learn more.
Ever since, I have been rewarded with a knowledge allowing me the
patience
to wait for the
major setups to trade. The principals illustrated here will work with
all degree of market trends, anything from 7 days to 5 years.
Most analysts should be familiar with price retracement
levels
acting as support or resistance between trends of similar degree. Gann
taught his students to measure prior price ranges and divide them into
1/8ths and 1/3rds, these levels can act as support in a downtrend or
resistance
in an uptrend. When a market reaches these levels and reverses, all the
trader has to do to verify a trend change is to look for a clustering
of
time cycles on that day. Gann angles also determine
time & price intersections. Figure - 8 shows the recent 2086 low
in the SPI on July 17 achieving an exact 50% retracement and the March
11 post election panic low at 2158 was on a 37.5% retracement.
The day of 17th July 1996 when the SPI reversed trend on the
50% retracement
of all the gains made between 1994 and 1996 there were several
important
time cycles peaking. I have shown 2, the time between the major lows in
1991 and 1992 was cycling 2.00 times and the time between the 1992 low
and the 1994 high was cycling 2.00. It is quite amazing how the market
continues to vibrate between highs and lows in a pure geometric form.
Most
people do not realize how easy it is to identify time cycles in
advance.
The charts in this article were prepared using my
personal WAVETRADER
/ CYCLETRADER SOFTWARE. I designed and programmed this software to give
me the advantage I needed to beat the market. I have continually
revised
and upgraded my software over years of new experiences. Now in 1996 I
feel
I have finally produced a tool that gives me total control over my own
trading destiny. Along the way I have made the software available to
other
traders, and have been amply rewarded from their input. I have found
over
the years there are a continuous number of new people entering the
market
and losing money, some depart, others regroup and try to learn methods
that will make them successful traders. The bottom line nevertheless is
each trader needs tools and methodologies from which to formulate a low
risk trading plan, one to follow mechanically where the trade selection
process remains similar. Once the trade selection process is automated
into a systematic approach, then the trader needs to have a workable
money
management plan to ensure success.
Gann summed it up best with a set of rules to follow, his
bottom line
though was, "Do not trade on guesswork or gamble on hope. Knowledge
brings
profits. Never trade without STOP LOSS ORDERS."
I hope these brief and limited examples of technical analysis
methods
illustrate what is possible, if you do a little work.
Bryce T. Gilmore
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