People with knowledge of technical indicators and active in the investing world are probably familiar with the name WD Gann and its famous Gann trading theory. However, for those who don't know, William Delbert Gann was a financial trader who started his trading career in 1902. He is famous for designing various technical analysis tools such as WD Gann Angles, Square of 9, Hexagon and more, of which these rules range from basic money management principles to advanced trading techniques.
Although these rules were made over a hundred years ago, they are so true today, which is why they are widely used by traders for all types of investment vehicles, including stock and cryptocurrency markets.
In this article, we will discuss:
What is Gann Trading Theory?
Gann's theory predicts the movement of stocks and assets taking into account the past, present and future of the market. The objective is to understand that at different times, different aspects will influence the market. Therefore, Gann used geometric proportions such as squares, triangles and circles in his analysis, along with various angles and astrological formations to predict the price movement of an asset or stock. However, at its core, Gann's theory is based on three general areas of prediction:
Time cycle: Gann believed that everything that happens in a market has historical reference points, everything that happened before is likely to be repeated in the near future. Therefore, he identified some important time cycles, including 90 years, 82 to 84 years, 60 years, 45 years and 20 years. To provide an example, let's understand how to calculate Gann time cycles by taking the example of a 90-year cycle:
W. D. Gann defined the 90-year cycle as: “When we start from sunrise or the horizon and measure down to noon, we get an arc of 90 degrees, which is straight up and down starting from the bottom. 90 months or 90 years is a very important period of time. The 90-year Time Cycle is one of the most important because it is twice 45. This period of time should always be observed at the end of long periods of time.”
Price study: since Gann focused primarily on geometric angles and mathematical relationships, the theory also makes angles its basis for helping to predict future price movements. Gann's theory allows traders to draw different angles by analyzing and evaluating period data, including short-term and long-term market highs. These angles suggest the price pattern of an asset or stock. Once the angles are drawn, they can be calculated by connecting the price points on the charts. In addition to angles, the price study also includes support and resistance lines as well as pivot points.
Pattern study: investor activities, in addition to stock movements, are evaluated in the pattern study. It also analyzes market swings using reversal patterns and trend lines.
How to use Gann's theory for intraday trading?
Gann Square 9 Strategy: Although Gann was not a stock trader, day traders around the world still use his rules, especially the square of 9 method. It helps identify the alignment of price and time to predict prices.
The Gann square of 9 means that a geometric structure has 9 * 9 = 81 numbers. As can be seen in the image above, the static square has the number 1 in the center, representing the historical minimum of the time series in the center. This value is then increased by moving in a spiral shape.
Traders struggling to use the strategy to build a 9 square indicator can learn how to trade the Gann square in the Tradingview as they have simplified the process in their step-by-step guide.
Fan Trading Strategy: Gann fans represent a series of lines called Gann angles.
They are overlaid on a price chart to help traders predict price changes. These angles are plotted along a 45 degree price trend. However, to ensure that the angle has a true 45-degree angular line, a Gann Fan can be drawn at a reversal point. In the case of an angle other than the 1/1 line, this strategy can be misleading and useless.
An ideal Gann fan will introduce you to a new world of support and resistance, so make the most of it by integrating the Gann fan with different technical standards such as upward flare wedge and upward wedge to find important entry and exit points.
Conclusion
Gann based his forecasts of price movement on price, time, and range nearly a decade ago. His theories are still employed because of their simplicity and potential to earn successful returns. Although Gann has laid out all trading principles and rules succinctly, the average trader should try to refine his theory and use it in conjunction with various technical indicators and charts.