In the world of technical analysis, W.D. Gann’s theories have intrigued and mystified traders for decades. This approach goes beyond traditional chart patterns, incorporating geometry, time cycles, and even astrology to predict market movements.
While some scoff at its unconventional methods, others swear by its ability to identify hidden patterns and potential turning points. Let us discuss what is Gann theory and everything about it in this knowledge centre.
What is Gann Theory?
William D. Gann developed a theory for traders in the 1990s. The theory used mathematical formulas and geometrical patterns to discover rich insights. Traders use these insights to make informed decisions and earn attractive returns.
The Gann theory states that the price of an asset changes with an angle. Price changes are related to different geometrical figures, thus helping predict future movements. One can draw angles on a price chart to determine the support and resistance levels with this theory.
What are Gann Angles?
A Gann angle is derived by joining a top and a bottom on the price chart. An angle drawn on the price chart will have a slope, which is measured in degrees. The most important angel angle in the Gann theory is 1:1. A 1:1 angle is considered to have a slope of 45 degrees. It represents a line that moves a unit vertically for every unit change in the horizontal direction, indicating the relationship between the price and time of the asset on the chart.
William D. Gann proposed many other angles that can be observed after joining the tops and bottoms. Other Gann angles are 1:8 (82.5 degrees), 1:4 (75 degrees), 1:3 (71.25 degrees), 1:2 (63.75 degrees), 2:1 (26.25 degrees), 3:1 (18.75 degrees), 4:1 (15 degrees), 8:1 (7.5 degrees). These angles with slopes or lines can help determine the support and resistance levels. Investors can also identify the trend direction with the help of Gann angles.
How is Gann Theory Used in Stock Market Trading?
Investors use the Gann theory for stock market trading, especially intraday traders. The Gann Square or Gann Wheel is one of the popular methods introduced in the theory. It involves arranging numbers in a spiral pattern within the square. The central number in the square is 1, which represents the 45-degree angle. Similarly, each number in the square represents an angle. You start from the centre and move outwards in the clockwise direction to arrange other numbers. One can analyse the distance between numbers and establish price relationships. The Gann Square method also helps establish time relationships.
Investors use the Gann theory in the stock market in different ways. One of the tools used is the Gann Fan, which is used to determine support and resistance levels. The Gann Fan is constructed by selecting a pivot point on the chart. The pivot point could be a major high or low on the price chart. Lines are drawn from the pivot point at different angles, say 45 degrees, 26.6 degrees, etc. These lines represent trendlines, thus helping investors determine potential support and resistance levels. The Gann Fan tool also helps determine the direction of the market trend.
Gann Square and Gann Fan aren’t the only tools/methods used under the theory. Investors also rely on Gann Boxes, Gann Retracements, Gann Cycles, Square of Twelve, and other tools/methods proposed under the Gann theory. The theory plays a major role in traders’ technical analysis. Since the stock market is designed geometrically, price movements are also geometric.
How to Use Gann Trading Strategy?
One can apply the Gann theory strategy to predict market movements. However, you must first understand the significance of different Gann angles. You must understand them because the market moves at different angles, as per the Gann theory. One must pay attention to points where the asset price intersects Gann angles. When the price intersects a Gann angle, it might lead to support or resistance. It might also represent the continuation of the trend or reversal in the market.
You must also observe the relationships between different Gann angles on the price chart. Look for different angles intersecting at a certain price level. It might indicate the strengthening of the price level in the market. Investors using Gann angles for trading must adjust them over time. As the market conditions change, you must draw new Gann angles to determine the price-time relationship.
Advantages of Using the Gann Trading Strategy
The Gann theory offers several tools and methods to make informed decisions. You can choose from a range of Gann methods for price analysis based on your preferences. These tools/methods are likely to produce accurate results.
According to some studies, the Gann theory strategies are around 92% accurate, which is more than several other methods. Investors having doubts can always use other methods together with the Gann theory to increase accuracy.
Conclusion
The Gann theory can help determine future price movements and support and resistance levels. One can use Gann Fan, Gann Square, and other methods to determine price movements. Besides price analysis, the Gann theory can help understand the impact of time on price movements. Investors often use this theory to determine the direction of the upcoming trend in the market. Learn more about the Gann methods/tools now!
