Gann's Proven Rules and Methods for Trading
The smartphone has become such an integral part of our lives that it's hard to believe Apple started the trend only 5 years ago. Since then thousands of apps have been developed covering practically every facet of our lives.
Gann 9 fills an important void among financial apps: it gives the mobile trader and analyst community the possibility to effortlessly apply some of W.D. Gann's most profitable and practical tools and methods.
Anybody serious about technical analysis sooner or later comes across the name W.D. Gann. And many who do, find themselves spending countless hours trying to decipher the meaning and application of his more esoteric tools, often at the expense of his many solid and straightforward rules and methods for trading. Although less glamorous, if adhered to, Gann's simple, proven tools will help you become a more profitable and consistent trader.
Below we'll focus on some of these tools, and show you how easy it is to apply them anywhere, any time, on almost any instrument from around the world.
In his last book, 45 Years in Wall Street, published shortly before his death in 1955, W.D. Gann humbly stated that "one of the greatest discoveries I ever made was how to figure the percentage of high and low prices on the averages and individual stocks… The extreme high price or any minor tops are related to future bottoms or low levels. The percentage of the high price tells where to expect low prices in the future" (p. 20).
Although this may sound a little intimidating at first read, Gann tells us exactly what he means. It may come as a surprise to some, but his finding is amazingly simple, and bears close resemblance to the findings of another of his contemporaries: R.N. Elliott.
What Gann was trying to impress upon his readers was that there are two things they should do first when starting to analyze a security: a/ perform a proper division of the range between swing high and swing low prices, and b/ subtract 50% from important highs, or add 50%, 100%, and multiples thereof to important swing lows.
By proper division of the range, he meant a division in 12.5% intervals, as well as by 33.3% and 66.6%. Of all these retracement levels he assigned the biggest importance to the 50% level, which he called a balancing point or Gravity Center. If a stock bounces off a swing low, and retraces 50% of the drop, but is unable to break above that level, it remains in a weak position, and the downtrend has in all likelihood not finished yet. The reverse is true for stocks which find support at the 50% level, and resume their uptrend.
But let's not take Gann's word for it - let's prove it to ourselves. After all, he himself stated that one can never make a success of anything if you just guess, follow tips or trade on hope. Only by proving that a rule has worked in the past can we have the faith to apply it in the future.
The easiest way of proving this rule is by drawing up a template that does a proper division of the range, and then flipping through as many charts as possible. My tool of choice will be Gann 9, which makes applying many of Gann's tools and techniques a breeze, even for novice traders.
Below is a 120 week chart of the Sp500:
It's clearly visible how the 50% retracement level acted first as resistance, and later became support. You can easily flip through as many charts as you want by simply tapping the left or right arrows.
Gann also spoke of the importance of the 50% and 100% advance from an important low as levels where resistance is likely to be met. Conveniently, the app automatically selects the exact level and date of the swing low for the selected period, and applies different extension percentages. Below is an example for FFIV:
FFIV made a swing low of 69 on 8.23.11, and proceeded to make a swing high of 139.46 on 4.3.12, or $1.46 above the 100% extension level.
In all of his books and trading courses Gann stressed the importance of recognizing and following the trend. In 45 Years in Wall Street he specifically pointed out that there are always two trends: a major and a minor trend. The minor trend is a reversal of the main trend, and lasts only a short period of time. Gann also reminded us that the most money is made by following the main trend.
Acknowledging and embracing this fact, Gann 9 includes two tools designed to help traders identify and trade with the trend.
First is the Tunnel indicator, named and inspired by W.D. Gann's book Tunnel Through the Air. In the book, believed to be an autobiography of Gann, Robert Gordon conceived of a weapon called Tunnel through the air, designed to capture enemy planes.
By analogy, the Tunnel indicator in Gann 9 is designed to capture 80% of price fluctuations. It also projects the trend for the following week (in daily) or month (in weekly mode). This gives it the ability to highlight the support/resistance levels likely to be hit in the future, allowing traders plenty of time to prepare their trading strategies in advance (see chart below):
Second are the automatic trendlines/angles from max/min high and low prices.
This brings us to another novel concept developed by W.D. Gann: the close relationship between price and time, or as he used to call it, the squaring of price and time. What he meant by that is that traders need to pay close attention to both the horizontal and vertical axis of the chart. Trends, tops, and bottoms need time to develop and mature.
Some interpret this literally, meaning that price must travel 1 point in 1 day. My slightly different interpretation is that price must travel 1 price unit per 1 time unit. That's why the price unit (rise) in Gann 9 is automatically adjusted for every security. In other words, the rise of the angle is automatically calculated for every security, so as to square the range in the selected time frame. Users of course have the ability to adjust the angle. To draw a 2 x 1 angle, simply move the slider to 2, for a 1 x 2 angle, move the slider to .5:
The interpretation is very simple and straightforward: when price moves above the 1 x 1 angle, it is in a strong position and the trend is up. The reverse is true for a downtrend. When price drops below/rises above an angle, it is likely to reach the next angle, which in turn will act as support/resistance level.
The third and final facet of Gann's approach to trading I would like to touch upon here is the importance of keeping track of reactions (against the trend) and rallies (with the trend). Gann correctly observed that when a stock is in a strong uptrend, it will only react for a few short days/weeks, after which the main trend will resume.
To help traders visualize trend and countertrend moves more clearly, Gann 9 incorporates a color coded Swing indicator which gives users the ability to compare the duration of trend, countertrend, and sideways moves. This is a coincidental indicator, which is best used as a confirmation tool, and in conjunction with the Tunnel indicator, angles, and support/resistance lines:
Although the focus so far has been on W.D. Gann's simple and straightforward rules for trading, no discussion of his legacy is complete without at least mentioning the Square of 9. The genius of Gann was in recognizing the practical applications for trading of this ancient tool.
Without getting into details about its use and applications which could fill a whole book, I'll just mention that Gann was rumored to bring to the trading floor only a piece of paper with the Square of 9 numbers on it. There is no doubt in my mind that, had the technology existed in the 50's, he would have carried the Square of 9 on his smart phone.
Gann 9 is the only app that incorporates the Square of 9 and allows seasoned and novice analysts alike to perform both price and time calculations. The table below, automatically generated by Gann 9 from the October 4th Sp500 low, shows the following minor CIT dates all falling on the Cardinal Cross: 10/27/11, 11/1/11, 11/26/11, 12/20/11, 3/3/12 and 3/28/12:
The price table, generated from the March 9, 2009 low of 666, produced the following support levels: 888, 1012, 1143 and 1282, all 360° apart, as well as the 949, 1212, 1355 and 1429 resistance levels, all falling on the Cardinal Cross as well:
In summary, W.D. Gann left a unique and very rich legacy. His trading rules and tools should be in the arsenal of every aspiring trader, analyst and investor. He used to sell his courses for thousands of dollars 60+ years ago. Gann 9 makes the task of mastering his rules and techniques a little easier and a lot more affordable.