I believe all of you mastered skills in Wyckoff Method, as we recently had a deep look into it. Today I want to start a new topic. And, we will talk about the basics of Gann Theory. I use his theory in my complex analysis and building portfolios for managed accounts.
Interesting Facts about Gann Theory
Mr. Gann developed such great tools as Gann angles, Square of 9, Circle of 360. His theory is based on ancient mathematics, geometry, and even astronomy and astrology. Can you imagine that? It sounds weird, but his theory is very accurate. As you know in 1933 Gann made 479 trades. 422 of them were profitable!
Based on my experience, I can say, that Gann Theory works great in complex with other methods. Swing traders have to add it to their tools – no doubts. It’s less effective for intraday traders.
“Do not trade or invest if motivated by hope, greed, or fear,” Gann declared. Instead, rely on an analysis of stock price trends. It will be worth mentioning that Gann created balanced portfolios always. He warned against placing more than 10% of capital in any one security. To identify a trend Gann relied on price changes over time. He paid special attention to the ratio of price changes to units of time as reflected in the angle of the trendline when it was charted.
What does the 1:1 ratio mean?
In one unit of time (day, hour, etc depending on what TF you use), the trading instrument (commodity, stocks, etc) moved up or down one point. On the chart, it looks like a line at a 45-degree angle. By Gann and his theory, it’s the strongest indicator of a continuing trend. I think you have heard about “Gann angles.” Other angles indicative of the strength of a trend, according to Gann, are (in order of importance) the angles created by ratios of 2:1, 1:2, 4:1, 1:4, 8:1, and 1:8.
Based on his theory the angles formed over 30-day periods the most accurate show the resistance and support levels. In case if the 30-day period was not conclusive, Gann recommended that 90-, 120-, 180-, 240-, 270-, and 360-day periods be used. He also stated that the overall market moves in various cycles that range from 10 to 100 years in length.
By the way, you can make a quick check of Gann theory. Every fifth year of a decade (every year ending in a zero or a “5”) is a bullish year for the US30 (Dow Jones) by Gann. Just check charts from 1905.
In my next post, I will explain in detail how to use his theory.
Written by Inna Rosputnia, Lady F Trader
Wishing you a great week!
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