Tips on Technicals - Gann Analysis
| Indicator type: |
Time and price target finder |
| Used to: |
Identify primary and secondary trend line slopes. Often combined with Fibonacci retracements and projections. |
| Markets: |
All cash and futures, not options |
| Works Best: |
All time frames |
| Formula: |
Markets are divided into 1/8's and 1/3's so slopes for trend lines, in terms of time and price, respectively, are
| 1x8 = |
82.5 degrees |
2x1 = |
26.25 degrees |
| 1x4 = |
75.0 degrees |
3x1 = |
18.75 degrees |
| 1x3 = |
71.25 degrees |
4x1 = |
15.0 degrees |
| 1x2 = |
63.75 degrees |
8x1 = |
7.5 degrees |
| 1x1 = |
45.0 degrees |
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These lines originate from market bottoms. Lines from market tops are inverted so the angles can be considered negatives of the above. |
| Parameters: |
Since having all of the above defined lines on the chart would be confusing, often only the three central lines are used. Also used are a set of Fibonacci retracement lines for finding intersection points. |
| Theory: |
Gann analysis is set of mathematical and geometrical rules for the markets that help predict potential market turning points. W.D. Gann placed strong significance on 50% retracements. When a market is trending, it moves according to an equilibrium between price and time. According to Gann, this means that the market should move in equal units of price and time -- one unit of price change should occur with the passage of one unit of time. This 1x1 line by definition is at an angle of 45 degrees on the chart and represents major rising and falling trend lines.
Unfortunately, the definition of what one unit of time and price means is a bit subjective. Using the next higher increment to the time frame used can be a good guide to unit determination. For example, a daily bar chart might have one week as its time unit. An instrument trading in 1/8's might use integers as its price units. By starting with long-term charts and observing major trends, it will be possible to draw the 45 degree lines as supporting and resisting trend lines.
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| Interpretation: |
Gann angles, also known as a Gann Fan when drawn together, indicate likely trend lines for the market to follow. The 45 degree line is the most important. Markets trend along these lines and target other lines when the original trend lines are broken. Intersections of Gann lines and Fibonacci retracement lines can identify market turning points. Intersections of rising and falling Gann lines are also significant. The more perpendicular these crossing lines are, the more significant the price and time of the crossing. |
Prices moving along the outer lines are thought to be moving at rates that are out of equilibrium. This means that they are moving too fast or too slow and eventually move back to the 45 degree (1x1) line. Figure 1 shows that the rising 2x1 trend in US Treasury bond yields was broken in July 1996 and the market moved down to the 45 degree line. When the 45 degree line is broken, as the falling 1x1 line was earlier in February 1996, there is a potential change in major trend.
In figure 2, Fibonacci retracement levels are added to the chart corresponding to the rally beginning January 1996. The combination of the 38.2% retracement and the rising 1x1 line ended the 6-week correction. Major turning points generally occur when retracement levels and Gann angle lines intersect such as they did in August 1996. Also, the intersections of rising Gann lines from market bottoms and falling Gann lines from market tops can be employed. The more perpendicular the lines, the more significant the intersection becomes. Projecting these lines out the future can help identify likely price and time targets.
