Gann Theory: A Pattern, Price and Time Combined Analysis
- The study of pattern, price, and time and how their relationships affect the market.
Gann based predictions of price movements on three premises:
- Price, time, and range are the only three factors to consider.
- The markets are cyclical in nature.
- The markets are geometric in design and in function.
Based on these three premises, Gann’s strategies revolved around three general areas of prediction:
- Price study: This uses support and resistance lines, pivot points, and angles.
- Time study: This looks at historically reoccurring dates, derived by natural and social means.
- Pattern study: This looks at market swings using trendlines and reversal patterns.
- Gann Angles are drawn from major price peaks and bottoms and are used to show trend lines of support and resistance.
- This allows the analyst to forecast where the price is going to be on a particular date in the future.
Constructing Gann Angles
Determine the time units:
- In most cases, the intermediate-term (such as one- to three-month) charts produce the optimal amount of patterns.
Determine the high or low from which to draw the Gann lines:
- The most common way to accomplish it is to use other forms of technical analysis—such as Fibonacci levels or pivot points.
Determine which pattern to use:
- The two most common patterns are the 1×1 (left figure), the 1×2 (right figure), and the 2×1.
- The 1X2 means the angle is moving one unit of price for every two units of time.
- The 1X1 is moving one unit of price with one unit of time.
- The 2X1 moves two units of price with one unit of time.
Draw the patterns:
- The direction would be either downward and to the right from a high point, or upward and to the right from a low point.
Look for repeat patterns further down the chart:
- This technique is based on the premise that markets are cyclical.
Gann Angles Provide Support and Resistance
- Uptrending angles provide support.
- Downtrending angles provide the resistance.
- Because the analyst knows where the angle is on the chart, he or she is able to determine whether to buy on support or sell at the resistance.
Gann Angles Determine Strength and Weakness
- Trading on or slightly above an uptrending/downtrending 1X1 angle means that the market is balanced.
- Trading on or slightly above an uptrending/downtrending 2X1 angle means that the market is in a strong uptrend/downtrend.
- Trading at or near the 1X2 means the trend is not as strong.
- Anything under the 1X1 is in a weak position.
Gann Angles Can be Used for Timing
- The basic concept is to expect a change in direction when the market has reached an equal unit of time and price up or down (1X1 angle).
- This timing indicator works better on longer-term charts, such as monthly or weekly charts; this is because the daily charts often have too many tops, bottoms, and ranges to analyze.