A Lesson In Gann

12/03/03 03:57:15 PM

by Koos van der Merwe

Years of studying the works of W.D.Gann have led me to apply his strategies in ways that may be slightly different to anything found in current books on the great trader. Here is one example of how I use a Gann fan to determine a buy/sell strategy.

Security: AVN.UN-T
Position: Sell

When I draw a Gann fan, I am a traditionalist. Gann never had the (dis)advantage of computers, so he drew all his charts by hand with one unit of price equal to one unit of time. This is a square, and the diagonal of a square is a 45 degree angle, hence the name for the primary Gann angle, is 1 x 1. Gann believed the price would move up in the boundaries of the 1 x 1 forming a top close to or at the 1 x 1 line.

This worked well with a $1 price, the unit of time being 1 minute, 1 hour, 1 day even 1 week. What what would happen if the average share price was $2 or $3 or $5? The unit of time would remain the same but the unit of price would differ. He therefore decided to "fix" his price based on what he experienced. He fixed the unit of price at 1, 2, and 5, and used multiples or divisors of 10, 100 or 1000 of these numbers. Therefore, 20 is as acceptable as 0.05.

Once he established his 1 x 1 line, he decided to form a fan, and using a protractor, divided the angle between the 45 degree and the 90 degree angle into two. These he referred to as the 2 x 1 and the 4 x 1 if below the 1 x 1 line, and 1 x 2 and 1 x 4 if above the 1 x 1 line. His original fans included a 1 x 8 and an 8 x 1, but somehow, most computer programs today have left them out.

A busy Gann chart.

Graphic provided by: AdvancedGET.

The Gann 1 x 1 fan is displayed in thick red on the above chart, and the other angles are in blue. I selected October 1, 2001 as the low point to start the fan rather than the lowest low reached, because this is when the RSI indicator gave a divergence buy signal.

Note the following:

1. The price topped out on the 1 x 1 on August 27, 2003.

2. The RSI gave a sell signal. I have identified other potential tops where the RSI gave a sell signal. However, none of these tops were viable, even though the RSI gave a sell signal, because the tops were way above the 1 x 1 line.

A look at the chart, also shows that I have drawn in lines parallel to the 1 x 1 from various tops and bottoms. These lines are in maroon. I have numbered the lines A and B, with the area in between them as the sell zone, and C and D with the area between them as the buy zone. This is self-explanatory. I have marked the sell and buy levels, and you'll notice in one case, prices appear to have moved up after selling, when it prices hit the buy zone, they had fallen back almost to the sell level. The idea is that when the chart tests the third sell level, after the third buy, any reverse that looks like a possible sell should be taken. On the above chart, after the third buy signal, I received a sell on August 27, 2003.

Traders however, will sell when the chart is in the sell zone, and buy back when the chart is in the buy zone.

For the future, you would have been out of the share, or short the share. The RSI indicator is presently suggesting a possible buy, not confirmed by any Gann signal on this chart. You would therefore wait until a definite Gann signal is given.

The chart looks very busy, and it is. In my next article, I will use the same chart and show you how to determine possible turning points using Gann technique.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.