In this tutorial, you will learn all about the Gann Theory in Technical Analysis.
William D. Gann, a famous American trader, has discovered, developed, and applied with remarkable success a set of mathematical rules and geometric shapes based not only on price movement but also on price duration.
Gann’s primary objective is to determine the future levels of resistance and support that prices may encounter shortly.
This makes it possible to build appropriate buying and selling strategies.
Gann Theory and Support and Resistance
These levels of support and resistance are calculated by dividing the price movement into octaves (1/8, 2/8, 3/8, 4/8, 5/8, 6/8, 7/8, 8/8) and thirds (1/3 and 2/3), thus obtaining a series of percentages that constitute the most frequent levels of retraction.
The most important of these divisions is certainly 4/8 (50%), followed by 3/8 (37.5%) and 5/8 (62.5%), which are essentially equivalent to Fibonacci retracements of 50%, 38.2%, and 61.8%.
A method used by Gann Thoery to calculate the probable levels of support and resistance is based on the use of geometric angles.
Starting from a significant minimum or maximum, trendlines are drawn whose angular coefficients are obtained by combining price and time.
The most important of these corners is certainly 45°, as it represents a perfect balance between the movement of prices and the passage of time.
According to Gann Theory, it is not enough to analyze the pure evolution of prices using Japanese candles. The time factor plays a crucial role in studying the behavior of financial markets.
Gann then constructed some indicators which, together with price movements and the passage of time.
Gann identifies not only the levels of resistance and support of some importance but also the time areas during which prices could reverse their trend.
One of these indicators is Gann Square.
At the center of the Gann, Square square is the minimum price recorded on the market, and every minimum price increase is recorded clockwise in the various boxes.
Numbers falling inside the row and center column of this square are the most critical levels of support and endurance, levels that must be reached after a precise number of sessions.
Gann then used several geometric shapes such as circles, triangles, and squares to determine potential time areas where changes in price trends could occur.
Gann considering the circular geometric shape as the harmonic shape par excellence.
He built the so-called Gann Hexagon. Starting from a minimum or a maximum calculates after how many days there may be a reversal.
Gann Theory Market Cycle
To better understand this cyclical/repetitive trend of financial markets, a recurring pattern of analysis can be used, which tries to identify the current characteristics of the various market movements.
In particular, the indications provided by the quantitative analysis can be combined with the study of sentiment on the market.
In this way, six cyclic phases can be identified, the characteristics of which are described below.
To describe this repetitive cycle, we hypothesize that prices, after an absolute increase of a sure consistency, stop their growth.
The climb is very often interrupted by a reduction in upward pressure, with buyers reducing their purchases, as they do not feel like opening up new long positions.
In a climate of optimism, a short-term maximum is formed, with indicators that first record excesses (overbought) and then draw negative divergences from price developments.
At a later stage, there is a strengthening of the downward pressure, with some buyers liquidating the long positions opened during the previous upward momentum, while other operators open short positions because they believe that the market can accuse.
In this way, the market is undergoing a short-term downward trend, with (directional) indicators entering the short term.
Prices are falling rapidly, fuelled by a sharp strengthening of downward pressure, with sellers, therefore in control of the market.
Prices, after a drop of a sure consistency, stop their fall.
The descent is very often interrupted by a reduction in downward pressure, with sellers decreasing their intensity.
In a climate of pessimism (sometimes excessive), a minimum of the short term is formed, with indicators that first record excesses (oversold) and then draw positive divergences concerning price developments.
At a later stage, there is a strengthening of the upward pressure, with several buyers opening up long positions, attracted by prices that seem convenient.
There is a short-term upward trend in the market, with (directional) indicators entering the long-term phase.
Prices are picking up as upward pressure intensifies, with buyers taking control of the market. The climb continues until you return to the starting situation.
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