The Mystery Of W.D. Gann

GANN AND CYCLES

Gann's ability to forecast market events has never been duplicated. All his forecasts were based on mathematical and geometrical cycles. He believed that the 24-hour day and the seasons of the year influenced the stock market. This was before the internationalization of the stock markets; he believed the ultimate cycles were the rotation of the Earth, the rotation of the moon around the Earth, and the rotation of the Earth around the sun.

Now, it sounds as though I am moving away from mathematics and moving into astronomy, which is the very thing that often reduces Gann's credibility among those who read his works. But after all, the market in the US opens at 9:30 am and closes at 4:00 pm, Monday to Friday (except for holidays). This is a cycle.

There are 24 hours in a day, of which six and a half hours make up the trading day. However, Gann also worked out that brokers take a break for lunch. He therefore considered allowing 30 minutes to cover the period as the market sets up after opening at 9:30 am, the periods before and after lunch, and the period before closing. This was a rule of thumb, but it meant there were actually six hours of trading in a day, or 360 minutes.

By coincidence (or is it?) circles are generally divided into 360 degrees. This intrigued Gann and solidified his belief in a 360-minute trading day. He also decided that the way we divide a year into calendar months is cockeyed. Some months have 31 days, others 30 days, and one month has 28 days (and every fourth year, 29). He looked for something more consistent, and with 365 days in a year, decided that the moon was a far more reliable guide than mankind's slipshod monthly divisions.

The year can be divided into 52 weeks, which is a number that Gann considered to be very important. He also divided the year into four quarters of 90 days. Thus, for 2004, the quarters will be as follows: March 30, June 28, September 26, December 25. These are the quarters used in financial reporting.

But why reinvent the wheel? The ancients had already divided the year into four quarters. Their dates are called solstices, and the dates for 2004 are March 20, June 21, September 23, and December 22 — close enough as a margin of error to be acceptable. Why not use these dates? This thinking certainly lends a bit of mystery, or perhaps mysticism, to his work.

And so, W.D. Gann the mystic was born. His methods did not concentrate solely upon the markets; his book Tunnel Through The Air forecasted the start and end dates of World War II, the dates of significant battles, who would start the war and how it would end, and mentioned the "ultimate weapon" used by the US against Japan.

GANN AND MATHEMATICS

Now, all mysticism aside, let us look at W.D. Gann the mathematician and successful stock market investor. Gann did an enormous amount of work in his attempts to forecast trading cycles and entry and exit points in the market. When he died, he left a study filled with notes and charts, but he never left a single idea or note as to which strategy he preferred to use in his trading. Students of his technique use them all, and hope that one of them works.

Gann's main work was his attempts to take emotion out of his trading. He realized early on that reacting to your emotions affects your trading. Emotions of hope, fear, greed, and impatience had to be overcome. If he could remove emotion from his trading — if trading could become a nonstressful, automatic decision, he would become successful — and he did.

The most important decision is to place a stop-loss order at the same time you place a trade, and never cancel it.

He stressed this over and over again in all his writing.

THE THEORY

At the time Gann lived, shares did not move much, nor were they as highly priced as they are today. He decided to combine one unit of time and one unit of price. This combination formed a "square," which became equivalent to one time period. He believed that a square should be 52 units, based on a 52-week year. Half of 52 is 26, and half of 26 is 13; 13 + 26 = 39. These are the values that led to his famous Gann angles (Gann fan), the basis of his cyclical analysis (Figure 1).

Figure 1: Gann angles or Gann fans.

Where conventional cycles run from a low to a low, or a high to a high, with a Gann fan over 52 weeks, a cycle could run from a low to a high, with a reversal after one 52-period cycle.

• A 1x1 angle is an angle that travels upward one point in price to one unit in time.
• A 1x2 angle rises one point in price for every two units in time.
• A 1x4 angle rises one point in price for every four units in time.
• A 2x1 angle rises two points in price for every one unit in time
• A 4x1 angle rises four points in price for every one unit in time.

These angles, Gann believed, not only offer support and resistance levels on a chart, but also measure space and time periods. They are completely mathematical and geometric calculations — and a picture is far easier to analyze than mathematical calculations of prices and times. It also allows a visual pattern to appear.

Angles are drawn from major highs or lows; they move up from a low, and down from a high. Angles from highs represent resistance levels, and angles from lows represent support levels. Gann would also draw an angle from zero at the same time level as the price chart. To him this was a significant support level.

William Gann believed that the distance between the high and low in a Gann square should be divided into eight sections. This was because the market at that time was priced in eighths. Today, stocks are priced in decimals, so very possibly we should divide the range into tenths. You would use the range from the lowest point the price reached to the highest point reached. This then becomes a square of the low, and to project into the future, you would use a 1x1 projection, or a multiple or division of 1.

The following are the numbers Gann found important in calculating a Gann square, and subsequently a Gann fan: 1, 2, 5, 10, and multiples or divisions by 10 of these numbers (0.1 is a Gann number, as is 100). Today's computer programs offer Gann squares that can be any fraction between a high and a low, and the projection is a usually a number similar to the previous Gann number. This square of the range between a previous high and low was to Gann the most powerful tool available to forecast future trends.

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