Introduction to the Gann Analysis Techniques A Member of the Investment Data Services group of companies Bank House Chambers 44 Stockport Road Romiley Stockport SK6 3AG Telephone: 0161 285 4488 Fax: 0161 494 6432 E-Mail: info@gann.co.uk Web: www.gann.co.uk
INTRODUCTION Gann analysis is an art which is improved with hard work and experience and is a form of Technical Analysis which uses past price movements to determine future positions. You should not attempt to make an investment decision without first learning all the techniques contained within this book. Gann used a combination of mathematical rules to help to determine where and when he should make a trade. Try to imagine the analysis process as similar to piecing together a jig-saw puzzle. One piece is not conclusive evidence of the final picture, but as more pieces fall into place the picture becomes clearer. We approach Gann Analysis in a similar way. Each technique is explained in turn on the following pages. It is advisable to start your analysis on the long term monthly chart first, then move to the weekly chart, and then the daily chart. When you have identified an area where action might be warranted, wait for the short term indicators on the daily chart to confirm your signal before making the trade. (One of the most useful features of Gann Analysis is that all the techniques can be applied to any type of investment. Therefore, where a share is used to illustrate an analysis feature, the technique can be applied to a commodity too). ALWAYS use a stop loss which is a method of closing a loss-making position or protecting any gains. Without a stop loss you could be remorselessly punished by the market. The function of the IDS software is to present up-to-date price information in graph form and to provide the tools with which you can utilise the Gann Techniques. The program will not make the decision for you and therefore your interpretation of the chart is of paramount importance. You should not let your own hopes and fears influence your decision. William Gann is credited by many as being the most successful trader in the history of the markets. He has said that you can make four good trades a year and become extremely rich. This means that you do not have to be invested all the time. The desire to make a trade does not necessarily mean that it would be correct to do so. Let your aim be to wait for indications which you simply cannot ignore. Patience is more difficult for the Professional Advisor or investor, but he too should understand that there is a time to buy; a time to hold; and a time to sell. On the following page you will find Gann s Trading Hints which were devised and operated by William Gann. If you break any of these rules you are likely to put your investments in jeopardy. Study them well, for without these rules all the investment analysis techniques which form the rest of the book will be to no avail. To accompany this book, a continuous series of workshop training sessions is provided by Gann Management Limited. Our most successful clients make a point of regularly attending these workshops - regardless of their experience. A common comment made by those who do is Every time I attend a workshop I learn something which makes it well worthwhile.
GANN S TRADING HINTS 1. Amount of capital to use: Divide your capital into 10 parts and never risk more than 1/10 th of your capital in one trade. 2. Always use stop loss points. They should be mental stop loss points. You should always protect your trades with stop loss points three to five points away from the price paid. 3. Never, under any circumstances, overtrade. This would be violating the rule on capital. 4. Never let a profit run into a loss. After you once have a profit of 3 points or more, continue to raise your stop loss order so that you will have no loss on capital. 5. Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts. 6. When in doubt, get out, and do not get in when in doubt. 7. Trade only in active shares. Keep out of slow dead ones. 8. Never limit your orders or fix a buying and selling price. Trade at the market. 9. Don t close a trade without good reason. Follow up with a stop loss point to protect your profits. 10. Accumulate a surplus. After you have made a series of successful trades, put some money into a surplus account to be used only in emergency or in time of panic. 11. Never purchase a share merely to obtain a dividend. 12. Never average a loss. This is one of the worst mistakes a trader can make. 13. Never get out of the market just because you have lost patience, or get into the market because you are tired of waiting. 14. Avoid taking small profits and big losses. 15. Never cancel a stop-loss point after you have placed it at the time you make the trade. 16. Avoid getting in and out of the market too often. 17. Be just as willing to sell short as you are to buy. Let your object be to ride with the trend and make money. 18. Never buy just because the price of a share is too low, or sell short because the price of a share is too high. 19. Be careful about pyramiding at the wrong time. Wait until the share is active and has crossed resistance levels before buying more and until it has broken out of the zone of distribution before selling more. 20. Never hedge. If you are long of one share and it starts to go down, do not sell another share short to hedge it. Get out of the market, take your loss and wait for another opportunity. 21. Never change your position in the market without good reason. When you make a trade, let it be for some good reason or according to a definite plan, then do not get out without a definite indication of a change in trend.
HOW A SUBJECT IS ANALYSED. GML analysis procedure can alter from time to time in order to suit the technical position of a subject. For instance, if a share has fallen almost 50% from its extreme high, then our first check would be to see if there is the likelihood of a signal in the G1 area - but this would not be an appropriate analysis tool to use on a share which is in new high ground. GML consider that the most important analysis techniques are probably the percentages (including major Gann levels) and the angles, but this does not necessarily mean that a signal will only be given for these reasons. GML approach the analysis of an item by applying angles and percentages on the monthly, then the weekly, and then the daily chart. We look for any areas on the chart where there are a number of percentages indicating a strong level of resistance above the current price, or strong support below the current price. We will then apply all the other analysis techniques to see if the areas identified by the percentages are supported by such analysis as retracement and natural levels etc. As more levels of support or resistance build up in the same price area the analysts will consider a signal appropriate. Ideally we would then look to see the price either rise to a level where we could consider a short position, or see the price fall to a level where we could consider a long position. Alternatively if a price surprises us by breaking up through an area of strong resistance it would be an indication of great strength and could warrant consideration of a purchase. Or, if the price broke down through a level of expected strong support, this would indicate severe weakness and a short signal may be considered. To take a simple example:- If a share price is falling to the G1 level for the first time, a speculative buy signal (because it is likely to be against the trend) would be to consider a purchase on any strength developing at the G1. (This would be a better signal if the level was also supported by other important analysis factors such as a major angle etc.) Alternatively, if the price falls below the G1 (which will usually result in an eventual fall to the G3 level) a short signal could also be considered on any bearish Trend Indicator Line formations under the G1. We are looking for areas of concentrated support or resistance. If an angle helps to indicate an added timing this would make the signal an even better proposition because prices can often track sideways at a level before hitting the angle and then moving as anticipated. It is recognised that the aim of many clients is to be able to prepare and execute their own analysis and signals and to do so they will need to invest their time learning the rules and techniques. GML are constantly scouring the vast range of items on the IDS database for any potential signals. If GML consider that there is the possibility of a buy or sell signal occurring on an item, you will have advance notice of the signal in order that you may prepare yourself for any proposed course of action. It is then a matter of keeping the chart up to date every day and waiting for the appropriate Trend Indicator Line formations to occur at the pre-determined level.
To make it easier for you, GML also provide the facility to collect a chart complete with the analysis from our server. By reading this book, monitoring the website, and studying the charts you should be able to absorb the techniques and soon arrive at a point where you can undertake your own analysis. Once a signal comes to fruition and a trade is entered, then the stop losses take over until broken and the trade is closed. However a continuing analysis is undertaken to provide for the possibility of a profitable position approaching a level of heavy resistance where the use of a Signal day exit technique may be employed.
2 Period Charts The 2 period chart is used to determine the trend of an item, and is also used to highlight the significant tops and bottoms. Once you have these tops and bottoms, you have a better idea as to where you are going to plot the analysis. The chart above highlights the major bottoms where you will draw % s from. The chart will rise until there are two consecutive days falls (for a 2 day chart), and will fall until there are two consecutive days of rises. On the daily chart below, highlight the 2-day bottoms and tops.
Gann Levels Gann Levels are predetermined and mathematically calculated resistance levels. HOW THE GANN LEVELS ARE CALCULATED - Examples G1 Level Find the extreme high 100 and Zero 0 Find 50% between the two levels 50 (the G1 level) G2 Level Add 50% of the difference 100 between the extreme high 10 and the extreme low to the extreme low 55 (the G2 level) G3 Level Take the extreme high 100 and Zero 0 Find 25% of the difference between the two levels 25 (the G3 level) G4 Level Add 25% of the difference 100 between the extreme low and extreme 10 high, to the extreme low. 32.5 (the G4 level) We will add the Gann levels to our chart. The All time high on XYZ plc is 180, the low is 0, where is the: G1 Level G3 Level G2 Level G4 Level
Percentages Now you have identified the major turning points, you now have an idea where to place your percentages. The percentages we use are listed below: Left Hand % s Right Hand % s 100% 133.33% 50% 66.66% 25% 33.33% 12.5% 16.66% 6.25% 8.33% 3.125% 4.165% 1.5625% 2.08% Other percentages you will see in use are 37.5% and 75% Gann says the most important percentage to add to any low is 50%, when the price gets to 50% it can do one of two things. It can go up, or it can go down. What the 50% level has given is a point at which to make your buy, sell, hold or do nothing decision. If the price goes through 50% and shows no major resistance (in other words the price continues to make higher tops and bottoms on your trend indicator, 2 week chart, etc.) then add 66.66% from the same low that you added 50% to, as in the vast majority of cases the price will top out at this level. Usually almost exactly. A break of this level with no resistance is a sign of great strength. However, if the trend does turn at the 50% level (the market starts to make lower tops and bottoms in the area of the 50%), then DO NOT put the 66.66% level on as, when the price eventually breaks 50%, in most cases it will show no resistance at this level, (IF it gets there) and is usually the point at which the price accelerates. When 50% or 66.66% are crossed then the next major resistance is 100%. Again, if the price gets there and shows no major resistance in breaking this level, then this makes 150% extremely important to watch for a major top to be formed. However, if major resistance is shown at 100% then this makes 150% less important and in a lot of cases the price will break through. So for example, when a top is formed I take away 12.5% from this level. IF the price gets there and shows no resistance then I take 16.66% from this high, and expect strong resistance here (the same as the 50% and 66.66% rule). If 12.5% did work then do not use 16.66% as in most cases it will not work. Remember the more you divide 50% and 66.66% by two - the less important it will be. In other words falling to 66.66% is far more important than falling to 16.66%. The ideal signal Say from a major low the price was at 150% after showing no resistance at 100%; from a secondary low you were at 50%, and from a minor low you were at 33.33% after showing no major resistance at 25% then this would be a very strong resistance level.
Bad signal The price is at 33.33% after showing resistance at 25%, at 16.66% from another low after showing resistance at 12.5% and at 150% after showing major resistance at 100%. We will now add the percentages to our chart. Retracements Any long term movements up or down are punctuated by retracement of some description. The most important retracement is 50% of the last move up or down. HOW TO CALCULATE 50% RETRACEMENT LEVELS Find the top and bottom of the last complete movement. For the purpose of this example we will assume that you are trying to determine the 50% retracement level of the long term downward move on XYZ Plc. Find the top of the move and the bottom of the move and calculate the 50% level between the two. If the top was 260 and the bottom of the move was 100, then the 50% Retracement level of that move would be 180. Q. Top on ABC plc is 330, low is 130, the 50% retracement is? A.
Angles Angles are drawn from important tops and bottoms and can be applied on long term monthly and weekly graphs and short term daily graphs. An angle taken from a bottom which occurred many years ago can be very relevant to the current price action. If an angle is broken on the upside, then higher prices are indicated. If the angle is broken on the downside, then lower prices are indicated. Once an angle is broken on the downside, the price will generally, eventually reach the next angle below. Once an angle is broken on the upside, the price will generally, eventually reach the next angle above. There are 4 types of angles, Daily, Weekly, Monthly and Calendar day Angles. This will relate to the price movement, for example, a 1x1 Daily angle will rise 1 point per day, whereas a 2x1 Daily angle will rise two points per day. A 1x1 Weekly angle will rise one point per week, or two points per week with a 2x1 weekly angle. A 1x1 Monthly angle will rise one point per month, or two points per month with a 2x1 monthly angle. Daily angles work on the assumption of 5 working days per week, whereas Calendar Day angles will work on the basis of 7 days per week. The two Categories for determining angles are: Full Angles 1x8 1x4 1x2 1x1 2x1 4x1 8x1 16x1 32x1 64x1 Half Angles 1x12 1x6 1x3 2x3 3x2 3x1 6x1 12x1 24x1 48x1 When to change angles There are times when you need to change from full angles to half angles from the same low or high. EXAMPLE. If the share price makes its first reaction on a daily 8x1 angle, when the price falls below you would expect the price to reach the next angle (4x1). But if, when the price reaches the 4x1 the price shows no change in trend and falls through, then the next major angle will not be the 2x1, but the angle halfway between the 4x1 and the 2x1 - which is the 3x1. From this point onwards you only use half angles below the 3x1. Do exactly the same if a half angle is broken with no change in trend - i.e. go back to full angles.
EXAMPLE. If the price showed no change in trend on the above mentioned 3x1 then the next angle to watch would be the 2x1, not the 3x2. With the angle below the 2x1 to use being the 1x1. We have now added an angle to our chart, which gives us an indication of time. In this case the 1x12 Daily angle is in use, the price will rise 12 points (cents in this case) for every 1 day.
Signal Entry Now we have highlighted a level of interest. On our chart, we are expecting a change of trend around the $72-75 level. This is where our cluster of percentages are gathered, just above the important G1 level, but more importantly, our Angle has met the price, and we now expect a move. There are now two ways we can enter into this trade; 1) the Trend Indicator Line (TIL) (Conservative) 2) Using the Signal Day (SD) and Day After Rule (DAR) (Aggressive) THE APPLICATION OF A TREND INDICATOR LINE (TIL) If the TREND INDICATOR LINE is forming higher tops and bottoms, the short term trend is up. If the trend indicator line is forming lower tops and bottoms, the short term trend is down. A bottom - on the trend indicator line is when the TIL has gone from a high price on a price spread, to a low price and then back up to a high again. A top - on the trend indicator line is when the TIL has gone from a low price on a price spread to a high, then back down to a low again. There may be more than 3 days making up this formations. The definition of a ' Trend Line Bottom': 'When the trend line which joins up the DAILY prices, goes from the top of a daily spread, to the bottom of a daily spread, and then to the top of a daily spread. (There may be 2, 3 or more days making up this formation.) Note: A higher trend line bottom means one which is higher than the previous bottom.
The definition of a 'Trend Line Top': 'When the trend line which joins up the DAILY prices, goes from the bottom of a daily spread, to the top of a daily spread, and then to the bottom of a daily spread. (There may be 2, 3 or more days making up this information). Note: A lower trend line top means one which is lower than the previous top. We have now added on our Short term TIL onto the chart, showing the signal confirmation forming over the $75 level.
On the daily chart below, draw the Trend Indicator Line (TIL) And then highlight each bottom and top
STOP LOSSES Stop losses are the method by which you protect an investment you have made, either after the initial transaction or to protect any profits not yet realised. Stop losses should be placed using a specific method where the MARKET TELLS YOU where to place it. Other methods of placing stop losses are generally the opposite - where the investor tries to apply his own ideas of what levels the market should operate to. As the trade or investment position progresses, then the stop loss should be moved in order to protect profits. In the following notes you will find the method by which we suggest you might place and subsequently move your stop losses, along with a specific definition of when you might consider that the stop loss has been broken and you would therefore close the position. Under normal circumstances, the following rules apply for the positioning of short term stop losses. If you have bought:- Find the LAST TIL bottom and place your stoploss 1% below the low. If you have shorted:- Find the LAST TIL top and place your stoploss 1% above the top. In the above example, at the time of the buy signal, our stoploss is placed 1% below the last trend indicator line bottom.
Raising your stoploss There are three main rules to follow once your in a trade, which will determine how and when to move your stoploss. 1) Trend Indicator Line On each subsequent formation of a higher Trend Indicator Line bottom, raise your stoploss to 1% below the last bottom. Once your stoploss has been hit, look for further weakness the following day to sell The chart below shows each raising of the stoploss with the TIL bottoms. 2) 7-10 Day Rule For instances where the price moves in your favour for 7 consecutive days, we raise the stoploss 1% below the 7 th day of rises, this is then repeated for the 8 th, 9 th and 10 th day. If the move continues in the same direction, leave the stop loss under the range for the 10th day, until either a new TIL bottom is formed, or you are stopped out, or you experience ANOTHER 7 days of movement up, where the procedure would be repeated. 3) The Gap Rule Provided the trade is no longer in it s infancy and is showing a fair profit, there may be instances where a gap can occur, allowing you to raise your stoploss and lock in profit from the move. A gap forms, when the low price is above the high price of the previous days trading, or in the case of shorting, a high price below the low price of the previous day.
Exiting a Trade Once in a trade, the success to trading is knowing when to sell. To help you there are three rules which indicate when to close your position. 1) TIL Stoploss rule The most common way to exit a trade once your stoploss has been hit, sell on further weakness the following trading day. 2) Signal Day Rule (SD Rule) If the stock is moving very fast up to a very important level, such as a major resistance level or major angle the following applies:- On the day when the price HITS the level concerned, at approx. one hour before the close of business on the same day find out the range of the prices for the day so far; High of the Day so far + Low of the Day so far 2 = THE MEAN Work out the mean or mid-point of the day; If the stock starts to weaken below the mean and the resistance level, close the position. Reverse this for short positions. If the price goes DOWN very fast to the level and starts to close ABOVE the mean and the resistance level, close the position. This is the ONLY time you should know the prices on the actual day. N.B. Occasionally, you may wish to use the Signal Day rule to enter a trade. This is usually where you have identified a level where you expect the price to reverse. 3) Day After Rule (DAR Rule) If you have followed the above procedure and the stock did not give a sell signal using the Signal Day rule, watch the price for an hour after the opening on the following day. If you are long of the stock and the following day the stock opens weak and stays weak for an hour. Sell the stock. If you are short of the stock, if the stock opens strong and stays strong for an hour. Close your short position. This is like a delayed reaction to the level - as if the price has not got the strength to maintain the break. N.B. The SD and DAR rules are for use in unusually fast movements and are designed to give greater degree of protection to profits in fast moving markets, or when used to open a position, to enter a trade by taking advantage of a reversal after a fast move.