Born in 1878, WD Gann was one of the pioneers of technical analysis and one of the most successful traders of his time. His concepts and techniques are still applied in trading today. Gann was first and foremost a financial astrologer (he lost me here) and spent countless hours studying cycles, numbers to predict stock and commodity market movements with great success. Some of Gann’s ideas I use at times in my own trading to predict market cycles and trends. In this article I will go over a simple Gann system to use when the market is in a narrow channel. However, before we get into the technique, it is important to emphasize that Gann believes that in order to successfully trade the commodity markets, you must follow a certain set of rules that should never be broken. His “28 Valuable Rules” still apply to traders today, and if you’d like to read the time-tested rules, head over to my blog and check them out there. Also for a chart view of this article it will also be posted there.
The technique is slightly different for shorter and longer time frames. This article will focus on the one hour time frame. I believe the solid consolidation is approximately 70 pips from the top of the range to the bottom of the range. The period of consolidation is longer than 7 bars, the longer it is, the better it would mean that the market is really ready for an explosive move after it breaks down overall. Seven is a Gann number, the time cycles and time periods of Gann cycles are 90, 84,60, 30, 20, 13, 10, nine, seven, five, three. (FYI) What we want to do is put a horizontal line at the highest high and a line at the lowest low of the consolidation. Once the market breaks through the upper line, we can buy the market and place a stop loss at the bottom of the range. Here’s Gann’s big trick, we want to see three higher closes in a row and Gann’s rule will apply. Your target will be the range multiplied by three. On each bar that is close is greater than the close of the last four bars (as the market is moving up) before it, mark the lowest low of those bars and move your stop loss to that low. If you get three closes up followed by three closes down, exit the trade because the market is not ready to continue the rally. The opposite will happen if we break the bottom of the range. You would sell this break looking for three times the range down. You would be looking for three closes down, if you get three closes up after a breakout down, get out of the trade because the down move may not continue. On any low close that is less than the previous four bars, move the stop loss down to the highest high of those bars.
This technique is easy to use and Gan uses it during periods of consolidation. He would always read what direction the general trend was in, so if the market broke but the general trend was down, he would look for a rally to fail. If he fails and reaches his target of three times the range, the market will tell him that maybe there is a change in trend or his time cycle may shift a bit.
Here is a sampling of Gans’s truisms “Time cycles repeat themselves because human nature does not change.” “Trend is your friend” is really Gann’s most basic philosophy. Gann always looked at the big picture first and believed that if you studied the past, the future would become easy reading.
I know this is hard to read, if you want to see a video on the technique go to my blog and it will be much easier to understand.