ASX Charting Course

Chapter 41

Gann Swing Charts

How To Use Them

Once the chart has been constructed the buy and sell signals generated by this trading system appear quite clearly, as do the stops. But first we need to establish some more definitions.

Tops and Bottoms

The trend line indicator only changes direction when we have an opposite day to the trend. That is on a down day in an uptrend or on an up day during a down trend. This doesn’t necessarily mean we’ve made a top or bottom. A top or bottom is not declared until the reversal takes out the previous opposite swing peak.

Trends

Perhaps the best thing about swing charts is that they clearly identify trends in the market, removing a lot of noise that might normally hide a trend. A trend is defined by progressive swings in the same direction. There are two up trends displayed in the chart below and while the first one suffered from a reversal the second is yet to be terminated.

Entry Points

If the trend is up, which is signalled by consecutive swing points progressively higher, a buy signal is generated when a new high is made following a swing bottom.

Conversely a sell signal is generated during a down trend when a new low is made immediately after a swing top. New sell signals are generated every time we make a reversal followed by a new low. The sell signal is generated as we make the new low.

The above chart has all the possible buy signals marked and the only sell signal generated in the sample. The sample is from the same data as the previous figs 63 & 64.

Breakout traders will recognise this system as a breakout system and that is exactly what it is. However it does filter out a lot of unnecessary noise that can plague a breakout trader and it relies on the establishment of a clear trend from those filters before issuing a new signal. Many techniques can be applied to the swing chart itself, such as trend lines or Elliot wave counts.

Nevertheless it has the same pitfalls that all trend following systems have, the most obvious being the requirement of a trend to capitalise on its profitability. Needless to say in the absence of a trend, in a corrective market, it can result in a series of losses.