ASX Charting Course
Chapter 42
Gann Fans
W D Gann postulated a theory that there exists a relationship between price and time that finds balance at specific points in time. The basic premise is that the market will make tops at multiples of the all time low and the timing will be quantifiable from the value of the all time low. It also applies to a lessor extent to major lows and highs.
It follows then that the market will track specific time versus price relationships from major lows and major highs. Even minor lows and highs will follow similar time price trend lines.
Gann gave specific instructions on how to construct a fan. So let’s start with a daily chart, the most common interval for Gann analysis. The time frame is not that important however the consistency of the interval is significant. First we should identify the last major low or major high or both. Let’s assume it’s a major low. We then draw a 45 degree line that increases by one unit of price for every one unit of time.
There are then the eight minor lines of the fan, starting with the 1*2 line and then the 2*1 line. In fact the lines extend from 1*8 through the 1*1 line to the 8*1 line and total nine lines in all, excluding the horizontal reference lines. As long as the scale is correct, that is one unit of price, this will be a variance from a 7.5 degree line to an 82.5 degree line.
The next most important lines are horizontal lines from the major high or the major low. These horizontal lines reveal potential turning points in the market wherever the fan angles cross the horizontal lines. The turning points are relative to the recent trend of the market.
Each of these fan lines provides either support or resistance depending on which quadrant the market is currently tracking. The market will tend to follow one particular angle and when that is broken looks for another Gann angle to track.
Fig 66
There are two vertical lines on the chart at 28Jun and 30Aug. They both occur as a result of a fan angle crossing the horizontal line emanating from the high or the low.
The first intersection signals the end of a small retracement and generates a sell signal counter to the trend, which was up at the time. That was followed by a substantial move lower and the resumption of the major down trend.
The next horizontal Gann angle cross on 30 Aug generated a buy signal as a result of the previous recent activity being down. Unfortunately that buy signal only produced two days of higher prices before the longer term bear market resumed.
Following the fan lines
The theory behind the Gann fan angles is that the market will tend to square itself in price and time. Therefore one would anticipate that price will gravitate toward the fan angle lines drawn from major tops or bottoms.
Quite often the move away from major tops or bottoms is extremely sharp and therefore lies in the 8x1 quadrant, which means it is moving 8 units of price per one unit of time. It won’t be long until this steepness is broken and the market will then move through the 8x1 line and head toward the 4x1 line.
In the example above the Gann fan from the major top doesn’t show the 8x1 line. It is clear however when price broke through the green line it moved to the blue line, failed to break it and then returned back to the green line to follow it lower. Once that was broken again price moved back through the blue line this time to touch the pink line before resuming the down trend and following the blue line lower. That blue line remained virtually in tact for the rest of the bear move until right at the end of the chart.
Gann did not provide a definitive trading system. And like all forms of analysis Gann’s theories can be interpreted and applied according the analysts whim. Apparently he was quite secretive and forced his students to discover their own timing in the markets.
Craig MacLean is a Futures Adviser Licensed under the Australian Securities Commission, Corporations Law. The writer accepts no responsibility for any losses incurred from any action or inaction derived from the advice in this report.