Table of Contents
Title Page
Copyright Page
Preface
Acknowledgements
CHAPTER 1 - Why Pattern, Price, and Time?
CHAPTER 2 - Who Was W. D. Gann?
COMMODITY LETTER: April 21, 1947
COMMODITY LETTER: January 26, 1948
CHAPTER 3 - Gann Theory in a Nutshell
THE BASIS OF GANN THEORY: THE LAW OF VIBRATION
PATTERN
PRICE
TIME
SQUARING THE PRICE RANGE WITH TIME
ADVANCED PRICE AND TIME TECHNIQUES
GANN THEORY AND ITS APPLICATION TO TRADING
CHAPTER 4 - Chart Basics
GANN-FORMAT CHARTS
PROPER CHART CONSTRUCTION
CHARTING PROGRAMS
TYPES OF CHARTS
SUMMARY
CHAPTER 5 - Pattern: Trend Indicator Charts
MINOR TREND INDICATOR
INTERMEDIATE TREND INDICATOR
MAIN TREND INDICATOR
TREND INDICATOR CONSTRUCTION
STOP ORDERS
USING THE INFORMATION GENERATED
CHARACTERISTICS OF THE TREND INDICATOR CHART
SUMMARY
CHAPTER 6 - Pattern: Swing Chart Trading
REVIEWING THE TREND INDICATOR CHART RULES
BASIC TRADING INSTRUCTIONS
TWO WAYS TO DETERMINE A CHANGE IN TREND
OTHER SWING CHART TRADING STRATEGIES
SWING TRADING RULES
SWING CHART NEGATIVES
SUMMARY
CHAPTER 7 - Pattern: Other Chart Formations
THE DOUBLE BOTTOM
THE DOUBLE TOP
PROLONGED RALLY OR BREAK RULE
BALANCING SWINGS
SIGNAL TOPS AND SIGNAL BOTTOMS
OTHER IMPORTANT FORMATIONS
OTHER POPULAR PATTERNS
SUMMARY
CHAPTER 8 - Price: Horizontal Support and Resistance
THE SWING CHARTS
PERCENTAGE RETRACEMENT PRICE LEVELS
OTHER RETRACEMENT LEVELS
MULTIPLES OF BOTTOMS AND DIVISIONS OF TOPS
PIVOT PRICE CALCULATIONS
MOVING AVERAGES
SUMMARY
CHAPTER 9 - Price: Gann Angles
IMPORTANCE OF GANN ANGLES
HOW TO CONSTRUCT GANN ANGLE CHARTS
SUMMARY
CHAPTER 10 - Combining Pattern and Price
CHAPTER 11 - Time
NATURAL CYCLES
ANNIVERSARY DATES
SEASONALITY
SWING CHARTS
SQUARE CHARTS
SUMMARY
CHAPTER 12 - Combining Pattern, Price, and Time
THE INTERMEDIATE TREND INDICATOR
THE SIGNAL BOTTOM
THE SIGNAL BOTTOM: THE FIRST LEG UP
GANN ANGLES
PERCENTAGE RETRACEMENT ZONES
PERCENTAGE RETRACEMENT ZONES AND GANN ANGLE COMBINATIONS
TIME INDICATORS
THE FORECAST
CONCLUSION
About the Author
Index
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Preface
I’m sure you’ve all heard the expression, “The more things change, the more they remain the same.” This is true when it comes to technical analysis. Although there have been advances in technology since the first edition of Pattern, Price & Time was published in 1998, the markets are still creating patterns, making percentage retracements, or hitting cycle lows just as they were in 1998 and even before then.
With each new software program there seems to be another way to analyze and trade the markets with some new oscillator or indicator in an attempt by the trader to gain an edge. Unfortunately, this theme of smoothing out valuable information like the Open, High, Low, and Close has, in my opinion, created more difficult trading conditions. Today, despite all the new technical analysis tools and equations, the definitions of an uptrend—higher tops and higher bottoms—and of a downtrend—lower tops and lower bottoms—have remained unchanged for decades. Today, while traders remain fascinated with smoothing out data in an effort to get the edge, the art of analysis of the simple basic data has been cast aside.
As I wrote in the first edition of Pattern, Price & Time, my intention is not to write about W. D. Gann, but instead to write a book about what I consider to be the major themes of Gann’s work: pattern, price, and time. In addition, I wanted to write a book that can be used by the analyst and trader who can apply Gann’s basic rules to the markets without having to learn astrology or buy Gann wheels and plastic overlays. I wanted to write a book that would introduce a trader to techniques that would allow a trader to take basic data that is available every day and through study, experimentation, and practice create sound market analysis.
My experience in the futures business has shown me that too often traders become hooked on either pattern, price, or time in their analysis. They tend to weight their analysis one way without an equal balance. The most common mistakes are systems built around time to enter and price to exit, or price to enter and time to exit. In addition, traders who use pattern often enter or exit at poor prices or with poor timing. These observations provided further evidence that a combination of all three methods is necessary for success in the marketplace. It is on this premise that I have based my book.
As I outlined this edition of the book, I decided to maintain my original objective to write about the simplest approaches that would demonstrate how each of Gann’s methods worked individually, and how each method worked in combination. In Pattern, Price & Time, 2nd edition, I even decided to include other popular pattern, price, and time indicators to show how they can be incorporated with Gann’s basic premise of balancing price and time.
After a brief introduction as to why I choose to write about pattern, price, and time, I introduce W. D. Gann and his theory. I follow this up with information on the importance of having correct data and charts. This is followed by descriptions of the key elements of technical analysis: pattern, price, and time. In the pattern chapters, I discuss trend indicators and chart formations. In the price chapters, percentage retracements and Gann angles are detailed, followed by a chapter on combining pattern and price. Finally, concepts of time analysis finish the core analysis techniques. The last chapter demonstrates the effects of combining pattern, price, and time into an analysis and trading tool.
After the last book was published, I received criticism that I was holding back on Gann’s secrets. This could not be further from the truth. I stated in the book that teaching financial astrology was beyond the scope of this book and could take years to learn and apply. I stated it was not my intention to write or teach financial astrology. I can say that if you understand the basics of this book then learn financial astrology, you will have an edge over those who only know astrology because, after all, astrology is a time indicator. Remember that although Gann said that time was most important in identifying changes in trend, price and time and money management are just as important when trading. In order to appease those who feel I am keeping secrets, I will publish a few surprises in this book that will point those who want to study the metaphysical elements of Gann analysis in the right direction. This includes what I believe is the source of his Law of Vibration and a list of books that he recommended. In an effort to provide the reader with more automation I’ve attached a link to the TradeStation code for my trend indicator at www.wiley.com/hyerczyk. This will allow the reader to create swing charts in the same manner as W. D. Gann.
In conclusion, this book is intended to be educational and informative. It is by no means intended to replace the books and courses written by W. D. Gann. At times the book may seem repetitive, especially in the chapters about the trend indicator. This is done intentionally because I wanted to emphasize, just as Gann did in his books, that the analyst must study, experiment, and practice these techniques over and over. If anything, this book should be used by the novice as an introduction to the subjects of pattern, price, and time. It should be required reading before computerized analysis is attempted. It is very important to learn how pattern, price, and time techniques work before using computerized trading indicators. This book will provide a good base for the analyst who wants to use more sophisticated technical analysis techniques. The expert trader could also use this book to enhance his or her analysis or trading abilities. While Gann analysis concepts are discussed in this book, it is not intended to be a book solely on Gann analysis as many original ideas and techniques are introduced throughout the text. Gann, for example, left no record on how to trade stock indices, Treasury bonds, or Forex markets. Although at times limited by page size in this book, I believe pattern, price, and time analysis is presented in a detailed but clear manner. I hope that you find the ideas in the book as useful as I have.
James A. Hyerczyk
Palos Park, Illinois
September 2008
Acknowledgments
I would like to thank my wife, Mary Colleen, and my daughters Amy, Kelly, and Erin for giving me the time and the space to pursue my passion for technical analysis. Each of you has a special place in my heart, and I love you all very much.
CHAPTER 1
Why Pattern, Price, and Time?
Despite the proliferation of trading analysis programs claiming to have “new” indicators and “new” ways to analyze the markets, I’ve come to the conclusion that there really is not anything new under the sun and that all of these discoveries can be placed into the categories of pattern, price, and time.
Ever since the early days of trading up until today, traders have been trying to create ways to manipulate data in an effort to find an edge over everyone else. Today’s sophisticated programs have the ability to smooth data and create sophisticated formulas to make the market’s basic data appear to show anything the programs want to find. Some programs create moving averages, while others try to break down the markets into oscillators that move between 0 and 100. All of these new ways to look at data may be fine for some, provided that they understand how these numbers are created, and the programs create rules on how to use them, but I find working with the original Open, High, Low, and Close data to be most beneficial. In addition, while I acknowledge that using computer-generated oscillators or indicators may speed up the process of analyzing a market, I have found that all of these smoothing tools will eventually collapse to or agree with my simple analysis of the markets using the Open, High, Low, and Close.
This book, although it is concerned with the technical analysis approaches to trading Forex, futures, and equities, should not be considered the definitive answer to making tremendous amounts of money in trading. Instead it should be used as a guideline to give the trader an edge as to what is actually taking place in the marketplace. My application of pattern, price, and time analysis allows me to see and understand what is happening in the markets. It does not hide anything in complicated formulas or computer number crunching. Although this is a personal preference, I feel that the analyst who understands how pattern, price, and time work independently and in unison with each other creates an edge to trading the markets that computerized analysis cannot.
Throughout the book the reader will see the phrase “study and experiment.” This is because the reader is encouraged to learn as much as he can about the movements of the markets, the characteristics of these movements, and how to make informed trading decisions once this knowledge is applied.
The basic premise behind pattern, price, or time analysis is that these three factors have not changed in the 100 or more years since Charles Dow unleashed his Dow Theory to the world. In fact, if you want to go back even further, take a look at Candlestick analysis which is said to have its roots back to the 1700s. This very popular analysis tool is a study of pattern with basic Open, High, Low, and Close the major elements. Despite the proliferation of today’s “new” trading analysis tools and trading systems as a result of the personal computer and trading software, trading tools used today can nevertheless still be categorized as pattern, price, or time.
Today’s pattern studies include stochastic indicators, relative strength indicators, overbought/oversold indicators, moving average crossovers, and Candlesticks. Price is categorized as moving averages, daily pivots, and retracements. Finally, time is used today in the form of seasonality, cycles, and time of day studies.
Hang around a trading room long enough, and you will often hear, “I had the right price, but was a little early” or “I’ve got a cycle low due at 11:00, I just don’t know where the market will stop.” These are the types of problems that can be created by using only price, or only time, or only a pattern. In this book I want to show the trader that there is a way to bring the factors of pattern, price, and time together in an effort to improve trading results.
When studying the history of technical analysis I came across several valid methodologies to analyze and trade the markets, but I found that these methods were weighted toward only one of the three main components of pattern, price, and time. This created problems for me because although at times one of these factors had control of the market, I found I did not have control of the trade. This frustration caused me to study the disciplines of Elliott and Dow, but I found personal issues with each. One relied too much on the forecast and prevented me from changing my mind while in a trade. My ego became too connected to the forecast, and I often failed to make necessary adjustments to the trade. The other analysis technique took too long to develop. I also tried to work with point and figure charts, and although I understood how to use the formations, I still felt time was necessary to help me become a better trader. When Candlestick analysis became readily available on the computer, I tried to use it, but found some of the patterns occurred too frequently and at random places on the chart, so I sensed that price and time would be necessary to improve this sort of analysis.
All of this study and experimentation of these other analysis disciplines led me back to the pattern, price, and time analysis of W. D. Gann. I chose Gann Theory as my primary source of analysis because throughout his works he wrote about the balance of price and time. This became very important to me because my work needed balance. I knew from my analysis and trading that I could not just rely on pattern, or price, or time independently. I knew that although I could use his techniques independently, I could improve my analysis and trading by finding a balance between his two or three key elements of pattern, price, and time (Figure 1.1).
FIGURE 1.1 Gann Format Monthly Dow Jones Chart Copyright © TradeStation.
In summary, the purpose of this book is to inform the trader of the analysis tools that are available just using the Open, High, Low, and Close. The other purpose is to teach the trader to categorize his trading tools into pattern, price, and time techniques and to apply combinations of the three to improve his analysis and trading. Finally, in an effort to jump-start the reader’s study and experimentation of pattern, price, and time, I have chosen to highlight the analysis and trading techniques of W. D. Gann because he was one of the first to speak of the balance of price and time.
CHAPTER 2
Who Was W. D. Gann?
If not the first technical market analyst, W. D. Gann was certainly among the more successful. Creating and publicizing a new approach to analyzing markets, Gann claimed that he had set a world’s record in leverage and accuracy more than once, that he had developed trading strategies for speculators, and that he could predict market moves to exact price levels.
William Delbert Gann was born on a cotton ranch on June 6, 1878, in Lufkin, Texas. He displayed a strong aptitude in mathematics during his early years, completed a high school education, and started trading in 1902 at the age of 24. By his own admission, Gann’s early trading was based on “hope, fear and greed,” all of which he later realized were not compatible with a successful trading strategy.
After losing significant sums of money, Gann began to observe that markets followed mathematical laws and certain time cycles. He was particularly interested in the connection between price and time, a relationship he referred to as the “square” of price and time. He began studying this interaction diligently, even traveling to England, India, and Egypt to research mathematical theory and historical prices.
In developing his theories, Gann was undoubtedly one of the most industrious technical analysts. He made thousands of charts displaying daily, weekly, monthly, and yearly prices for a wide variety of stocks and commodities. He was an avid researcher, occasionally charting a price back hundreds of years. At a time when most market analysis was strictly fundamental, Gann’s revolutionary theories relied on natural laws of mathematics, time cycles, and his unshakable conviction that past market activity predicted future activity.
Gann moved to New York City in 1908. He opened brokerage offices at 18 Broadway and began testing his theories and techniques in the market. Within a year it was clear to others that Gann’s success was based on more than just luck. A December 1909 article in The Ticker and Investment Digest explained that “. . . Mr. Gann has developed an entirely new idea as to the principles governing stock market movements” (reprinted in the W. D. Gann Commodities Course [Pomeroy, WA: Lambert-Gann Publishing, 178]).
In this article, Gann asserted that most traders enter the market without any knowledge or study, and that most eventually lose money. He explained that he noticed a cyclic recurrence in the rise and fall of stocks and commodities, and decided to study and apply natural laws to trading strategy. Gann indicated that months of studying at the British Museum in London revealed what he called the “Law of Vibration.” This law determines the exact points to which a stock would rise or fall, and predicts the effect well before the Street is aware of either the cause or the effect. Beyond this vague explanation, Gann was reticent about his strategies and unwilling to explain his theories in any detail.
Although past success is not an indication of future results, Gann’s trading was extremely successful, at least to a point. An analysis of his trading record over 25 market days revealed that Gann made 286 trades, 264 of which were profitable. His success rate of 92.31 percent turned an initial investment of $450 into $37,000. A colleague of Gann’s said, “I once saw him take $130.00 and in less than one month run it up to over $12,000.00. He can compound money faster than any man I ever met.” It is not surprising that the press concluded “. . . such performances as these. . . .are unparalleled in the history of the street” (Gann Course, 180). Although Gann’s theories were apparently profitable at times, he was equally subject to the potentially substantial risk of loss that is inherent in commodities futures trading.
Gann issued annual market predictions of major moves and exact support and resistance levels (Figure 2.1). Newspapers around the country kept track of his predictions for 1921, 1922, and 1923, substantiating his accuracy. In January 1929, he issued an annual forecast that read:
September—One of the sharpest declines of the year is indicated. There will be a loss of confidence by investors and the public will try to get out after it is too late. . . . A “Black Friday” is indicated and a panicky decline in stocks with only small rallies.
Truth of the Stock Tape (reprint Pomeroy, WA: Lambert-Gann
Publishing, 1976, 36).
His facility in analysis and prediction extended to areas other than the market. He predicted the exact date of the Kaiser’s abdication, the end of World War I, and the elections of presidents Wilson and Harding. Gann also predicted the occurrence of World War II 13 years in advance and described the stealth bomber 61 years before its invention.
Gann’s original reticence about his success later turned into an almost religious fervor to share his knowledge. He had begun writing during his trading career, starting with Truth of the Stock Tape, written in 1923 (originally published by Financial Guardian Publishing Co.; reprinted by Lambert-Gann Publishing Co.). This book was intended to help traders analyze market activity using a standard stock tape. In 1927, he wrote The Tunnel Thru the Air: Or, Looking Back from 1940 (reprint Pomeroy, WA: Lambert-Gann Publishing Co., 1976). This seemingly autobiographical novel provides insight into Gann’s trading theories and his morals. (It also includes his predictions of World War II and the stealth bomber.) He went on to write books and courses explaining his new discoveries, including New Stock Trend Indicator, How to Make Profits in Commodities, and 45 Years in Wall Street (originally published in 1936, 1942, and 1949, respectively; all three books were later reprinted by Lambert-Gann Publishing Co., 1976). He also created home study courses for stocks and commodities and taught weekend seminars to explain the use of special price and time calculator tools he had invented. These materials were considered valuable enough that in 1932 people were paying $1,500 for his home study commodity course, and $5,000 for his master price and time calculator seminar.
FIGURE 2.1 W.D. Gann’s Scientific Forecasts 1919-1926
In the late 1940s Gann published a market letter covering advice on stocks, cotton, and grain. The letter was produced weekly along with a daily version published three days a week. The letter was written in a style that combined fundamentals with chart points. There was no mention of important dates or time cycles, but it included comments such as “We expect heavy selling during the next few days and much lower prices before the end of the week.”
I have included two reprints of the letter in this chapter. Because the reprints may be difficult to read I have typed the letter in full. When I studied these letters I looked for references to astrology or other timing phenomena but found none. This does not mean that Gann did not use it in his timing; it may just mean that Gann was a businessman who wanted to sell a newsletter to earn income. He may have saved his advanced price and time analysis for clients who had taken personal classes or purchased his expensive courses (Figure 2.2).
COMMODITY LETTER: April 21, 1947
Wheat
All the Grain markets showed weakness today and from Secretary Anderson’s statement today, it was evident that the Government realizes that there are going to be plenty surplus commodities later and that prices will have to come down and parities lowered. The market will not wait for the Government to do something to get prices down but will decline and discount future developments.
We are confident that the market has seen final highs and is now starting on the long down-trend. We expect heavy selling during the next few days and much lower prices before the end of the week. If you are not already short, sell short without waiting for rallies.
May Wheat—Is showing more weakness and breaking 250 could decline quickly to 240-238. We favor selling the distant options.
July Wheat—Short sale at the market. Very little rally indicated before big decline takes place. Breaking 218 will indicate lower and breaking 215 will be a signal for very much lower prices.
FIGURE 2.2 Supply and Demand Letter, April 21, 1947
Sept. Wheat—Short sale at the market. Breaking 213 will indicate lower and breaking 210 will indicate 205-203.
Corn
Sold off Saturday and was weak and lower again today. It is getting into position for a fast decline as support levels have been broken. If you are short, stay short. If not, sell at the market.
July Corn—Breaking 163 ½ indicates 156-155.
Sept. Corn—Breaking 152 could decline quickly to 145-144.
Oats
Buyers are withdrawing from the market and offerings are increasing. Today’s high prices are not likely to be exceeded before a decline to much lower levels.
July Oats—Breaking 78 indicates 72 or lower.
Sept. Oats—Breaking support at 72 will indicate 68 or lower.
Eggs
The market was weak on Saturday with prices recording the greatest decline for several months. There was very little rally today and the market closed weak. The buying has been overdone and the market is in a position for a sharp decline. We advise staying short.
October Eggs—Not likely to cross 49 cents and breaking 4785 indicates 4550-4500.
Cotton
The market rallied on Saturday and had a further rally early today and the distant options sold off about 50 points while the old crop options held up, and closed strong. We advise short sales of October and December. These options are not likely to rally to today’s highest before going much lower. The weather is improving and planting is making good progress. Price cutting is going on in the textile industry, and the old crop options are much too high but might hold up a while longer while hedge selling depresses the new crop options. We consider this a real opportunity to go short of October and December.
Oct. Cotton—Breaking 2940 will indicate lower and breaking 2900 indicates 2800 or lower.
Dec. Cotton—Breaking 2860 indicates lower and breaking 2800 will be in a very weak position and could decline fast.
W.D. Gann & Son, Inc.
Gann also published a weekly market letter. In this letter he provided more information on support and resistance for the reader as well as buy/sell recommendations and stop loss suggestions (Figure 2.3).
COMMODITY LETTER: January 26, 1948
Grain
All grains declined near the close today in anticipation of a bearish Government report on stocks of grain in trade channels. This report was not foreshadowed by prior reports from the Southwest to the effect that elevator stocks had about been “cleaned out” by Government purchases. It is too early to say for sure, but if today’s action was caused by factors other than the Government report there is substantial evidence that the end of the long bull market in grains is not far off. And, if May wheat is unable to close above 298 ½ very shortly, we expect lower prices for all grains. Corn behaved the best. It was followed by oats and wheat, which were cleaned out yesterday, in that order.
We recommend short sales of May wheat on rallies with a stop that will reverse your position it closes above 298 ½.
May Wheat—Will meet resistance on rallies at 296¼-8½, 300 ¼-2 and 305-07. Watch the market closely at these resistance points for indications of a change in trend. After such points have been penetrated on the way up, they become support points on subsequent declines. Move stops up under them after they have been penetrated as protection against a reversal of trend.
Will meet support on declines at 293- ½, 289 ½ -90 ½ and 286 ½-8. Watch the market closely at these support points for indications of a change in trend. After such points have been penetrated on the way down, they become resistance points on subsequent rallies. When short, move stops down over them after they have been penetrated as protection against a reversal of trend.
July Wheat—Will meet resistance on rallies at 264-5 ½, 267 ½-9 ½, and 272-4. Will meet support on declines at 260 ½-2, 257 ½-9, and 253 ¾-5. Closing below 253 ¾ indicates lower. See May Wheat for comment on use of support and resistance points.
May Corn—Will meet resistance on rallies at 268-9 and 269 ¾ -71 ¾. Will meet support on declines at 264 ¼ -5, 262-3, 258 ½ -60. Closing below 258 ½ indicates lower. See May Wheat for comment on use of support and resistance points.
July Corn—Will meet resistance on rallies at 256-7 and 258 ½-60 ¼. Will receive support on declines at 251 ½-2 ¼ and 248 ½ -50. Closing below 248 ½ indicates lower. See May Wheat for comment on use of support and resistance points.
FIGURE 2.3 Supply and Demand Letter, January 23, 1948
May Oats - Will meet resistance on rallies at 128 and 129- ¾. Will receive support on declines at 126- ½, 124 ½-5, 122-3, 119 ½-20. See May Wheat for comment on use of support and resistance points.
July Oats—Will meet resistance on rallies at 105 1/2-6 1/2 and 108-10 1/2. Will receive support on declines at 103 ¾-4 1/2, 102-1/2, 101 and 99 1/2-100. See May Wheat for comment on use of support and resistance points.
Eggs
After an early rally, January eggs went off the board low and weak. Egg futures rallied and closed fairly firm.
October Eggs—New purchases should be confined to reactions to 4990-5020. Protect long commitments with a stop that will take you out if they break 4940 or close below 4970. Closing below 4970 indicates 4920-30, and perhaps lower. Closing above 5095 is first indication of higher prices. Closing above 5125 indicates 5240-5300 and perhaps higher.
Cotton
Rallied yesterday in response to General Marshal’s testimony. However, the rally in the spot market was very feeble (26 points), and it lost all of this today. Spot cotton closed in New York tonight at 3552, or about 85 points over March.
The trend of cotton is down and short sales on rallies are advised.
March Cotton—Crossing 3500 indicates 3510-30, a selling zone with a stop that will take you out if it crosses 3570 or closes above 3540. Breaking 3425 indicates 3390-3400, and possibly 3330-70. Closing below 3370 indicates lower.
Best Trade
Sell Cotton on Rally as advised.
W.D. Gann Research, Inc.
As you can see from these samples, Gann was all about the trend, support, resistance, and a target. First he identified the trend, then he found prices that would accelerate the move in the direction of the trend and a price that would change the trend. Note in the first letter he signed it W.D. Gann & Son, Inc. and in the second letter W.D. Gann Research, Inc. At some time between 1947 and 1948 he is said to have had a falling out with his son John. Some Gann biographers cite his work ethic and intensity as too much to handle by his son. Others claim his son quit when Gann married a woman many years his junior.
Gann continued to refine his techniques and teach them to others until his death on June 14, 1955. From notes and papers, some of which were dated just two weeks before he died, it is evident that Gann was continuing his pursuit of a perfect trading system. For example, there is written evidence that he was developing a three-dimensional chart that incorporated price, time, and volume, and how they applied to the market.
Since his death, rumors of a $50,000,000 fortune have circulated throughout the futures and stock industries. However, this figure is unsubstantiated by the material that was left after his death. Also, brokerage statements indicate that he traded an account with a balance in excess of $2,000,000, and his will, filed in Miami, indicates a figure considerably below $50,000,000.
I have never seen any of Gann’s actual account statements other than reprinted trade confirmations in one of this courses, nor have I seen his tax returns. I have searched in various places and spoken with individuals who may have known how much money he made in the markets, but these people cannot prove the accuracy of his personal trading profits. Throughout his books and courses he did mention being successful, but never any mention of taking out as much as $50,000,000 from the markets. I can say this with conviction, the first mention of Gann’s $50,000,000 fortune that I have seen is from a May 1982 Commodities Magazine article by Mr. Billy Jones, the man who purchased Gann’s original material, books and courses from Ed Lambert. In the article one sentence was written about the $50,000,000 fortune. The sentence said “Over the next half century, Gann would take over $50 million in profits out of the markets—and keep most of it.” This one sentence spawned a generation of Gann analysts and newsletter writers who still advertise today anything from “Gann made $50 million in the markets” to “Gann took $50 million from the markets from 1929 to 1932.” This sentence by Billy Jones could be interpreted in many ways. Gann, for instance, may have had $50 million in profits and $49 million in losses. It is also possible since he traded a long time that he took out $1,000,000 or more per year for 50 years. No one will ever know without documentation so I consider this a moot point and irrelevant to the book. Since this amount cannot be proved, I choose not to believe it or write about how he may have accomplished it.
Most of the evidence of Gann’s trading success is found in the numerous articles by newspaper writers who witnessed and verified his short-term trading activity. These articles, which have been reprinted in many of his books, highlight his trading successes in terms of both accuracy and trading results. Since Gann was a great promoter of his trading books and courses, only his successes are highlighted. Although his losing streaks and major losses are never cited, Gann always warned about the danger of trading without stop loss orders.
Following Gann’s work in chronological order shows that he experienced losses when he first started to trade. In addition to trading losses, Gann also lost money in bank and brokerage firm failures. These events probably played a major part in his desire to succeed in the market. Like many traders today, Gann initially derived income from selling his advisory service and his books while simultaneously trading. His obituary lists him as an author and a stockbroker; as his popularity and success grew, however, it is probably safe to assume that he turned more of his attention to trading.
As he got older, his health began to fail, which made writing and lecturing very difficult. During this time he sold his publishing rights to Ed Lambert and formed Lambert-Gann Publishing. Based on this business deal, he was able to maintain some income by reprinting his books and courses, but, in my opinion, he focused more attention on deriving an income from the market. In May 1954, he stated “I am nearing my 76th birthday and am writing this new course of instructions, not to make money (for I have more income than I can spend) . . .” (Gann Course, 1).
Based on the physical evidence left behind and the substantiated articles highlighting his trading activity, Gann did trade the markets successfully but did not amass the huge fortune alleged by rumor.
CHAPTER 3
Gann Theory in a Nutshell
Gann Theory can be described as the study of pattern, price, and time relationships and how these relationships affect the market. Gann Theory looks at pattern, price, and time as the key important elements in forecasting the future movement of the market. While each element has its own characteristics, each also has a unique, overlapping quality.
The focus of Gann Theory is to find the interlocking relationship between these three primary indicators of changes in trend and market direction. In other words, in certain instances a pattern has a large influence on the market, while at other times price and time exert their dominance. It is the balance of these three elements, especially price and time, that creates the best trading opportunities that can lead to more success in the market. Gann Theory helps the trader to determine the best combinations of pattern, price, and time to initiate successful trades. While trades can be triggered by each element individually, a trader who weights his signal too much toward one of these elements may experience a large number of losses, whereas a trader who is patient enough to wait for a proper balancing of pattern, price, and time may experience more success.
Pattern study consists of the proper construction of minor, intermediate, and main trend-indicator swing charts and closing-price reversal patterns. Price study consists of Gann angle analysis and percentage retracements. Time study looks at swing timing, cycle timing, and historical dates. The combination of these three time factors helps the trader decide when and where to buy or sell. In this book, I describe techniques that help the trader determine how to discover these elements through proper chart construction and how they are related in trading activity.
While there is much material available about Gann Theory, very little of it explains how to put the Gann tools to practical use in a trading system. I used to think that this sort of material was valuable until I placed a stop according to some huge astrophysical law. In other words, information about the origins of cycles and price and time relationships is very interesting, but if it cannot be converted to practical use in a trading system then I consider it essentially useless. Research that reveals that a sixty-year cycle bottom is due in 2009 plus or minus two years does not help you trade soybeans profitably today. This is why you have to focus your attention on the market and what pattern, price, and time are telling you at the present.
It is my intention to focus you on the portions of Gann Theory that can be used to create a profitable trading system. My studies of Gann’s original work show that he primarily used swing charts, Gann angle clusters, and cycle counts from former tops and bottoms. There also is evidence that he used astrology to initiate some trades. This latter topic is not discussed in great detail, however, as it involves a great deal of background research before it can be utilized. Since it does fall under the concept of time, which is a key element of Gann analysis, I do discuss some simple examples of how Gann applied financial astrology to the markets. In addition, Gann created and used a series of master price and time charts, which he used to determine current and future support and resistance points.
Many of his writings contain rules for trading hypothetical examples. The only evidence I found of an actual trade recommendation was in his Master Egg Course. This information, however, became the basis for my research, as it made clear to me what was important and what was not in developing a Gann-based trading system. Each paragraph highlighted how Gann combined pattern, price, and time into a trading strategy. In the following paragraph,1 he speaks of his use of the Master Chart (Figure 3.1).
Example: May 3, 1949, October Eggs high 5025. This was on the timing of 168, which is 14 years, and 169 is the square of 13. Note that the price of 5010 hits 7/16 point of the circle at 5010, which would make this a resistance and selling level based on the Master Square Chart. See notes and time periods on the right hand of this Master Chart.
This example concerns his use of support and resistance angles:
I wired Chicago last night that October Eggs was a sure sale today. The reasons were as follows: Based on the angles on the daily high and low chart, the angle of 4 × 1, which moves 2 ½ points per day from the first top at 4760 made December 6, 1948, crossed at 5020. The 45 degree angle moving up from the low of 4685 on March 16, 1949, crossed at 5020. The angle of 67 ½ degrees, which moves up 20 points per day from the low of 4785 on April 18, crossed at 5020 and the angle moving up from 4735 on February 14 crossed at 5005, making 4 important angles coming out at this high point. A sure point for great resistance because the time from the starting of the option was over 6 months. The time from the first important top on December 6, 1948, was close to 5 months and the angle from this top called the top exactly.
FIGURE 3.1 October Egg Gann Chart
In the next example, Gann speaks of the importance of a price scale:
Since receiving 1 letter stating that the contracts for Eggs were changed on February 1 and that 1 point now equals $1.44, I did some experimenting to adjust angles to the money value because that is very important. I wanted to get something that would work to an angle of 11 ¼ angle and by multiplying 144 × 8 it gave 1152 or $11.52 profit on 8 points. This would give an angle 5 × 4 or about 39 degrees, moving up at the rate of 8 points per day, instead of the 45 degree angle which moves 10 points per day.
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