Gann Analysis: Experts Share Their Journey – Part 2

In Part 1 of our series talking to Gann experts, we discussed how Gann’s published works introduced them to his methods and led them to implement his techniques into their trading.

This week we discuss some of their preferred Gann methods, how their understanding of Gann’s techniques evolved over the years, and how they incorporate risk management into their trading strategies.

What is your favourite Gann trading tool or technique and why? Can you share with us a chart that highlights this technique in action?

Alan Oliver: One of my favourite Gann tools is the Gann fan angle, which is a geometric line or trendline drawn at a specific rate from a starting point. The typical trendline used by traders requires an anchor point and a secondary point to create an angle at which the trendline is extended. Gann summarised when Time and Price are equal or constant the markets can have a reversal of trend. 

One of my most memorable trades was to correctly identify the market panic of September 11, 2001, when the terrorist attack in New York created a sharp decline. I used the Gann fan angle on the XJO chart, the Australian Top 200 Index, from the major low in March 2001 just as Gann described in his Commodities manual.

The market was clearly in a downtrend, and a very weak reversal was created on September 11. Using the Gann fan angle, based from the major low on March 23, we see a time count of 120 Bars (a significant Gann count in and of itself) in combination with a price rise from the low of 118 points. This equates to a 1×1 rally or 120 days from the low and 118 (very close to 120) points up from the low. I entered multiple contracts short on the futures market to take advantage of what I was sure would be a decline, and the terrorist attack greatly expedited the drop.

Ian Flack: My favourite Gann technique is swing trading because it is simple and works on most markets in any timeframe.

The chart shows the makeup of a long trade. You enter the trade at point 4. The reverse applies for a short trade. The exit is discretionary and needs to be rigorously back-tested for the market you are trading. I like to use the Gann swing chart overlay tool in Optuma.

Darren Wilson: Tough questions, there are so many. I’d have to say the best tool both for determining current levels of support and resistance, plus where both of those may be in the future, is the Gann fan angles.

Bitcoin (BTCUSD) is a market that conforms very strongly with this tool, as can be seen. Zero angles across this chart provide even more assurances of future price & time levels.

Jon Kirk: Hands down my go-to tool is his basic Mechanical system and trading rules – pure gold and mostly overlooked.

It keeps you with the trend and is simplistic in execution. All the other tools, Angles, Squares, Square of nine, Astrology, Physics, mathematics etc. sit on top of this base. When it all comes together it’s like watching a well-rehearsed orchestra play a difficult piece – the hair on the back of your neck stands up.

You must make this stuff your own – added one entry to Gann’s rule and used his rules to create a solid risk and trade management plan suited to my nature and risk profile. I learned a lot about myself during this period, what I could and could not live with.

I only have to worry about 4 entry types; 2 long, and 2 short, and there is only one of each in play at any one time. There is no mathematics involved in the entry – it’s all geometric. The rest becomes trade management.

Once you have mastered this only then can you proceed to getting closer to the mark using Mathematics and Astronomic calculations.

The chart below is of the micro-Emini S&P500 (MESVolSpot), which I’m trading on a very small account for my subscribers. With the basic mechanical setups and rules – just to prove it works – again! 

You can see I’m long on a swing, with the trend. The Optuma Chart shows the setup and tools needed for the Micro Emini or Emini. It shows the entry and final exit – this is a live trade.

The only tool required to trade the mechanical method is a swing chart.

The trading chart below is an actual live trade that stopped out today. Once I’m in I can either trail stops behind the bars or look for something to allow me to tighten my stops and make a little more profit. 

Using Gann’s form reading and trading rules I am watching for pattern and time – I’m looking for a reaction around double tops, perhaps around a time count say 60 days from the previous high. I’m not going to give you all my secrets here but I think you can agree the chart is pretty simple.

I’m only looking for a reaction, not a major top – my longer-term forecast does not call for a major top here.

MH: As I read through these four responses, each approaching Gann’s techniques in a unique way, I noticed there was a consistent theme: Gann’s methods can be successfully applied using a few of his base techniques. Despite the great depth of Gann theory – Optuma offers over 70 Gann-based tools and chart styles – a trader can develop an effective trading plan with a straightforward implementation and understanding of Gann swing charts, Gann’s key cycle counts, and Gann Fans. 

Newcomers to Gann’s methods may find it tempting to explore all of the available tools, but it’s best to start with the foundational principles of Gann and a set of entry and exit strategies. Over time and with experience, traders can incorporate Gann’s more intricate indicators and see how they complement each other.

In keeping with this theme, I asked our experts the following question:

How has your understanding of Gann’s theories evolved over time and what advice would you give to someone new to Gann’s theories to avoid any pitfalls you encountered early in your own Gann studies?

Ian Flack: Studying Gann can become a life’s work. I suggest someone new stick to the money management rules and the trend-following techniques. I have seen many Gann followers get lost following the forecasting techniques and never actually trade. Paralysis by Analysis applies to many Gann followers.

Darren Wilson: I’ll be honest: less is more. The Gann rabbit hole is deep and long, and if one so wishes they can go very deep into the things Gann studied as being responsible for moving all markets. But you don’t need to. Gann perfected his trading system by using his Trend Line Indicator system, what we commonly call swing trading.

The last chart he ever drew was on his office desk when he passed: it was a swing chart with time counts on it. My suggestion is if it was good enough for the great man, then new people to this area of study should master his swing trading method first.

Grab some charting paper, sharpen your lead pencils, and do Gann’s examples from ‘Truth of the Stock tape’ & ‘30 Years on Wall Street’. Do the work, you will succeed. Leave the Astro side of Gann’s work for after you master the basics.

Jon Kirk: Gann is a layered approach, and he taught in a very specific way. Most educators out there are selling blue sky, forecasts etc., and while Gann did this, and so do I, this is not where he started. 

I spent the first 5 years working with every tool he taught, trying to put everything together and make it line up perfectly. Actually the more tools I added the fewer trades I took and the less money I made. The money is in the simplicity when you know what you are doing.

• Don’t get stuck in ‘The Tunnel Thru The Air’.
• Don’t believe everything you read on ‘Face Tube’ and the ‘google net’, you must prove these things to your satisfaction before they are of any value to you.
• The more you work with this material the easier it becomes, like learning to play a musical instrument.
• Free information and HOT tips are worth about what you pay for it – nothing. If it’s free the cost is in the time it takes you to backtest it.
• Start with Gann’s early textbooks.
• Find a good mentor if you can. I had to figure this stuff out alone.

Alan Oliver: Gann had a very popular theory and constantly produced market forecasts of turns well ahead of time by using what he called a “Master Time Factor”. This is still a subject of intense debate and almost every trader I meet wants to be able to forecast markets. An honourable endeavour, but no one yet has been able to produce anything close to Gann’s records. It may never be known what the exact time factor was, although some claim to have it but are unable to produce a forecast on request.

The majority of Gann’s work appears to be based on Time, and Time and Price relationships. If we, as humble aspiring traders, would look into the fabulous other aspects of Gann like time counts, swing charts, Square of 9, angles, Geometry, Astrology and Planetary cycles etc., we would have a toolbox of immense value.

Gann started traders with a mechanical system based on the Swing chart, and my own Three Gold Keys uses this method as its core base. So many people from the very start of their own trading journey try to emulate Gann’s greatest discoveries without success and get disheartened and give trading away. It should be pointed out that Gann himself stated he lost well over $300,000 in his earlier efforts. It pays for all of us to remember that no one is a ‘born’ trader. The amount of reward from trading is directly proportionate to the amount of effort expended to learn and master the art.

MH: These responses lead me to the K.I.S.S. acronym being a guiding principle for newcomers to Gann theory. Keep It Simple, especially in the beginning, is key to successfully implementing Gann’s methods into your trading strategies. This is a common issue in trading as there are countless indicators and strategies available through modern technology. Attempting to use too many tools simultaneously on your charts and hoping for a cohesive trading system is a recipe for disaster and frustration.

The final question I asked our experts was to find out how they implement risk management into their Gann-based trading strategies…

How do you incorporate risk management into your Gann-based trading strategies and what do you do if Gann’s indicators conflict with any other indicators you may use on the same chart?

Darren Wilson: The basis of Gann’s lessons, say the US Steel examples, are laid out over a campaign that lasts years of trading. By extension, anyone would learn the idiosyncrasies of their preferred market in this time. And of course their form reading (learning to interpret what the chart is saying to you) will sharpen up too.

I use the following Gann risk management rules daily: his 7-10 day rule for a sustained price move up or down, timing rules around seasonal or other Astro-related dates, and long-term resistance and support levels. I use these when in a live trade to help manage my risk and increase profit taking.

Rarely do I need other TA indicators for this. If I do, the Gann rule always takes precedence.

Jon Kirk: I NEVER TRADE WITHOUT A STOP—every trade has a predefined tested risk based on history and the entry type. I DON’T USE OTHER INDICATORS, I try to remain a pure Gann trader using what he used. As an example I use resistance cards in 1/8ths, not Fibonacci. I’ve tested hybrid systems and they bring more complexity that makes me second guess what I am doing so I tend to keep it simple these days. I don’t need any excuses not to take a trade if the key signal is there.

Alan Oliver: My risk management has been simplified over many years of trading. I use a simple 1:1 risk to reward, that is, I calculate the amount of loss in any trade should it become a loss, and once the trade generates a profit equal to the amount of allocated loss, then I have a 1:1 reward. At this point, typically I will move my stop loss up to my entry price therein removing the risk of any loss. At this point, I will review the market conditions and if the trend is strong and no visible threats to the trade are close by, I will allow the trade to run. If there exists a potential threat, like a double top within 2 or 3 days of trading from my position, I would remove half the trade and allow the rest to run on to test the resistance level.

My trading is not encumbered by many or various trading tools. Most of the trading tools I use are Gann’s with very few exceptions, and the other tools I use complement the Gann tools beautifully so I don’t have conflicts or concerns.

Ian Flack: Gann recommends strict money management and position sizing rules. It’s important you set these parameters in your trading plan. I have a rigid trading plan and don’t use any other indicators on the same chart.

MH: All the experts agree risk management is an essential part of Gann-based trading strategies. Each expert has their unique approach to risk management, but they all emphasise the importance of having a predefined risk/reward ratio. Gann’s timing rules, long-term support and resistance levels, and some form of stop-loss are all useful tools for managing risk.

While generally not relying on other technical indicators in addition to Gann’s indicators, they believe using too many indicators can lead to confusion and hesitation in taking trades. However, if other technical indicators are used, the Gann rules take precedence.

In the last part of our series next week we explore how technological advancements, particularly in Artificial Intelligence (AI), are beginning to affect all aspects of our lives, including the financial sector. We examine whether Gann’s theory, which builds on natural cycles, can withstand the impact of artificial influence in future markets.

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