PATTERN
In Gann Theory, pattern is defined as the study of market swings. Swing charts determine trend changes. For example, a trend changes to up when the market crosses swing tops and it changes to down when the market crosses swing bottoms.
The trader can also gain information from swing charts about the size and duration of market movements. This how price, which is size, and time, which is duration, are linked to a pattern.
In addition, the trader can learn about specific characteristics of a market by analyzing the patterns formed by the swing charts. For example, the charts delineate a market’s tendency to form double tops and bottoms, signal tops and bottoms, and the tendency to balance previous moves.
PRICE
In Gann Theory, price analysis consists of swing-chart price targets, angles, and percentage retracement points.
Swing-chart Price Targets
After constructing a swing chart, the trader creates important price information that can be used to forecast future tops and bottoms. These prices can be referred to as price balance points.
For example, if the swing chart shows the market has had a recent tendency to rally 7 – 10 cents before forming a top, then from the next bottom, the forecast will be for a subsequent 7 – 10 cent rally.
Conversely, if the market has shown a tendency to break 10 – 12 points from a top, then following the next top, the trader can forecast a break of 10 – 12 points. If the swings equal previous swings, then the market is balanced.
Angles
Geometric angles are another important part of the Gann trading method. The markets are geometric in design and function, so it follows that they will follow geometric laws when charted.
Gann insisted on the use of the proper scale for each market when charting to maintain a harmonic relationship. He therefore chose a price scale that was in agreement with a geometric design or formula. He mainly relied on a 45-degree angle to divide a chart into important price and time zones. This angle is usually referred to as the “1X1” angle, because it represents one unit of price with one unit of time.
He also used other proportional geometric angles to divide price and time. These angles are known as 1X2 and 2X1 angles because they represent one unit of price with two units of time and two units of price with one unit of time, respectively.
All of the angles are important because they indicate support and resistance. They also have predictive value for future direction and price activity. All of which is necessary to know in order to forecast where the market can be in the future and when it is likely to be there.
Percentage Retracement Points
Just as Gann angles offer the trader price levels that move with time, percentage retracement points provide support and resistance that remain fixed as long as a market remains in a price range. Gann is commonly acknowledged to have formulated the percentage retracement rule, which states that most price moves will correct to 50%. Other percentage divisions are 25% and 75%, with the 50% level occurring most frequently.
Gann believed traders would become successful if they used price indicators such as swing-chart balance points, angles, and percentage retracement points to find support and resistance. In essence, however, the combination of the two price indicators provides the trader with the best support and resistance with which to work.
For example, while the uptrending 1X1 angle from a major bottom and a 50% price level provide strong support individually, the point where these two cross provides the trader with the strongest support on the chart.
TIME
According to Gann, time had the strongest influence on the market because when time is up, the trend changes. Gann used swing charts, anniversary dates, cycles, and the square of price to measure time.
Swing-Chart Timing
A properly constructed swing chart is expected to yield valuable information about the duration of price swings. This information is used to project both the duration of future up moves from a current bottom and the duration of future down moves from current tops.
The basic premise behind swing-chart timing is that market patterns repeat: this is why it is necessary to keep records of past rallies and breaks. As a swing bottom or top is being formed, the trader must utilize the information from previous swings to project the minimum and maximum duration of the currently developing swing.
The reasoning is that price swings balance time with previous price swings. However, in strong up moves the duration of a rally is greater than the duration of a break, and subsequent upswings are equal to or greater than previous up moves. Conversely, in strong down moves the duration of a break is greater than the duration of a rally, and subsequent downswings are equal to or greater than previous down moves.
Anniversary Dates
Among the timing tools Gann used is a concept he referred to as “anniversary dates.” This term refers to the historical dates when the market made major tops and bottoms. The information collected in effect reflects the seasonality of the market because often an anniversary date repeats in the future.
A cluster of anniversary dates indicates the strong tendency of a market to post a major top and bottom each year at the same time. For example, in order to predict future tops and bottoms in wheat, Gann claimed to have studied prices back to the twelfth century, noting not only the prices, but the anniversary dates – top to top, top to bottom, bottom to bottom, and bottom to top – were fundamental factors in this thinking.
This information he learned from the research was very important to his analysis, and these dates gave obvious clues to another of his approaches to the market: time cycles.
Cycles
As mentioned earlier, Gann tried to build analysis tools that were geometric in design. When looking at anniversary dates he saw a series of one-year cycles. In geometric terms, the one-year cycle represented a circle or 360 degrees.
Building on the geometric relationship of the market, Gann also considered the quarterly divisions of the year to be important timing periods. These quarterly divisions are the 90-day cycle, the 180-day cycle, and the 270-day cycle. In using the one-year cycle and the divisions of this cycle, you will find a date where a number of these cycles line up (preferably three or more) on a single point in time in the future.
A date where a number of cycles line up is called a time cluster. This time cluster is used to predict major tops and bottoms. Time cycles are a major part of Gann analysis, and should be combined with price indicators to develop a valid market forecast.
James A. Hyerczyk is an experienced Gann analyst and trader. His firm, The Pattern, Price, & Time Report publishes daily, weekly and monthly newsletters and strategy papers as well as providing webinar and educational services. He can be reached at 773-793-8630 or by email at patternpricetime@yahoo.com. His website address is http://patternpricetime.com.
