What is the Gann fan?
In this article, we will explain another market analysis tool developed in the last century by a famous analyst and trader, which was designed to study the price oscillations between market highs and lows. This tool has some popularity and can be found on most trading platforms, although its effectiveness has been questioned. The Gann Fan is a technical analysis tool used to indicate price movements from important highs and lows as well as to identify price breakouts.
William Delbert Gann developed analysis techniques based on geometric patterns and classical angles whose relationship, according to its creator, allows us to correctly predict future market movements in both time and price. This analysis tool is built based on Gann angles.
Gann was a stock market analyst who in the 20th century wrote his foundations to invest in the stock market in his work “The basis of My Forecasting Method”. This work, which consists of just over 30 pages as a manual, was published in 1935.
The Gann fan is formed by lines that start from the same point with different angles. It is similar to the Fibonacci fan, but the angles between the lines that make up this fan are classic angles like the 45 degrees one.
To use the Gann analysis techniques, and therefore to use the Gann range, the idea is to use the same price and time intervals in the price chart. This ratio is known as 1 × 1: a unit of the price goes up or down by a unit of time, this movement will give an angle of 45 degrees. Gann believed that the ideal relationship between price and time was when the price rises or falls at an angle of 45 degrees with respect to the time axis.
Although Gann proposes more angles, the 1 × 1, or 45 degrees, is the most important and the trend line formed in this angle is used as a criterion to determine the general market trend. Thus a bull market is one in which the price is rising and moves at the top of the 45 degree line. A bear market will be one in which the price is falling and moving below the 45 degree line. The price break out of this line of the Gann fan will predict a change in trend.
All other lines in the Gann fan are drawn above and below line 1 x 1. Traders can use a variable number of lines above and below line 1 x 1 on a fan chart. All fan lines represent units of time per unit of price. For example, in the 2 × 1 line, one unit of the price is traversed for every two units of time.
This famous trader proposes 8 more angles besides the 1 × 1; these are 1 × 2 (63.75 degrees), 1 × 3, 1 × 4, 1 × 8 and 1 × 16, above the 1 × 1 line; and 2 × 1 (26,255 degrees), 3 × 1, 4 × 1, 8 × 1 and 16 × 1 under the 1 × 1 line. Using these lines, the entire Gann fan is built, although the 1 × 2, 2 × 1 lines and, of course, the 1 × 1 line is the most used in the Gann range. It starts from an important point, that minimum or maximum in which a trend movement has begun, and from this point, the different lines of the fan are drawn. In each of these lines, Gann believes that the market will find support/resistance. If a breakout of one line occurs, the price is expected to follow the direction of the breakout until the next line of the Gann fan.
Bases of Gann methodology
Gann based his investment strategy on the assumption that by studying the past, we can predict the future. For this, Gann assumed the following assumptions:
- Price, time and range are the only three relevant factors for movements in the market.
- The markets are cyclical in nature.
- The markets are geometric in their design and operation. Gann knew that movements in the market are a reflection of human nature, which is constant over time, so they tend to show repetitive price patterns that can be seen with the right tools (such as price charts for example) and they can be used to invest and obtain gains in the markets on a regular basis.
Based on the above, Gann used three methods to predict market behavior:
- Price study: This is based on the use of support and resistance lines as well as angles and pivot points.
- Study of time: This type of study is based on the search for events that occur recurrently in the market due to the natural order. We must remember that Gann considered that the market is a manifestation of human nature which is constant over time.
- Pattern study: This approach studies the changes in the market using trend lines and reversal patterns.
How to trade with Gann angles?
The usefulness of the techniques proposed by this analyst has been much questioned by both traders and technical analysts. However, it is a very popular tool and widely used today. Gann established in his method three factors to study that are reflected in the angles:
- Study of price.
- Study of time.
- Analysis of chartist patterns.
In this sense, Gann used these lines as support and resistance. And, after that, he also used complementary patterns to trade in daily, weekly and monthly charts. One of the simplest uses is to establish a general market trend first. For example:
In the previous price chart, we can see that the trend was bullish, through various tools different from the Gann angles. Considering this, I would use the 45-degree line and those below it as support:
Here the fan is drawn from the reference minimum and new long positions are open when the price bounces on the lines representing the angles.