What Are Gann Indicators?
Alongside other titans of the industry, like Dow, Wyckoff, and Elliott, Gann is considered one of the most influential figures in trading. After he developed the Gann indicators, traders picked up his teachings worldwide. In this FXOpen article, we’ll dive into two of the most popular Gann indicators, Gann angles and Gann fans, and look at how they work, investigate their uses, and explore their limitations.
Introduction to W.D. Gann
William Delbert Gann, known as W.D. Gann, was a legendary trader and market technician born in 1878. He began his career on Wall Street in the early 1900s and quickly began developing a technique for predicting market movements.
Gann's theory was rooted in his belief that the market followed specific geometric patterns and that time and price had a special relationship. Throughout his career, Gann developed various innovative tools for technical analysis, including Gann angles and Gann fans. These tools, known as Gann indicators, still have a valuable use in the markets today.
Gann Angles
Gann angles, as the name suggests, use a sloping line to help traders predict future price movements. These angles represent the rate of change between time and price. The primary 45-degree Gann angle is the 1x1 line, where the market moves one unit of price for every unit of time.
Similarly, angles like the 2x1 line, where the price moves two units for every single time unit, will result in a line flatter than 45 degrees. A 1x2 line will see the price moving one unit for every two units of time. Other angles are 1x8, 1x4, 1x3, and 1x2, while the angles less than 45 degrees are 2x1, 3x1, 4x1, and 8x1.
These Gann angles are primarily used to predict future support and resistance levels, plotted by the Gann fan indicator. When the price moves in the direction of the 1x1 angle, Gann believed that this indicates a strong trend with balanced supply and demand forces. Sustained moves above the 1x1 line show a bullish trend, while moves below are considered bearish.
The Gann Fan Indicator
Gann fans offer an easy way for traders to plot these angles. The fans consist of nine diagonal lines that use the price-time relationships described earlier, as seen in the diagram. This offers a broad perspective on where the price may end up and helps to forecast potential support and resistance levels.
To construct a Gann fan, traders start by identifying a significant swing high or low point in the market. From this point, they draw a 45-degree, or 1x1 line, to represent the most critical angle. The Gann fan is then plotted along the angle, creating nine lines. As prices approach or move away from these lines, we can begin to predict market reversals and trend continuations.
How to Use the Gann Fan
Let’s take a look at how to use Gann indicators, specifically the Gann fan. Traders generally develop a Gann fan strategy using three primary methods: identifying support/resistance levels, timing entry and exit points, and gauging a trend's strength.
Support/Resistance Levels
Gann angles within the Gann fan often behave similarly to trendlines, revealing areas where the price may stall or reverse direction. These angles help traders identify crucial support and resistance levels, which may inform their decisions on future price movements.
Looking at the example above, we can see that the 2x1 line offered significant resistance, even as the trend progressed bullishly. Meanwhile, the 3x1 line provided strong support, allowing us to anticipate that these two angles would hold whenever the price visited them.
Timing Entry and Exit Points
Consequently, Gann fans can help traders time their entry and exit points. As the price approaches a Gann angle, traders may anticipate that the market may reverse in this area. They could then look for confirmation with other technical analysis tools, like candlestick patterns or momentum indicators, before entering to catch the reversal or closing their existing position.
As with each of the Gann charts shown in this article, these angles aren’t guaranteed to hold. This might help traders identify opportunities where prices will likely continue trending. The choppy area marked by the box in the diagram above could have shown us that the price wasn’t ready to reverse up, given that it closed below the 3x1 line several times.
Gann theorised that once the price had broken through one angle, it would likely head to the next. As a result, we could have predicted that momentum was likely to continue to the 4x1 line and enter a position to catch the move. Alternatively, if traders had entered a trade on the reversal at the 2x1 line, denoted by the dashed line, they could take partial profits at both the 3x1 and 4x1 lines.
Gauging a Trend’s Strength
As mentioned earlier, the 45-degree 1x1 line can also show us the strength of a trend. In the chart above, we can see that significant bearishness entered the market on the left-hand side. This was confirmed by the fact that the price was sitting beneath the 1x1 line, indicating that the strong bearishness was likely to continue.
Using this knowledge, traders could have predicted that the sharp move downward would carry on. As the price began to cross over the 1x1 line, the trend’s strength weakened. Traders could then start to anticipate that the price might begin to range or recover slightly, as it did in the chart.
In this sense, traders don’t even necessarily need to use the Gann fan. By drawing a 45-degree angle from a key swing point, they can use the line as a Gann trend indicator and expect that price will follow the trend's direction as long as it remains above (if bullish) or below (if bearish) the 1x1 line.
Limitations of Gann Indicators
While Gann angles and fans may provide valuable insights into the market’s behaviour, there are some limitations that traders need to be aware of. The biggest issue is subjectivity. Different traders identify different swing points; some may prefer the last swing point, while others use the most extreme. This might lead to differing results and interpretations.
There’s also the issue of subjective scaling. While a 45-degree angle seems simple enough to apply, the angle depends on the zoom and price-to-bar ratio of a trader’s chart. As a trader zooms in and out, the line will stay at the same angle, but its position on the chart will change.
This can be mitigated by locking the price-to-bar ratio of the chart, but this a) makes zooming in and out of price action cumbersome and b) still doesn’t offer a “true” 45-degree angle that can be universally agreed upon.
To see this for yourself, try using the Trend Angle tool under Trend Line Tools in TickTrader. Then, apply it to a swing point, and zoom in and out. You’ll notice that its position can vary wildly depending on your zoom level.
Besides locking the price-to-bar ratio, traders can try to correlate the 1x1 line with an area in which the price reversed, then plot the Gann fan over it. This may help to bring some uniformity to the process.
Your Next Step
In summary, Gann indicators, particularly Gann angles and Gann fans, may help us predict future price movements with a high degree of accuracy. However, their subjective nature can make them tricky to apply consistently, and they are better suited to more experienced traders.
Once you’ve mastered the Gann indicators, you can open an FXOpen account. We offer a wide range of markets, competitive spreads, and an ECN-based order routing system, so you can trade using Gann indicators and other advanced trading techniques. Good luck!
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Text source: Forex Trading Blog
