While W.D. Gann’s legendary trading methods have been extensively discussed, this article seeks to offer more than a mere retelling of tales. Instead, it’s a robust infusion of practical trading wisdom, a hallmark of Mr. Gann’s remarkable success. Our aim here is to equip you with the means to integrate numerous techniques we’re about to delve into directly into your current trading arsenal. Focusing specifically on Gann’s utilization of squares, not only will we unravel historical market trends, but we’ll also unveil a pragmatic window into predicting the future paths of the markets he mastered.
Gann often referred to the intriguing interplay of price and time cycles as “squares.” For those new to this concept, a simple substitution of the word “cycle” for “square” can make grasping these ideas much more accessible. Visualizing squares or cycles can be quite challenging. Therefore, Gann, always pragmatic, devised a method to illustrate these cycles on a chart using geometric angles, effectively representing the intertwining dynamics of time and price. This insight reveals an undeniable truth: in the world of the markets, price is intricately linked to time.
Creating one of these squares is no small artistic feat. It involves a meticulous artistic endeavor resulting in a complex web of vertical, horizontal, and diagonal lines forming what we call “Gann Architecture.” These charts are exceptionally intricate, teeming with numerous lines. They prove useful primarily to the average trader and offer minimal benefit to advanced Gann experts. Nonetheless, for novice learners seeking a profound grasp of Gann’s methods, constructing a few of these charts manually is essential. If you lack artistic flair, we recommend utilizing tools like Peter Pich’s Gann Trader to craft these intricate charts with ease.
Creating a Square: A Step-by-Step Guide
Constructing a Gann square manually involves a systematic process. Here’s a step-by-step guide:
- Select Your Market: Begin by choosing the market you want to analyze. You’ll start from either its all-time high or low.
- Draw the Basis Square: Begin by drawing a square with four equal sides. The size of this square should be in harmony with the type of chart you are using. For instance, if you are working with a weekly chart of the S&P 500 Index, you might opt for a Square of 52 (reflecting 52 weeks in a year).
- Create the Time/Price Grid: Draw angles from each of the corners on the left side of the square, just as Gann did. To establish a time/price grid, divide the square into eighths or sixteenths, both from top to bottom and from left to right.
- Angle Construction: Gann employed straightforward angles. Begin with the division of the range or high by two, representing the 50 percent retracement zone. To create this angle, draw a 45-degree (1×1) uptrend line from the bottom and top left corners of the square.
- Additional Support and Resistance: The second most crucial support/resistance angles are drawn by creating 37.5 and 62.5 percent (2×1 and 1×2) uptrend and downtrend lines from the two left corners.
- Lesser Importance Lines: Gann also utilized lines of lesser importance but still worth monitoring. These are the 25 and 75 percent lines (4×1 and 1×4). Draw these lines from the left corners as well.
- Weak Lines: Lastly, consider the lines that Gann regarded as weaker. These are at the 12.5 and 87.5 percent divisions (8×1 and 1×8). Execute horizontal and vertical range divisions accordingly.
By following these steps, you can create a basic time/price square that forms the foundation for Gann’s unique analytical approach.
Sculpting Precision with High and Low Squares
The use of squares rooted in significant market highs and lows is a potent tool for traders, offering more precision than the standard overlay technique. This method, akin in essence, equips traders with a rich array of time/price projections, invaluable for active traders.
For instance, consider the S&P 500 Index’s recent all-time high, standing at 348. To employ this technique on a daily chart, envision drawing a rectangular box, its top-left corner anchored at the 348 high. This box extends horizontally into the past, covering 348 days of market history. While it may require ample chart paper, the insights are worth it.
Next, trace a vertical line down to zero, with each side of the box being equal. With your canvas ready, as before, dissect it vertically and horizontally, creating eighths or sixteenths.
Now comes the exciting part. Draw in the Gann angles from the left-hand corners. Voilà! A fully realized square of the high emerges, a testament to your meticulous craftsmanship.
Mastering the Square of the Low
Constructing a square of the low mirrors the steps for crafting a square of the high. The key distinction is in directing the vertical lines not downward to zero but upward, towards the towering prominent high, which often stands as the all-time high. This process equips traders with a dynamic support and resistance framework that furnishes a wealth of time/price projections for future market actions.
Harnessing the Power of the Square of the Range
Gann’s square of the range reigns supreme as one of his most practical and impactful techniques, contributing up to 60 percent of total effectiveness in any trading system. Its versatile application spans the spectrum from short-term intraday charts to the broader landscape of monthly and annual charts.
As a cornerstone in my day trading strategies, employed through our hotline service, MARKETLINE! – The Professional’s Choice, we’ve consistently achieved remarkable results, averaging 27 weekly trades across ten markets. The average percentage of profitable trades stands at an impressive 59.25 percent, delivering daily gains exceeding $1300 on a $50,000 margin account.
To construct this square, you can apply the same techniques outlined earlier. However, restrict the square to encompass the range of the recent advance or decline you’re examining, and behold, you wield one of the most potent trading tools available today.
While numerous trading strategies can arise from this tool, here are some vital considerations:
- Don’t anticipate reactions at every range division and angle within the square, as this could lead to significant time wastage and substantial losses.
- Focus on opportunities that emerge around the 37 1/2, 50, and 67 1/2 percent range divisions in angles, time, and price. Convergences and intersections of these lines signify significant opportunities.
- As with any trading tool, combine it with additional tools to either validate or invalidate your trading hypotheses. Consider incorporating Elliott Wave theory, Fibonacci ratios, and various momentum oscillators to refine the raw data generated through this technique.