Technical Analysis - Gann Fans and Grids
Hello there, Protraders!
In this article I'd like to present one type of very unique drawing tools that is included in Protrader 3 – Gann tools. Specifically, we’ll look at Gann fans and grids because they are not included in most alternative platforms.
Gann's story is very interesting and it is no surprise that it has inspired so many traders. Because of Gann's great success in trading on commodity and stock markets his theories found many followers and now some platform providers include Gann’s tools in their toolset. The basis of Gann's theory says that price is equally important as time, therefore he came up with a 45 degree trend line as a basic trend indicator. Gann stated that when upon seeing a newly forming trend, you can judge the conditions for this trend by using a time/price correlation. Initially, when price was moving above the acceding Gann line, the trend was supposed to be in good shape with potential to continue its advances. When price broke the Gann line, trend was considered to have lost its momentum and the there was a large risk of fading. But the 45 degree line wasn't the only angle that he introduced. Actually, he made a whole set of angles for trading purposes which put together create "The Gann Fan". A Gann fan is basically a set of trend lines in different angles placed symmetrically to the 1/1 = 45 degrees line. To be more specific, the lines are:
Time x Price = n degrees
1 / 8 = 82,5 degrees
1 / 4 = 75 degrees
1 / 3 = 71,25 degrees
1 / 2 = 63,75 degrees
1 / 1 = 45 degrees
2 / 1 = 26,25 degrees
3 / 1 = 18,75 degrees
4 / 1 = 15 degrees
8 / 1 = 7,5 degrees
Gann was using these lines as dynamic supports depending not only on certain price level but also certain time flow. When, in an uptrend, one line was broken he was anticipating deeper retracement looking for the support on the next one. Similar in downtrend.
Please note that originally Gann was using his techniques on weekly and monthly charts. Nowadays analysts recommend to use it on higher TF charts - 1hour and above.
To use Gann's tools you need to determine trend, i.e. 2 higher highs accompanied with 2 higher lows. Pick the latest low then and place Gann line or Gann fan. Below you'll find the example of use Gann's tools to trade the recent USD/CAD uptrend.
When an uptrend was there, and we had some higher low established, we picked it to anchor the Gann fan. Notice how price swings are developing mainly between 2/1 and 1/2 line and how price action reacts to those lines. After price establishes meaningful high we drew some downward Gann lines (45 degrees each) to measure the retracement momentum.
Because every retracement is simply a minor trend, we are able to determine its momentum also. We could use descending Gann fan as well, but I don't think that it's good to multiply levels and therefore signals. So price could provide you signals on each Gann line and clean break could be one as well. In following example we treat downward line break as a signal of trend resuming.
Using Gann tools you probably will be in need of editing them at some point. Use right mouse button at anchoring point and choose "settings". You can also "clone/copy" or "remove" it. In settings window you are able to set some certain options, similarly as in case of other tools:
- Background - tool will hide under candles and other tools that aren't marked as background.
- Mirrored - tool changes its position symmetrically.
- Color and shape regarding your taste and preference.
- Timeframe visualization – here you can pick which time frames on which this tool will be visible and invisible.
- This is handy when you need to see it (i.e.) only on higher TFs and don't want it to mess your chart on lower ones.
Set as default - this very useful button allows you to save your own style as a platform's default. Thanks to that every time you use such tool it will be your way.
Another popular tool from Gann's stable is Gann's grid. It's little bit harder to use. Basically speaking it's a whole bunch of 45 degree Gann lines with defined distance. The theory says that you may anchor it at the meaningful high/low in way that it fits the price. That's not the best explanation as you probably can imagine and it's really not that usable. In the example we placed it between our chosen low and the next high. Luckily it fits quite nice. So now we have to watch every line as potential S/R point and after clean break we should wait as it reaches another line. Apparently you could also trade breakouts.
So, how can we use these tools in our trading? If you're new to Gann's theory, you should definitely try to get some practice on demo account in order to avoid losing real money in result of misuse. We used USD/CAD pair in our examples because it's quite a nice technical pair as you can see on images. Now we placed our orders in two versions which are based on Gann's theory and little bit simple technical analysis.
In situation displayed above we used Gann's grid combined with market order. Our main signal was the fact that price bounced for the second time at grid's lower band. We can see that there is also traditional support. It turned out, that two days later we have some nice profit of about 40 pips with very small drawdown.
Using a Gann fan in the same situation we placed buy limit order just below actual day's low. In this scenario we are anticipating another pullback and another test of support at figure 1.0400. Behind this argumentations stands the fact, that Gann 1/3 line is still too far from price what tells us that it's not the right time to enter the trade. Looking at the USD/CAD chart two days later we discover that price went rapidly up and our order wouldn't be filled during this time.