In the past I discussed about a different type of trading analysis called Gann Theory. This is a popular style of analysis that looks at patterns and repeatable price action based on time. After receiving some emails on the subject, I decided it best to examine Gann Theory a bit further in my articles. I am not going to go into the history of Gann Theory or give a biography of W.D. Gann. Instead I will discuss some practical applications of some of his theory.
There are three trends applicable to any timeframe which you are analyzing: Minor, Intermediate and Major. That also means that there are three types of swing highs and lows that correspond with these trends. In my article, the Gann swing highs and swing lows I labeled as Gann Swings are actually intermediate swings. Let’s examine the definitions of the swing bottoms (lows) and swing tops (highs).
Gann Minor Swings:
A minor bottom is a low price compared to previous lows followed immediately on the next bar or candle by a higher low and a higher high. The minor top is a higher high compared to previous highs in price followed immediately by a lower high with a lower low.
Gann Intermediate Swings:
The intermediate bottom is also a lower low compared to previous lows. However, it differs in that the immediate high that follows must be higher than the previous two bars or candles. The intermediate top is a higher high than previous highs that is immediately followed by a low that is lower than the previous two lows.
Gann Major Swings:
A major bottom will hold much significance to a trader using Gann Theory for their analysis. A major bottom would be a low price on a bar or candle that is lower than previous lows but is immediately followed by… you guessed it, a high that is higher than the previous three bars or candle highs. The major top is a high that is higher than previous price action followed immediately by a low that is lower than the previous three bars or candles.
Identifying Trend:
If you see price breaking a previous swing top, then you are in an uptrend in the timeframe and level (minor, intermediate, or major) that you are trading in. You would continue to trade only in the long direction until you break a previous swing bottom of the same degree. For instance, the following chart of USO opens the day with a minor swing bottom. If we were already in an intermediate uptrend, a trader could use that as an opportunity to trade long intraday until a swing bottom is broken. In fact, they may want to enter or add to longs when a new swing bottom is formed. After the minor swing bottom is broken a trader should wait for a new intermediate or major swing bottom to form before entering any more long positions.
In Gann trend analysis, a downtrend occurs when price breaks a swing bottom. If price moves downward in a defined uptrend but does not break a swing bottom, it is called a correction and the trader has no need to exit their long. A break of a swing bottom would constitute an exit signal.
The rules would be the same for a downtrend. Once a major downtrend has been established for the timeframe you are trading in, you could look to short intermediate or minor swing tops until they are broken.
In future articles I will explore more uses of Gann Theory for trading. Until then, trade safe and trade well!
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD clings to gains above 1.0750 after US data
EUR/USD manages to hold in positive territory above 1.0750 despite retreating from the fresh multi-week high it set above 1.0800 earlier in the day. The US Dollar struggles to find demand following the weaker-than-expected NFP data.
GBP/USD declines below 1.2550 following NFP-inspired upsurge
GBP/USD struggles to preserve its bullish momentum and trades below 1.2550 in the American session. Earlier in the day, the disappointing April jobs report from the US triggered a USD selloff and allowed the pair to reach multi-week highs above 1.2600.
Gold struggles to hold above $2,300 despite falling US yields
Gold stays on the back foot below $2,300 in the American session on Friday. The benchmark 10-year US Treasury bond yield stays in negative territory below 4.6% after weak US data but the improving risk mood doesn't allow XAU/USD to gain traction.
Bitcoin Weekly Forecast: Should you buy BTC here? Premium
Bitcoin (BTC) price shows signs of a potential reversal but lacks confirmation, which has divided the investor community into two – those who are buying the dips and those who are expecting a further correction.
Week ahead – BoE and RBA decisions headline a calm week
Bank of England meets on Thursday, unlikely to signal rate cuts. Reserve Bank of Australia could maintain a higher-for-longer stance. Elsewhere, Bank of Japan releases summary of opinions.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
Discover how to make money in forex is easy if you know how the bankers trade!
5 Forex News Events You Need To Know
In the fast moving world of currency markets, it is extremely important for new traders to know the list of important forex news...
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and...
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.