Gann Angles: Time and Price Analysis
W.D. Gann (1878-1955) developed the use of what he called "Geometric Angles", now commonly referred to as Gann Angles, used to determine trend direction and strength, support and resistance, as well as probabilities of price reversal.
Gann was fascinated by the relation of time (T) and price (P). Gann drew his angles from all significant price pivot point highs and lows. He used just one pivot point to draw an angle that rose (or fell) at predetermined and fixed rates of speed, as follows:
T x P = n degrees 1 x 8 = 82.5 degrees 1 x 4 = 75 degrees 1 x 3 = 71.25 degrees 1 x 2 = 63.75 degrees 1 x 1 = 45 degrees 2 x 1 = 26.25 degrees 3 x 1 = 18.75 degrees 4 x 1 = 15 degrees 8 x 1 = 7.5 degrees
T is the number of units of time, graphically plotted on the horizontal x-axis.
P is the number of units of price, graphically plotted on the vertical y-axis.
x is read as "by".
n degrees specifies the slope of the Gann angle, measured in degrees.
Translating time by price into degrees assumes a square grid, where one unit of time on the x-axis takes up the same amount of horizontal space as the one unit of price on the y-axis takes up vertical space. For example, 1/16 of an inch might be set to one week of time on the horizontal x-axis, and 1/16 of an inch might be set to one dollar of price on the vertical y-axis. On such a proportionally scaled chart, the 1 x 1 geometric angle, which for every one unit of time rises one point in price, is a 45 degree angle.
Without this equality of time and price scaling, however, Gann angles stated in degrees do not work out correctly. That would not prevent correct Gann angles from being drawn on oddly proportioned grids; it would only prevent the translation of time by price angles into correctly-displayed degrees. But that would not affect the interpretation of the Gann angles if we avoid thinking in terms of degrees. Rather than thinking in terms of degrees, it is simpler to express Gann angles in terms of units of time by price.
For practical purposes, weekly Gann angles, drawn on a weekly bar chart, appear to offer the most useful perspective. Gann often said that the weekly chart was more important than the daily chart. Nevertheless, Gann angles are flexible and can be used on any time-scale, so long as the time by price proportions are correctly calculated.
Gann angles offer indications of support and resistance that may not be evident based on any other method. For example, during an up-trend, the 1 x 1 angle tends to provide major support. A major reversal is signaled when prices fall below the 1 x 1 angle. According to Gann, prices should then be expected to fall to the next angle below, the 2 x 1 angle. In other words, as one angle is penetrated, expect prices to move to and consolidate at the next angle, which is less steep.
Gann placed special emphasis on the 1 x 1 angle. On a perfectly proportioned time by price grid, in an uptrend, the 1 x 1 angle extends "northeast" at a precise 45 degree angle. This 1 x 1 angle is the most significant angle: it represents a sustainable, perfectly balanced trend, not too fast and not too slow, but just right. In a bullish uptrend, the 1 x 1 angle tends to provide major support. When this 1 x 1 angle is broken, a significant price trend reversal is signaled. The price should then drop down to test the 2 x 1 angle, below.
In a downtrend, the 1 x 1 angle extends "southeast" at a precise 45 degree angle. Eventually, after a downtrend, when price moves above and stays above the 1 x 1 angle (which is sloping down and to the right at 45 degrees), price should then make its way up to test the next, less-steep Gann angle, the declining 2 x 1 angle. An angle that provided resistance, once decisively broken, should provide support.
Furthermore, when a 1 x 1 angle crosses a horizontal line extending forward in time from a significant past pivot point price (an obvious high or low), then time and price are square relative to that past pivot point, and that is a likely time for a change in trend or an acceleration of the existing trend. Also, when a geometric angle crosses zero or another geometric angle, a trend change is likely.
Identification of the most important Gann angle is dependent of the price level of the instrument analyzed: very high and very low priced instruments will follow steeper and shallower Gann angles, respectively. In other words, the best functioning Gann angle for support and resistance depends on the price level of the instrument being analyzed.
For example, for the S&P 500 Composite Stock Price Index, a relevant support and resistance price channel was well defined by 2 x 1 weekly Gann angles from the 8/9/82 price low at 102.20 until 1995. After the 12/9/94 low at 442.88, the S&P price level quickly rose so high that the bull market trend was better defined by the rising 1 x 4 weekly Gann angles. A glance at the chart should make obvious the value of these Gann angles, which can be drawn before the fact, as soon as the user can identify a pivot point high or low. (See Robert W. Colby's book, page 285, for this chart.)
Gann also divided significant price and time ranges and previous highs and lows into eighths, and looked for support and resistance there. For example, dividing the low to high price range after a substantial upswing, the most important divisions would be 8/8 (or the high), ½ (the midpoint) and 0/8 (the low). Next most important would be 3/8 and 5/8. Expressed in decimals, 3/8 is 0.375 and 5/8 is 0.625, which are only .007 away from the Fibonacci ratios of 0.382 and 0.618.
Note: The above is an excerpt from The Encyclopedia of Technical Market Indicators, Second Edition, McGraw-Hill Publishing, 2003.