One of the things that I love about Technical Analysis and especially the analysis with Gann techniques is the “Oh Wow!” moments when you apply a tool and see the market treat the lines that you just added like an impenetrable barrier.  How does that work??? Why is the market respecting a line that is a simple geometric calculation from a previous turn in the market?  The how and why I think I’ll leave for another time. What I aim to do in this article is to introduce you to one of the Gann tools that I use every day and reveal how I trade from it. 

Let me firstly say that I believe that the field of Gann is one of those areas where you need to dedicate yourself to study.  It’s not for everyone, but perhaps it’s my engineering background that makes me fascinated with the cyclic and repeatable nature of markets.  I also truly believe that if you can master his techniques, then you will be able to be very successful as a trader.

One of the first things that I do once I open a chart is start looking for major highs and lows in the historical data that I have.  The first chart I want to show you is Incitech Pivot (IPL) on the ASX.  This stock first came on my radar after it suffered a 30% reduction in value in the space of a week.  If you remember my article last issue on the three dimensional sector map, you will know that this fits the bill of what I look for.  
What I’ve done here is add the “Gann Square Top/Bottom” tool to the high just before IPL crashed in January 2009.  

While at first glance it can be just a jumble of lines on the chart, what I am looking for is instances where the stock has “respected” the lines, and proof that this square provides support and resistance to the market.  One of the more notable points are as follows. 

I’ll explain the theory a bit more in a moment, but for now just remember that those vertical lines are very important.  What we see here is that the next top in IPL (some 8 months after the crash) was highlighted in advance by placing this tool on the previous high.  IPL made a new major high on the date that we had a square midpoint (I’ll explain that later too).   Also you can see that the blue horizontal line (which is the price of the previous high) provides support and resistance, although nearly every trader in the world knows that previous high and low prices provide support and resistance.  

The other thing that I look for is if the stock is following the general lines that join critical points in this square.  From the first image you can see that the trends in IPL have been following the lines and staying contained by them.  Now don’t scream and point to all the times the lines were crossed, this technique is a general guide and one that can assist you in spotting places where there is going to be support and resistance.  I actually think of the lines as force fields, they’re not impenetrable, but unless the stock has enough momentum, they will get drawn to the lines. Maybe I’ve just watched way too much Star Trek!

All of this has now confirmed to me that this is a good square and that I can trust this to provide guidance to me as I trade.   Normally I would not stop here, although you can.  If I was trading long term I would wait for the market to come down to the red angled line and look for an opportunity to buy, setting a target back near the horizontal blue line.  My experience is that the market “bounces” between these lines and that is where the trading opportunities lie. Because it has done it so many time in the past, I have statistical confidence that it is more likely to bounce off the line (even temporarily) than shoot straight through it.

What I want to do now though is add another square.  This is important if I am trading intraday as I don’t want to have my stops too far away, and I want to try to catch the intraday oscillations in the market.

In this image you can see that I have now placed a Gann Square Top/Bottom at the final low price of the crash in IPL.  Again, as you study the image, you can see that the lines are respected by this market.

   
Here I have put both of the squares that we have been working with on together (I’ve made the first one dashed lines so you can see which square is which).  What becomes apparent is that the squares drawn from both points are important.  Now we could go through and draw squares from every top and bottom and while I’m fairly sure you would have every single minor turn in the market covered, it would be too cluttered and too difficult to trade from.    

Having said that, there is a way that you can use many squares on a chart and get some very powerful information. Have a look at the following stock, CTP, where I have put a Gann Square Top/Bottom on every major turn in the market.

In this screen shot I have included the Market Analyst structure panel that shows I have added 14 Gann Square Top/Bottoms and made them all invisible.  Then what I did is add a “Cluster” tool to my chart.  The Cluster tool goes through all other tools on the chart and counts how many times a line exists on any date (this works with symbols, Fibonacci etc).  To give it a bit of tolerance, I have given the cluster a 3 bar tolerance which simply means that if there is a line on one day, we count it on the day before and the day after as well.

What we are looking for is where the cluster peaks, showing us that there are a number of vertical lines hitting the same date.  You can see that there is an obvious peak that coincides with a time when this stock went “through the roof” in October this year.  The amazing thing is that we knew that something very significant was going to happen beforehand if we took the time to study it.

Oh, and this works no matter what time frame we use.  Have a look at this chart of the Share Price Index (SPI) futures in Australia.  This is a five minute chart which has a single Gann Square positioned on the recent high of 4897.
      
If you pay attention to the vertical lines, you can see that all the vertical lines are significant warnings that something is about to happen in the market.  In this case I have asked the tool to repeat a number of times and you can see that the squares have considerable correlation to what is happening with the major and minor moves on the SPI.

OK, so how do we get those lines?  This tool is a classic for the Gann mantra of Squaring Time and Price.  What we do is take the price where the square has been placed on, let’s say it is $2.35 then we square that into time, i.e. we set the end of our square 235 bars from now. This gives us our basic box.   All the diagonal lines are then drawn between the corners and the midpoints of the square.  The tool also has a setting that allows you to show more vertical and horizontal lines at thirds and eighths of the original box.  Those lines are again very interesting and very useful on larger squares.

Here is our first chart (IPL) with the thirds and eighths switched on.

In most cases the bottom of the square is 0, so that the height is 235 cents and the width is 235 bars, but sometimes we may apply a price factor to make the squares a bit smaller.  This is the thing that I love the most about these squares and what makes it 7 parts science and 3 parts art.  It does not matter what scale you use, you can divide all the values by 10 and you will have a good square, you could multiply all the values by Gann numbers 90, 144, 360 and again have some amazing squares.  The trick here is to find a square that gives you a descent range to trade between, but not so far apart that you miss the opportunities in-between.

So why does it work? Well that is actually a deep philosophical discussion.  I personally believe in a very ordered and designed world. Everything follows designed mathematical rules – we just don’t understand all the rules.  I guess this is one of those areas that when we see enough evidence we just have faith. If we open our eyes it’s hard to deny what is in front of us.  I know this works and I now know how to trade with it, I’m just grateful to the work of Gann in unlocking this secret that I can use in my trading.

I hope you can see from this short article the power that Gann Squares can offer to you as you trade the markets.  I love Gann Squares and my best trades have always been from using them.  These tools are available in the Gann Edition of Market Analyst. Call our client services team if you do not have these tools and would like to have a trial of them.

ADDED 27th October 2011

Recently at the IFTA conference in Sarajevo, I gave a session on Gann Squares and in there showed the following chart of the S&P 500 with a Gann Square of the Bottom starting on the March 2009 low.  

(Click image to enlarge)

As soon as I put this square on I knew it was significant by the way the lines were being respected and how the midpoint of the square caused an aggressive move in the market.  The square told us that the 27th October would also be significant, and we knew that more than a month in advance.  Well, the following chart is now showing what happened last night on the S&P.

The Gann Squares are amazing, a very small amount of effort and we have such a powerful date marked off in the future.  The thing I have learned is that the more significant the starting point, the more powerful are the dates that it relates to.

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