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Gann Online Lessons#1 of #12
Gann's Trend Line Indicators.
By Alex D. Andresen: All Rights Reserved @
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Lesson 1 of 12 is vital in terms of understanding trend and the direction of money flow. Once you have a complete understanding of the Trend Indicator you then can move on to Lesson Number 2.
Learning W. D. Gann's Mathematical Methods
Gann has become popular because of some his mathematical method of trading like, Squaring of Price and Time, Squaring of Ranges, Master Charts, and his Astrological style of trading. Gann studied and used these mathematical principals but not in his trading, but in his forecasting. Gann was a swing trader through and through.
Basically, Gann filtered out much of market noise, by using a one, two and three day trend line indicator. He also used these indicators on hourly, daily, and weekly charts. The one-day trend line indicator has more swings then does the two and three day indicator. When Gann spoke in all of his books about, "making sure the direction of trend", or any time he referenced and historic low or high, he took the high or low based on his trend line indicator charts, not just because they were the lowest (highest) price.
I've personally seen Gann's trading records and his monthly statements from his Clearing Firm and it shows me the importance of using this trend line indicator as a swing trading type of method.
As in any trading system there are rules one must follow. Also there are certain swing patterns and retracements, that occur from time to time, that one will need to be aware of and filter accordingly.
How to create a 1 day trend line indicator. First off it's important to know the text book definition of a "trend". A one day trend up; when a bar on the chart makes a higher high and higher low then the previous bar. Trend down; when a bar on the chart makes a lower high and lower low then the previous bar. TREND CHART chart1.gif
A few things to note: Openings and closes are not important in developing of this chart, only thing that is important is if the market makes a higher high and a higher low (up). Also, inside and outside trading days are consider neutral bars and the main trend will continue until the market makes a "definite sign of trend change. (Inside day: when the bar has a lower high and higher low to the previous bar. Outside day: when the bar has a higher high and lower low. )
Gann connected the lows together when the trend was down. And connected the highs together when the trend was up. Remember, this is a one day trend line indicator. A two day line indicator needs two consecutive bars (days) of making higher high and higher lows or lower highs and lower lows. Below shows a one-day trend line indicator. ONE DAY TREND INDICATOR chart2.gif Two day trend line indicator: chart3.gif Two Week trend line indicator:
The only time I moved the trend line indicator is when the markets made two consecutive days of higher highs and higher lows or lower highs and lower lows. As you can see, the two-day indicator filters out more of the market noise then does a one-day indicator. The three day trend line indicator filters even more. In extremely active markets or when a market is in runaway bull frenzy, the market very seldom gives even a one-day pull back. This is when one should use an hourly or an accumulation Tick Chart using an one bar trend indicator, to monitor the short-term trend. [ chart3c, chart3d ] And, monitor the one-day trend line indicator for longer-term trend changes. In retrospect, if the markets are slow and more then likely in a distributing bottom, one should switch to the two-day trend line indicator for short term and a three-day trend line indicator for longer term trend change.
The most import task for any systematic trading system is to go with the direction of the trend. Understanding Gann's method of trend indicator can help other methods of trading like, stochastic, rsi, adx, moving averages, etc. The market will reward you for not fighting the flow of money.
RULES OF TREND LINE INDICATOR:
Rule 1: Trading on the trend line indications only.
In an active market, place a buy or sell stop under the last trend line bottom or above the last trend line top. Remember, just because the trend line indicator signal is up, this does not mean the market is up, the market must make a higher high then the previous swing high! (Opposite for lows) chart4.gif
Rule 2: Buying at double or triple bottoms.
Buy after the market makes a "confirmed " double bottom. Don't assume the bottom is going to hold. Get confirmation from the trend line indicator. chart5.gif
Rule 3: Selling at double or triple tops.
Sell after the market makes a "confirmed " double top. Don't assume the top is going to hold. Get confirmation from the trend line indicator. chart6.gif
Rule 4: Fourth time at the same level.
Fourth time through a level of support or resistance is powerful and one should go with the direction of the professionals. chart7.gif
Rule 5: Ascending or rising bottoms after a triple bottom.
After a "confirmed" triple bottom the market rallies, then reacts and makes a 4th and 5th higher swing highs and lows chart8.gif
Rule 6: Descending or lower tops after a triple top.
After a "confirmed" triple top the market sells off, then reacts and makes a 4th and 5th lower swing highs and lows
Rule 7: 7 to 10 day rule for active or blow-off markets.
This rule works well in active markets. If market is trend up and the market trends up for 7 day to 10 days in a row, (again, trend up is making higher highs and higher lows), start following a sell stop under the 7th day up lows to liquidate or go short (or long). (To enter into a new short position, one needs apply all the other rules to make sure there are no conflicts.)
When's & How's of Pyramiding:
Rule 8: Pyramids
Buy or sell at certain intervals or price increments. For example buying Beans at 625 then 650, 675, 700, 725, etc.. Stops loss orders can be incrementally raised as well. Remember to watch for old highs and lows for support and resistance. (Do the opposite for a down trend pyramid.) chart9.gif
Rule 9: Moving with the direction of the "confirmed" bottom (top).
Don't begin a pyramid until you have a confirmed bottom (top). Add your positions either by Rule 8 or Rule 10.
Rule 10: Pyramiding with the trend line indicator only.
Follow the rules of using the trend line indicator and when a market makes a new trend line swing high (low) add to your position. (Note: Many of Gann's mathematical methods were developed to give Gann confidence that a longer term bull or long bear trend may be developing.) chart9a.gif
Rule 11: Safest pyramiding rules.
Start at extreme levels and buy or sell at fixed intervals.
Rule 12: Fast markets and wide fluctuations.
Don't exclusively rely on trend line stops in fast markets.
Rule 13: When not to pyramid.
When markets are in a distributing phase, near double or triple top (bottom) areas, major support or resistance levels.
Rule 14: Minor Trend.
Trend is not up until the previous top is crossed. If the previous top is not violated then long-term trend is down with a minor trend up. If the volatility is high, wait to confirm top with higher highs and a higher close the last swing level. This doubly confirms the trend is up.
Rule 15: Main Trend Indicator.
This is the use of the 2 or 3-day trend line method.
Rule 16: Breakaway Points.
When the starting point is broken reverse position. Normally this is your previous swing bottom or top. This type of method will always have a position on, long or short.
Rule 17: Watch the second and third higher bottoms when trend is up, (lower tops in down trend) for longer term trend change.
Watch for the market to change trend after the 2nd or 3rd bottoms, (or tops) have been violated. chart10.gif
Rule 18: Sections of a move.
Study the size of the past ranges in terms of price and time. Watch 2nd, 3rd, 4th or 5th, higher tops and bottoms. The market is showing topping action when the price rally is less then any of the last 5 swing rallies. Also the market is showing topping action when the time required to reach current highs is longer then the last 5 rallies. When both time and price are not in harmony, then expect the change in trend. chart3.gif
Rule 19: Advances from a low.
Watch the current swing to see if is larger then recorded previous moves. This can be helpful in a slow or distributing market.
Rule 20: Sharp two or three day signal.
When a market rallies over 50% of the previous swing in two or three-day period, and the market has series of neutral inside, outside days, and or small counter trend days, then penetrates the sharp second or third days highs, then buy on close of that day. (Opposite for sell point). chart11.gif
Rule 21: Signal top day.
After a prolonged move up, in the second or third campaign, if the market makes a higher top and closes below halfway, below the opening or lower on the day, place stop under the signal days lows or if there is a report or weather weekend, exit trade at market and stay flat until market "confirms" trend change
Rule 22: Signal bottom day.
Opposite from above
Rule 23: Closing Near the top or (bottom) and opening lower or (higher)
Rule 24: A narrow day after a sharp decline or (a sharp advance.)
Rule 25: Closing at the same levels for more then two days. First close above indicator, first close below indicates a down move.
Rule 26: Three "confirmed" bottoms or (tops) near the same level and closing price. Sharp run, more then 2 days, close near lows or (highs), advance to same level 2 or 3 times.
Rule 27: Crossing tops or (breaking bottoms) of two-day moves.
Rule 28: First 2 or 3 day reaction.
After a prolonged trend watch for the first two or three-day move (trend change), this will often be a sign that the end of a move is near. Normally the strong bull or (bear) doesn't have more then a 1-day break, (rally).
Rule 29: The third move on a 2 or 3 day chart.
If a market reacts 2 days; then advances to a new high or (declines to new lows); then has a secondary 2 day reaction and advances to a new high or (declines to a new lows), it is nearly always a sign that the move is over.
This lesson is long but extremely important! Study these rules with other historical charts to prove to yourself how these rules can work for you.
Next lesson, Lesson 2 will deal with mathematical trend lines.