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Here is an article from Traders World that describes the application of the
Gann Square.
Steve
Unveiling The Mystery
of W.D. Gann ‘s
Price and Time Squares
from Theory to Practical Application
By Marcus Robinson
Much has been written about many of the fabled trading techniques of W.D.
Gann. This
article is not meant to be another one of the glori.ed recitations of
folklore, but rather a
healthy dose of trading practicality which I feel was the hallmark of Mr.
Gann’s success.
If we get our work done with this article, you will be able to incorporate
many of the techniques
we’ll cover into your present trading strategy. This article will con.ne
itself to Gann’s use of
squares (geometric .gures) not only interpret past market history but also
to provide practical
insight into the future direction of the markets he traded.
SQUARES
Gann referred to the various price and time cycles as squares. So. for the
novice investor
reading this article, it may useful to simply substitute the word "square"
with the word ‘cycle.
This will help facilitate your understanding of these much maligned
concepts. Squares or
cycles are sometimes very dif.cult to visualize. So, Gann with his unique
sense for practicality
devised a method of actually displaying the many price and time cycles on a
chart by the
use of geometric angles which represented the duality of time and price.
This in itself is an
interesting yet blinding glimpse at the obvious - in terms of the market,
price never occurs
outside of the context of time.
To construct a square would call for an elaborate artistic effort which may
result in a
rather intricate network of vertical, horizontal and diagonal lines of
varying degree which we
call Gann Architecture. The charts are so intricate and provide so many
lines that it will, for
the most part. be useful to the average trader and of minimal use for the
the advanced Gann
technician. Nevertheless, to get a thorough understanding of Gann’s work, it
is necessary for the
beginning student to construct a few of these charts by hand. If you aren’t
artistically inclined, we
recommend using Peter Pich’s Gann Trader Ito construct these elaborate
charts.
To construct one by hand, choose a market and starting with its all time
high or low and
draw the basis square. You know, a box with four equal sides. The size of
the box should be in
harmony with the kind of chart you’re working with. For example, using a
weekly chart of the S&P
500 Index, I would recommend using the Square of 52 (for 52 weeks in a
year).
Once you have drawn your square you need to draw all the angles which Gann
used from
each of the corners on the left side of the square. Then divide the square
into eighths or l6ths
from top to bottom and left to right to create a time/price grid. Once
complete, you will have fully
constructed the time/price square in its basic from.
The angles that Gann used were very simple. He simply divided the range or
high by two
(50 percent retracement zone) and this angle would serve as his most
important support and
Traders World 183
resistance. to construct this angle simply draw a 45 degree (or lx 1)
uptrend line from the bottom
and top left corners of the square. To construct the second most important
support/resistance
points, draw a 37 1/2 and 62 1/2 percent (2x1 and 1x2) uptrend and downtrend
lines from the two
left corners. This would complete a basic square as the next set of line are
of lesser importance
but nevertheless should be monitored. They are the 25 and 75 percent lines
(4x1 and 1x4)
and should be drawn from the left corners as well. And .nally, one should
consider the weak
lines which Gann considered. They are at the 12 1/2 and 87 1/2 percent
division (8x1 and 1x8).
Horizontal and vertical range divisions should be executed accordingly.
SQUARES OF THE HIGH AND LOW
I consider the use of squares off major highs and lows to be of greater use
to the trader
than the generic overlay technique described above. The technique is very
similar and should
provide the trader with a vast array of time/price projections which can be
very useful to the
active trader. Take for instance the square of the high for example. Using
the S&P 500 Index,
the recent all-time high for the move is around 348. Using this technique on
the daily chart, you
should draw a box that the top left corner starts at the 348 high and moves
forward (horizontally
to the left) in time by 348 days. As you can see, you going to need a
suf.cient amount of chart
paper to complete this exercise. Then draw a vertical line down to zero.
since all for sides
of the square are equal, you can easily complete the box. Now, as in the
previous exercise,
divide the box vertically and horizontally into eights or sixteenths. Once
this is done, allyou
have to do now is draw in the Gann angles from the left hand corners and
presto, you now
have a fully constructed square of the high.
To construct a square of the low, you basically follow the same steps as
when constructing
a square of the high. The only difference is, instead of drawing the
vertical lines down to zero,
extend them upward to the high prominent high (which will most likely be the
all-time high).
Armed with the support and resistance architecture offer by the powerful
charts a trader may be
informed of the majority of time/price projections for its future market
action.
SQUARE OF THE RANGE
The square of the range was Gann’s most practical and effective technique.
This single
technique alone can account for as much as 60 percent of the total
effectiveness in any trading
trading system. A trader could use this technique in any time series ranging
from short term
intraday charts to the long term monthly and annual charts. I utilize this
strategy to develop my
day trading strategies we recommend on our hotline service -MARKETLINE!, The
Professional’s
Choice. This service has averaged 27 trades a week in ten markets with an
average percentage
of pro.table trades at 59.25 percent. Average daily Gains amount to more
than $1300 per
day on a $50,000 margin account. The core strategy employed in our analysis
in all time
series is Gann’s squaring of the range.
To construct this square, simply use the same techniques we’ve described
above but
con.ne the square to the range of the recent advance or decline you
interested in and presto,
you have in your hands perhaps the most effective trading tool available to
date. While there are
numerous trading strategies which can be developed with this tool, the most
important things to
remember are: I) don’t expect to see a reaction at each one of the range
divisions and angles
within the square. This would only result in a huge waste of time and
trading at everyone of
these area could result in tremendous losses. 2) look for the valuable
opportunities to show
up around the 37 1/2. 50 and 67 1/2 percent range division in angles, time
and price. Any
convergence and intersections of these lines should be regarded as
signi.cant opportunities.
And, 3) as with all trading tools, they are most successfully employed when
using another
set of tools to con.rm or invalidate your trading hypothesis. We recommend
Elliott Wave
theory, Fibonacci ratios and a variety of momentum oscillators to "smooth"
the raw data
developed with this technique.
References
Gann Made Easy. By William McLaren
Relevance lu/ama Trading Manual. By R. Maynard Holt
How To Make Use Time And Price Overlays. By L.L. Jacobs
Gann Trader I User Manual. By Peter Pich
Marcus Robinson is a freelance writer and commodities trader. He is the
editor of The Market
Alert!!, a hi-weekly commodities newsletter and is the principal analyst for
MARKETLINE!, a
premium audiotext service (900 535 0200). The services are published by
Spectrum Analytical
Systems, Inc., 1088 Bishop Street, Suite 2807, Honolulu, HI 96813. (800)
327-9995.
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