W.D. Gann is a well-known market trader who established his own forecasting techniques based on price and time. He considered that time, as measured according to divisions of the circle, exerted a controlling influence over the price spiral depicted in his price square.
Gann correlated his circular time with natural cycles experienced on earth. His idea was to place the divisions of the circle representing days, months, quarters, over his square to represent a natural constraint of time.
The Gann square is a tool used to measure the likelihood of support/resistance on the chart, due to both price and time constraints, and therefore forecast market reversal points.
Circular Time Measure
Since the smallest effective unit is one degree and there are 360 degrees in a circle, it was natural to approximately correlate one degree with one day of a 365-day year.
The circle was also broken down into quarters, representing the seasons of the year. This was particularly important for the analysis of commodities, which depend on the seasons of the year.
Finally, the circle was broken down into twelve units representing the months of the year.
Correctly Setting the Clock - Time by Degrees
If each of the main divisions of the circle was going to represent a potential turning point, the starting point had to be correctly established. Gann let each of the 90-degree divisions of the circle represent the beginning of the seasons, as defined in astrological terms:
- 0 degrees marked the first day of spring
- 90 degrees marked the first day of summer
- 180 degrees marked the first day of fall
- 270 degrees marked the first day of winter
The process ensured that the 0 degree line cut through the part of the spiral in the price square (see figure 1), which contained the actual price ruling on the first day of spring (March 21).
If a price in the square subsequently occurred on the same day as one of the important dividing lines, then a reversal could be expected. The important lines were three months, six months, nine months and one year from the initialization of the square.
Natural Circular Time Units
Gann’s second approach was to use time units independently of the price square. He found that prices would often reverse in direction after the elapse of a time period derived from particular number sets:
- Numbers based on divisions of the circle: 360 degrees of a circle divided by 5, 8, and 12.
- Numbers derived from “natural” mathematical sequences, such as doubling, trebling, squaring and Fibonacci sequences.
The Rule of Three in Time
Similar to the rule of three in prices, Gann found that a reversal was very likely if multiple time periods coincided simultaneously. That is, measuring forward from successive historical turning points (highs or lows), the coincidence of three or more time divisions taken from one of his number sets, on a particular date, would likely mark a reversal.
In summary, Gann's theories suggest that there is only a limited number of time cycles, derived from only a few number sets that can impact on prices. Since cycles come from the same number set, they bear a mathematical relationship to one another. Finally, cycles appear in harmonic clusters due to the coincidence of at least three numbers from the same set.
References:
- “Forecasting Financial Markets – Technical Analysis and the Dynamics of Price”, Tony Plummer. John Wiley & Sons. London. 1991
Harry P. Schlanger - Hello, I started out as a physicist working for research organisations. Mostly in the area of heat transfer in solids and porous media. ...
