THE GANN SWING CHART
While it's been reported that Gann could "day trade" with best "tape readers" of his time, it should be clear to anyone who has seriously studied his literary works that W.D. Gann's primary trading strategy was "swing trading, "trend trading," and "position trading". While the modern definition of swing trading does not include the computer generated "swing chart," it is the "key chart" which we, at the Price-Time Review, use to trade. It is a very important part of our metrology to determine the current trend, with Elliott Wave counts applied, and when a reversal is most likely to occur...or has already occurred.
The vast majority of new traders, and even a few old timers, believe that W.D. Gann's major contribution to the art of speculation was one of his many "calculators," like his Master Mathematical Formula, or his ever so elusive "Square of Nine", actually the SPIRAL CHART, or one of the other exotic methods he "dabbled in" from time to time...but they couldn't be more wrong!
The real master trader delivers his best product in the form of a diverse dossier of common sense strategies to identify the trend in a stock, or commodity, and the rules for riding that trend to it's fullest profit potential. In the world of W.D. Gann, the tortoise who sees the true value of these simple but time proven trading methods should easily outpace the hare who chases that always elusive magic formula for "the one big score."
Of course, the majority of old timers already know that, or they wouldn't be old timers, or at least not in the art of speculation and trading.
The graphic below shows a good, and up to date, example of how we use these Swing Charts in our analysis, eventhough, we are not what some would call "swing chart traders."
IF you are an Elliott Waver, and you have not been using Mr. Gann's Swing Charts, or the Point and Figure chart as shown above, to "reduce" the noise of intra-day and inter-week trading, so as to get a better view of the current wave count, or at least a 2nd opinion of it, then that chart has probably knocked your socks off. Enjoy it, but please don't forget who showed it to you, as we need the monthly clients and this is not a non-profit business.
<Example #2: Using Gann Swing Charts for wave and pattern analysis. >
W.D. Gann's "primary" trading tool was the--GANN ANGLES--used in conjunction with the his "Rules of Eighths" to divided the "price range" of prior" corrections, or rallies, which he called bull and bear campaigns, and the "Geometric Square" of those prior prices, times, and "ranges" to future price and time.
At PTR, we call the "square" of the price range to TIME of a decline down simply "the Bear Square," and the square of the price of that decline to future TIME--going back up and positioned at the major CIT low--as "the Bull Square," and they are the cornerstone AND foundation of our Gann analysis.
What he was doing is very cleaver, well thought out, and obviously "back tested" on many real world charts. A cursive overview of his trading method can best be defined as: 1) identifying the major trend by first identifying a "reversal," then 2) "estimating" the strength of the new trend based on it's trend angle in relation to a few "standard" angles he applied to the daily, weekly, or monthly charts...if set to the correct "scale."
While Mr. Gann did maintain a yearly and hourly chart for some stocks and commodities, the monthly chart was his "Master Square of 12," and I concur that this is "usually" the most important chart to define the scale, or "frame of reference," for INDIVIDUAL STOCKS, STOCK INDEX PROXIES, AND EVEN THE STOCK INDEXES THEMSELVES.
As part of his key trading strategy, he needed to actually "observe the ACTION" of volume and price, or index values, as they "reacted" with his key angles, and since there are no guarantees in this business, Mr. Gann always maintained a stop loss to protect the trade in case his "estimation" proved incorrect. A the PTR, we follow this exact same method, but we also use many other indicators to confirm a trend and or a reversal.
Unfortunately, I'm "extremely confident" that he "finally" realized that there is no such thing, and settled down with his time proven strategies for trend and reversal detection. Also, I'm not sure whether he ever realized that his methods "usually" do not work on long term charts, but it really doesn't matter since we now have the Fibonacci trend to take over when (not if), Mr. Gann's linear lines and parabolic curves fail.
While W.D. Gann used a wide variety of other techniques to aid in his "forecasting" of a stock or market trends, the underlying basis of his trading was just as I have described it in the paragraph above. I have very little no doubt of this premise because it took me nine years to arrive at that same conclusion, while it appears W.D. either arrived at that conclusion a lot early then I did, or he had a darn good mentor.
Based on the strength of the 1909 Ticker Magazine article, it appears that Mr. Gann either learned the art of speculation very quickly, or he had a natural intuition for the business that guided his path. Regardless of how he came to be an expert trader, it is apparent that by the nineteen twenties he was a highly experience professional capable of formulating the rules for others to follow if they were seeking to speculate in the financial or commodities markets.
At the PriceTime review, we only use those "methods" that W.D. Gann "clearly" described, which are also the only ones we understand, and we apply them just as he explained them in his trading courses. We make no effort to change what we don't like or don't understand, and we do not use or support any of those "alternatives" that claim to be part of Gann theory, but which, in reality, have little or nothing in common with W.D. Gann's actual work except for the simple division of a range into one eighths.
Now, I know that many people use and believe in these "SIMPLE alternatives," and that is just fine with me, but we don't and we have studied the three major alternatives in depth, so we do not exclude these methods out of ignorance. To the contrary, we paid out somewhere near $1,100 for all the programs, software, manuals, and books to test them ourselves. If one reads a lot of W.D. Gann's work, you will soon realize that he "projected" so many price points and cycle times "forward" that he said were "important to watch for a change in trend" that it would be nearly impossible to miss one.
Now, I'm not sure whether this was by design or it just came out that way, but one thing is for sure, the alternative methods have more "targets" or SRL's (support-resistance lines) then a full blow Gann chart, and I though that was impossible. So much for the reason for the swing chart, now I'll quickly describe it and show a few graphics.
First of all, the GANN SWING CHART has no connection or association to his ANGLES, his Geometric SQUARES, or his mathematical SPIRAL CHART, so don't get them mixed in together. The main function of the swing chart is to "filter" out some of the short term "noise" of trades. To accomplish this Gann devised a method to connect a trend line along a series of higher-highs and lower-lows until this string was broken by a reversal to a new string of lower lows and (not or) lower highs. He called this "string" a "Trend Line Detector." During a transition in the direction of a trend a stock or index may trade for many, or a least a few, time periods when it is not either advancing or declining, and it's this "non directional noise" that is eliminated by the construction of the swing chart.
Modern swing charts are not just a trend line drawn along only the tops or bottoms of high-low bar charts as they were when Gann described them as his "mechanical system." The software generated swing charts eliminate the individual bars and condense a "trend" into a single vertical line who's height is proportional to the number of days (or other time periods) in the trend.
In the IBM daily swing chart, below, you can see that the price went into a down trend on 1/15/2003 from a high at 88. This down trend made lower lows and lower highs every day for seven "calendar" days, dropping nine points to 79. It then made a reversal up for two day to a higher high at 81. This "swing trend" was actually only five trading days plus a weekend, which is the way the Gann Analyst program works, and it's the way Gann did his, or so "they say." You have to be careful with this time scale difference if you're using days to check ratios between ranges, and the best way to do this is don't, or at least don't do it on the swing chart.
When the "swing trend" was down, with lower lows and lower highs, day after day it had to make a higher high with a higher low to get a "reversal." Needless to say, this starts a vertical line going up until the new string of higher highs and higher lows is "reversed." In the case of IBM, the new up trend only lasted two days before a new lower low and lower high was made on 1/25/03. The chart then picked up two empty weekend days (1/25-1/26) and made a temporary low on Monday 1/27/03 at $77.61. You only see 77 on the swing chart, and that is because I had the decimal point settings at zero, other wise it would have displayed the actual $77.61. These extra digits take up a lot of room when I'm trying to keep the pic's as small as possible, so I don't usually carry the fractions.
This construction method for the weekly, monthly, and quarterly charts would follow the same process and trace out a continuous series of "mini trends" in the same manner as I just described. The only difference is that the high-lows are weekly extremes and the mini-trend minimum time after a reversal is one week-month-quarter. In the Gannalyst software program that we use, and which generated the IBM chart below , the "calendar days" in a "mini-trend" are shown for this daily chart. In a weekly chart the "mini-trends," called "swings"are in block of seven calendar days, so if an up trend says 7d then it could have been anything from one to five days. The same is true for months, and quarters, and the time of the "swing" on the monthly chart will show as a minimum of 28d to 31d even though the actual "swing" may have lasted only one day, when checked on the daily chart, since the "reversal" could have occurred on the last day of that month. Once again, you can see, comparing time on these charts can lead to trouble; however, since we are mainly interest in the price levels, "reversal," and the overall swing chart pattern, this little "caution" with time is no big deal.
The next graphic shows the construction and labeling on the IBM swing that was generated by Gannalyst Professional, and then I continue the description below that.
The Swing Chart Construction
W.D. Gann drew his swing charts on chart paper by drawing a line alone the highs or lows of his current high-low bars chart. He called this line a "Trend Indicator Line," or TIL as abbreviated. The Trend Indicator Line can be applied to a daily, weekly. monthly, quarterly, or even a yearly chart you have the historic data. In the following description, I will use the daily chart as an example, but where I'm saying "today" or "previous day" you can substitute "this week-month-or quarter," and, of course, "previous week-month-quarter" The chart is based on the extreme inter day highs and lows, or extremes for the week-month-quarter periods for those charts. The Trend Line Indicator moves up to the high of today's candle if today's candle is a higher high than the previous day. If the next day's candle has a lower low then the indicator line moves to the bottom of candle. The exceptions to this process are the inside days and outside days.
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 "definite sign" of trend change. Gann connected the lows together when the trend was down, and connected the highs together when the trend was up. The basic process is called a one day trend line indicator. A two day line indicator needs two consecutive bars (two days) of making higher highs and higher lows or lower highs and lower lows.
An outside day occurs when the day's high is higher than the previous day and the day's low is lower than the previous day. If the outside day occurs after a series of higher high days, and the high occurs before the low during the day, then connect the trend line indicator to the high and draw down to the low. The opposite would be true for outside days following a lower low day. .
An inside day, as the name suggests, is a trading day with a range where the high is lower and the low is higher than the previous day's range. Inside days are generally ignored all together. However, if an inside day occurs after a lower low and is then followed by a higher high, the TIL moves to the new high. If the inside day is followed by another lower low, which does not exceed the existing TIL low, the TIL does not move. Only when the existing TIL low is exceeded can the TIL continue down. The converse is true for inside days following higher highs.
Applying the Swing Chart
Turning a bar chart into a swing creates a smoothed price chart where a series of higher tops and bottoms translates into a clear and obvious uptrend and vice versa for a series of lower tops and bottoms. The chart above is a daily charts to compare IBM as a bar Candlestick chart and a Gann swing chart.
A bottom occurs when the TIL has gone from the high price on the range to a low price and then back to the high price on the next day's range. Although this implies it would occur over a three-day period, it could take longer. The trend is up when there are higher swing bottoms after a swing top has been broken.
A top occurs when the TIL has gone from a low price on the range to a high price and then back to a low price. As for a bottom, it can take longer then three days. The trend is down when there are lower swing tops after a swing bottom has been broken.
The Entry Signal
According to Gann, when the trend is up, a buy signal is given when a new high is made after the swing bottom is established. Conversely when the trend is down, a sell signal is given when a new low is made after a swing top is established. Gann defined a pyramiding technique where for instance a short position is added to at the break of a new swing low.
The Stop Loss Level
The stop loss level for Gann swing trading is based on the recent swing in the opposite direction.
Needless to say, the software is the way to go, and if you have an couple of G's ($2000) to spend, the HOT Trader program "looks like " a first class program to swing with, but I have not used it myself. The URL can be accessed from the links selection on the home page menu.
If you're looking to do just swing charts without all the other "goodies" that most programs tack on, for a much high price of course, then Gannalyst Professional or even the Gannalyst lite, which was free at one time, will do nice swing charts. The Profession works with most date feeds but the Lite version only works from end of day ASCII data, I think. Therefore, it's fine for a chart here and there, but would quickly become a problem if your working with many charts or trading from it. For part timer traders that have not used Gann before, I suggest you work with the Lite program before dropping $500 for the Professional program and another $400 a year in data to feed it.
For The Price-Time Review
Andrew J. Quiggly
All original content is copyright (c) 2003 PriceTime LLC