Trading Techniques – WD Gann Method
WD Gann is a name that many professional traders know well. Gann's 1942 book How to Make Profits in Commodities is a classic trading text that is full of sound advice covering topics from market trends, to isolated highs and lows, to swing trading, to volume analysis, to individual psychology and money management. Gann talked about the importance of studying the difference between a time period's opening price and closing price long before other analysts were talking about information that we now know is embodied in candlestick charts.
Despite his insistence on "never bucking the trend," Gann is best known for his counter trend theory that markets move in increments of one-eighths. He believed that if one took a completed market movement from top to bottom and divided it into eight equal sections and then extended those levels into the future, they would have predictive value.
The levels would take turns providing both resistance and support, with the four-eighths, or 50 percent, level having particular significance in determining the trend. The three-eighths and five-eighths levels are also of particular importance in providing pivotal levels and determining the trend. When a market stalled at a Gann one-eighth level, it generally mean that market would retreat back to the previous level, and when a market closed through a Gann level, it meant it generally would continue its current direction to the next level. Gann also considered the seven-eighths level to constituent significant resistance and the one-eighth level to standard significant support.
Ironically, Gann's extension teachings on the benefits of trading with the trend, his theory of dividing market moves by 12.5, and his belief in the value of swing trading led many of his followers to concentrate on counter trend trading. The drawbacks to following Gann's tactics today come not from his original works but from the interpretations of those works by analysts and brokers trying to capitalize on Gann's name.
Gann was also credited with using astrology in his analysis, largely as a result of his followers' interpretations. Gann also believed that fractal geometry was at work in the markets, with the distance between the larger one-eighth sections breaking down into smaller one-eighth sections.
Source: Jessie Roberts