Gann angles
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The Gann Angles are named after W. D. Gann, a 20th century market theorist. Gann described the use of the angles in the stock market in The Basis of My Forecasting Method, a 33-page course written in 1935. It should be noted that the legitimacy of Gann's techniques has been seriously questioned. Calculating a Gann angle is equivalent to finding the derivative of a particular line on a chart in a simple way.
Each geometrical angle (which is really a line extended into space) divides time and price into proportionate parts. The most important angle Gann called the 1x1 or the 45° angle, which he said represented one unit of price for one unit of time. If you draw a perfect square and then draw a diagonal line from one corner of the square to the other, you have illustrated the concept of the 1x1 angle, which moves up one point per day. Other important angles were the 2x1 (moving up two points per day), the 3x1, the 4x1, the 8x1, and the 16x1. When the angles are drawn in a group, they are often called a Gann fan. Angles may either be drawn ascending from price bottoms, as just described, or descending from price tops.
As with other forms of technical analysis of stock price movements, the Gann angle model violates the weakest form of the efficient markets hypothesis which states that past price movements cannot be used to forecast future price movements.
[edit] Using Gann angles
Gann watched for important tops and bottoms to form on a daily, weekly, or monthly chart and drew his angles from these changes in trend. When the trend is up and the price stays in the space above an ascending angle without breaking below it, the market is strong; when the trend is down and the price remains below a descending angle without breaking above it, the market is weak. The market shows its relative strength or weakness according to the angle it is above or below. For example, if the price is above the 2x1 the market has shown itself to be much more bullish than if it is above the 1x1. In his angles course, Gann argues that when an uptrending price reverses and breaks under an ascending angle, the tendency of the price is to go to the next nearest angle below it; likewise, when a downtrending price reverses and breaks up through a descending angle, the tendency of the price is to go to the next nearest angle above it.
[edit] Question of Scale
It is not always practical to give the 1x1 a value of 1 point of price for each day, as Gann observed in his course. Let us say that the Dow Jones Industrial Average is trading around 10,000 points at the time we are analyzing it. It is obviously not useful to draw a 1x1 along a chart of 10,000 days! In such cases, Gann said that we must devise another scale, in which we posit that a certain number of points taken together (for example, 100 or 1,000) is to be considered a single price unit in the 1x1 angle, the same as a $100 or $1,000 bill could be considered a single bill. Critics note, however, that Gann did not set down rules for determining how many points should be considered a single unit in such cases. This leads opponents of Gann theory to say that the positioning of the angles on a chart is entirely arbitrary and not scientific.
What is practical, however, is to give the 1x1 value its corresponding angular value. A line drawn from the base of a price chart at a 45 degree angle would then correspond to the 1x1 Gann angle at any chosen scale.
