Fibonacci and Gann Applications in Financial Markets

Gann, The Misunderstood Analysis 147
application and gives some excellent entry and exit points. It is a pity that this form
of charting is even less popular than Point and Figure charting, as it is simple to use
in the extreme.
BASIC CONSTRUCTION OF A GANN SWING CHART
The trend indicator line (TIL) is based simply on the relationship between daily
highs and lows. If in day 2 the high is higher than that in day 1, then the line moves
up to that level, but if the low is lower in day 2 then the line moves down to there.
Inside days, where current high and low are inside the previous day’s range, are generally
ignored, except for occasions when a reversal follows from an inside day. In
the case of outside days, where the current high and low are outside the range of the
previous day, draw the TIL to whichever of the high or low occurred first during the
session and then reverse it to the other extreme.
ENTRY AND EXIT STRATEGY
A strong buy signal is given once a swing chart base has been formed and the price
action breaks out of the range. The reverse is true of a sell signal, where congestive
highs in the swing chart are needed first and then the range breakout happens.
As in all good techniques, stop loss levels are critical. These are set at the last
change of direction in TIL level, as indicated in the swing chart of Figure 9.1. This
is really all the charting that is necessary to give an insight into the market direction.
The most serious and approachable of Gann’s theories involves the relationship
between price and time. Gann believed that this relationship was key to market action
and that price and time were inexorably linked. Here the strongest relationship is
between the change in price by one unit and that of time by one unit, usually a day. A
straight line can be drawn on a daily chart showing this relationship, which appears as
a 45° line on a chart. Subordinate relationships are also important, such as one of price
to two of time, two of price to one of time and so on. Drawing these on a daily barchart
gives the ‘fan’ pattern as seen later in Figure 9.7. This is a fairly ‘fixed’ system
to apply to a chart and there is very little room for manoeuvre from these fixed
amounts, but the analyst has to remember that Gann was talking about prices within a
360 day year and indeed within 32nds of a dollar, making the prices themselves link
clearly with the degrees of a circle. Although there is nothing wrong with using decimal
pricing in Gann analysis, the analyst has to ensure and remember that all possible
prices that can be generated within the market are not equally important and that quarters,
eights and so on are much more important in Gann analysis than decimals. There