Chapter 4 How is Gann Theory used in Stock Market Trading?
Day traders globally use the Gann theory for intraday trading. Among his theories, the square of 9 method is the most popular. This method helps to make price forecasts by identifying the alignment of price and time.
The square of 9 has 81 numbers. At the centre is a static square that contains the number 1. This represents the historic low of the period. The next step is to move spirally and increase the value.
Fan Trading Strategy: A sequence of Gann angles is called a Gann fan. Price change predictions are made by superimposing the Gann fan over a price chart. The traders draw these angles across a price trend at 45 degrees. The angle must have an accurate 45-degree angle line. Traders often draw the Gann Fan at a reversal point to achieve this. Failing to maintain the angle may lead to ineffective and useless predictions.
A Gann fan offers helpful insights about support and resistance. Traders must use it in addition to other technical patterns, like a rising wedge or ascending broadening wedge, to determine useful entry and exit points.
The Gann theory of technical analysis and trading strategy has the following assumptions:
A time cycle governs the ups and downs of prices in the stock market.
Stock markets are designed geometrically, and their movement is also geometric.
Range, time, and price are the only factors that affect the market.
While strategising their moves, traders must keep in mind that the market follows different angles that can only be rotated but ultimately remain the same. The path of asset movement can be from one angle to another.
According to the “Rule of all angles” entailed in WD Gann theory, on attaining one angle, the asset can move to another. Most traders use Gann angles to find the support and resistance lines.
A broken support is referred to as a break and indicates a price decline. Traders determine their time frames and draw Gann angles onto the stock chart. Also, once individuals set a time frame, they can draw out the Gann angles on the chart. 1X1, 2X1, 3,X1, 3X1, 1,X2, 1,X3 can be the angles. The lines help to analyse how the stock price will change.
Up-trending support angles show support, whereas down-trending angles are a sign of resistance. Traders may also use different angles to identify resistance or support. A bullish stock can retrace to 50%, which will then become the stock support. However, the 50% retracement level for bearish stocks becomes resistance.
