The Gann indicator: techniques for understanding market movements
William D. Gann was a passionate Wall Street trader. In the 20th century, he developed a trading strategy based on the principle that price movements are cyclic. He proposed that the market remains in 1 of the 3 states, uptrend, downtrend, and flat. He then used the principles of geometry, astronomy, astrology, and time-cycle analysis to develop a technical analysis tool, which we call the Gann indicators today.
Remember, as with all technical analysis, while these patterns may give clues on potential future price action, past performance is not a reliable indicator of future results.
What are Gann indicators?
Traders use Gann indicators to determine areas of support and resistance, identify key tops and bottoms, and predict future price moves. These indicators are based on the premise that the markets rotate from angle to angle. When an angle is broken, the price moves towards the next angle.
So, Gann indicators basically measure the relationship between price and time to identify market cycles. Gann believed that price and time are fundamentally linked. When these 2 elements come together, a major market move is imminent. This is called price/time equality or confluence.
Remember, as with all technical analysis, while these patterns may give clues on potential future price action, past performance is not a reliable indicator of future results.
Open a demo account to learn how to recognise this indicator and use it in your Gann trading strategy.
Understanding the core concepts of Gann theory
Gann theory is built on several geometric and mathematical principles related to market structure.
Gann angles
Gann angles are lines drawn on a chart, starting from a significant pivot point (a high or a low). These angles represent a ratio of price to time and are measured in degrees. The most important angle is the 1x1 angle, which is 45°.
1x1 (45°): perfect balance
This means that price moves 1 unit for every unit of time. It is considered the most critical support/resistance line. When this line is broken, it is often the first sign of a major trend reversal.
2x1 (63.75°): faster movement in a specific direction
Here, price moves 2 units for each unit of time. This forms a steeper angle, showing a faster uptrend or a quicker downtrend.
1x2 (26.25°): weaker trend
Price moves 1 unit for 2 units of time. This is a shallower angle. It indicates a slower price movement.
Other common Gann angles include 4x1, 8x1, 1x4, and 1x8.
Time/price equality
Time/price equality revolves around the cyclic nature of the markets. When the number of time units (days, weeks, or bars) from a high or low is equal to the number of price units (pips, points, or dollars) in a move, the market reaches a point of perfect equilibrium. At this point, a reversal is highly probable.
Gann squares
Gann developed several geometric tools based on numbers.
Square of 9: spiral-shaped calculation tool
It places numbers in an infinite spiral pattern. Traders use it to find potential support and resistance levels. These levels align with specific market degrees (like 90°, 180°, 360°).
Square of 144: based on the number 122 = 144
It is used for both price and time forecasting and helps find cyclical turning points in the market.
Gann fan and Gann grid
Gann fan is a collection of the most important Gann angles. It is drawn from a key high or low. Gann fans instantly provide a series of angled support and resistance lines, originating from the pivot.
Gann grid is a series of equidistant horizontal and vertical lines. It shows both price levels and time periods and is used to quickly identify key price and time milestones.
Gann angles vs. trendlines
Gann angles may look like regular trendlines, but their meaning and construction are very different.
How Gann angles differ from traditional trendlines
Traditional trendlines connect 2 or more significant price points. They are purely price-based and indicate the general direction and speed of price movement.
Gann angles are drawn based on a fixed price-to-time ratio. Instead of simply connecting price pivots, they consider slopes, or the pace of change of price. This slope is determined by the scale of the chart. It measures the balance between price movement and time passage.
Interpretation of angle steepness
The steepness of a traditional trendline shows momentum. A steeper line means stronger momentum. A broken line indicates a change in trend. For instance, a break above a shallow angle (like 1x4) suggests the price is accelerating faster than time, while a break below a steep angle (like 4x1) signals that price is decelerating more slowly than time.
Gann’s principle: price moving faster or slower than time
When the price is above a specific ascending angle, it is moving faster than time. The next line above it acts as resistance. When the price breaks below an angle, it has fallen behind time. The next line down becomes the support.
How to use Gann indicators
Your Gann trading strategy must carefully develop setups to use Gann indicators.
Drawing Gann fans on a chart
- Step 1: Identify a significant pivot Start the Gann fan from a major high in a downtrend or a major low in an uptrend. This is the origin point.
- Step 2: Set the correct scale Since your analysis rests on this, correctly set up the ratio between the price scale and the time scale on the chart. This means the 1x1 angle must be 45. If needed, manually adjust the price-per-bar ratio.
- Step 3: Draw the fan Most popular trading platforms provide a built-in Gann fan tool that automatically draws the key angles from your chosen pivot.
Combining price and time for entries
The real power lies in using the Gann fan to combine price and time. A classic Gann signal is generated when the price breaks and closes below a fan line. This signals a trend change or major correction. For example, a break below the 1x1 line and into the 1x2 line is a strong sell signal.
Traders also look for price action to occur when an important time interval aligns with a key price level on the fan. This confirms that a trend change is highly probable.
Gann support and resistance levels
Gann angles act as dynamic support and resistance levels. In an uptrend, a break below the 1x1 angle often signals a correction to the 1x2 or 1x4 angle. During a downtrend, a break above the 1x1 angle suggests a rally to the 2x1 or 4x1 angle.
Integration with trading platforms
Popular trading platforms, such as TradingView and MT4, include the Gann fan, Gann square, and Gann grid tools. To effectively use them, you must adjust the scale adequately. Advanced features may also allow you to ‘lock the scale’ or set a specific ratio to ensure the accuracy of a 45° angle. Always verify this setting before trading.
Gann-based trading strategies
Gann analysis can offer clear, rule-based entries and exits. However, it’s important to remember that when observing price action using technical tools, past performance is not a reliable indicator of future results.
Gann fan breakout trades
Start by identifying a trend. Next, draw a Gann fan from the most recent major price pivot. Wait for the price to test a key angle. Confirm the breakout and take your position in to the direction of the breakout.
If the price breaks and closes above a descending angle (resistance) or holds above an ascending angle (support), open a buy trade. A breakout above the 1x1 descending angle is a strong signal of a new uptrend.
You can open a sell trade if the price breaks and closes below an ascending angle (support) or holds below a descending angle (resistance).
Gann angle reversal trades
Reversals are likely when the price moves into a slower angle or crosses 1x1. Let’s understand this with an example.
Let’s say Stock ABC is trading above a steep angle (say, 2x1). When the price breaks below this angle and falls to the 1x1 angle, it signals the end of an ongoing uptrend.
If the stock was trading below a steep angle and the price breaks above the 1x1 angle, it suggests that the downtrend is now over.
Price/time confluence setups
Remember how the Gann technique emphasises that the market often pivots at confluence points? The price/time strategy builds on this premise.
In this Gann trading strategy, begin by identifying the time target. Use the square of 9 or count bars from a major pivot to find a major future time for a potential turn (such as 90, 180, or 360 bars).
Next, identify the price target. Determine the price level at which a key Gann angle is expected at a specific future date.
Finally, enter a trade near the confluence point, or where the price target meets the time target.
Multi-angle alignment method
Managing risk in Gann analysis
Risk management is crucial for every trading strategy. Let’s consider the Gann fan breakout strategy with a setup where an asset is in a clear downtrend. You would draw a Gann fan from the most recent high. If the price is below the 1x1 descending angle, here’s how you trade:
Enter a long position when the price breaks and closes above the 1x1 descending angle, suggesting a trend reversal.
Place the stop loss just below the 1x2 descending angle, the next level of support if the breakout fails. Set your profit target at the next key resistance level. For example, the 2x1 descending angle.
As the price moves up, you could trail the stop loss under the angles it breaks. For instance, once the price is above the 2x1, the support level changes. You can now move the stop to the 1x1 angle.
Strengths and weaknesses of Gann indicators
To effectively use Gann analysis, you must know the strengths and limitations of the indicators.
Pros:
Unique approach: considers both time and price
Gann methods offer a dimension that is often missing in other technical analysis tools. This offers a holistic view of the market.
Built-in range limits: support/resistance levels are inherent to the strategy
The Gann angles and square levels provide immediate, dynamic, and fixed levels for support and resistance.
Strong signals: greater trading confidence with price/time confluence
Price/time confluence points increase the probability of a reversal. When all the cycles align, the move can often be significant.
Cons:
Steep learning curve: requires understanding of mathematical principles
You must clearly understand geometry and scale to effectively apply Gann indicators. Applying this understanding in volatile markets needs practice. Use demo trading for this.
Highly subjective: lacks structure
You have the greatest responsibility – that of setting the correct price/time scale. The whole analysis will be flawed if you make a mistake at this crucial first step. Plus, the initial pivot point selection can also be subjective.
Complex calculations: difficult to execute manually
Understanding the underlying mathematical relationships of the Gann squares requires complex calculations. The good news is that software helps.
Modern applications of Gann theory
Gann’s methods are not relics of the past. They are actively used in today’s markets.
Can Gann tools still work in high-frequency markets?
Gann’s principles are based on market cycles. These are relevant regardless of trading speed or a trader’s experience. Gann indicators can be applied to any timeframe, from 1-minute to monthly charts. The principles of price/time equality hold across them.
Adapting Gann techniques for algorithmic strategies
The rules of Gann angles (such as, ‘if price breaks 1x1, move to the 1x2’) are highly quantifiable. This makes them suitable for algorithmic trading. Automated systems can calculate and track the exact coordinates of the Gann angles, eliminating subjectivity and manual error.
Gann vs. other technical indicators
How do Gann indicators fare against other technical analysis tools? Let’s take a look.
Gann vs trendlines
Gann trading strategy uses fixed, mathematically determined slopes based on a price/time ratio. Trendlines, on the other hand, are subjectively drawn, connecting pivots. They consider only the price.
Gann vs Fibonacci
Gann is based on geometry and number cycles in the form of angles, taking both price and time into account. Meanwhile, Fibonacci is based on a mathematical sequence (0.382, 0.618, 1.618). Fibonacci levels are also based on price alone, not when they might be achieved. Since both indicators help locate support and resistance levels, experienced traders often use them together.
Gann vs Elliott wave
The Elliott wave uses market psychology and wave patterns (impulse and corrective waves) to determine entry and exit points. As mentioned earlier, Gann indicators focus on price and time geometry.
| Indicator | Primary Focus | Pro | Con |
|---|---|---|---|
| Gann | Price & time | Highly predictive support and resistance | Steep learning curve, scaling issues |
| Trendlines | Price only | Simple to draw and understand | Subjective, lacks time component |
| Fibonacci | Price only | Universally accepted retracements | Limited time prediction |
Real-world example of applying Gann to chart analysis
Let’s consider the US500 chart.
Asset: US500 index
Timeframe: weekly chart
Focus period: decline from the all-time high (ATH) in late 2021 to the major low in late 2022
Past performance isn't a reliable indicator of future results
Consider the following pivot points in the US500 chart:
January 2022, significant high: 4,818
October 2022, significant low: 3,491
Duration: January 2022 to October 2022 (nearly 42 weeks).
Crucial setup (setting the scale): on a weekly chart, the price scale must be set such that the 1x1 angle represents 1 unit of price per unit of time (say, 1 point per week).
Drawing Gann fan and analysing breakout levels
A descending Gann fan from the January 2022 high (4,818) radiates several angled resistance lines: 8x1, 4x1, 2x1, 1x1, 1x2, etc.
The initial drop (fast momentum) is from the 4,818 high. The price rapidly falls through the shallow angles (1x4, 1x2) and establishes a trend below the critical 1x1 angle. Here, the price is moving faster than time. The 1x1 angle acts as major resistance throughout the bear market.
During the steepest part of the decline, the 2x1 angle (2 units of price per unit time) provides a temporary level of support or bounce, confirming the rapid pace of the fall. The severe sell-off ultimately finds support at a low of 3,491 in October 2022.
Identifying breakout/reversal signal
The market enters a recovery phase after the October 2022 low. The sustained break above the 1x1 descending angle occurs in early 2023. This move indicates that sellers are exhausted. It confirms that the balance between price and time has shifted from negative to positive.
Trade setup: buy on 1x1 breakout
Pivot used: 4,818 high (January 2022)
Entry condition: weekly closing price clearly above the 1x1 descending Gann angle.
Signal interpretation: when price breaks above the 1x1 (the line of perfect balance), it confirms the end of the dominant downtrend and signals the start of a new uptrend.
Stop loss: the support price just below the next supportive angle. In this case, it is the 1x2 descending angle.
Profit target: The ascending 1x1 angle drawn from the 3,491 low becomes the new primary support. The target can be set at previous resistance levels or by using the geometric square of 9 projections.
Understanding Gann indicators allows traders to see the market not just as random price movements, but as a structured, cyclical environment where price and time are bound together.
