How to Make Money Trading by W D Gann

W D Gann is a legendary name in the world of stock and commodity trading. Gann was believed to be one of the most successful stock and commodity traders in history. Mr. Gann was Born in Lufkin, Texas June 6, 1878, W.D. Gann began trading in the early 1900’s, and in 1908 moved to New York City to open his own brokerage firm, Gann & Company. Using his style of technical analysis, Gann was reported to have made more than $50 million dollars in profit from the markets (a staggering sum today).

Gann based his trading methods on time and price analysis. This made it possible for Mr. Gann to determine not only when a trend change was imminent, but also what the best price would be to enter, or exit that market. So accurate were Mr. Gann’s techniques that in the presence of representatives of a major financial publication (known as The Wall Street Journal today), he made 286 trades in a period of 25 market days. Of these, 264 trades were profitable!

W.D. Gann’s use of Natural Law and geometric angles based on the circle, square, and triangle are as effective today in the stocks and commodities markets as they were in his long ago time.

A Summary of W.D. Gann’s Techniques of Analysis and Trading

Psychological Framework

Master yourself

Do not over-trade the markets.

See if your trade is based on hope (wrong) or on logic (good) and developed by you

Trading strategies

Have different strategies for four trade situations:

1. Bull market

2. Bull market top i.e. reversal from bull to bear market phase

3. Bear market

4. Reversal phase from bear to bull market

The Importance of Number 3

Majority of moves will generally occur in time periods of three – days, weeks or months. Never trade in the direction of the trend on a third day.

Tops, bottoms and consolidations

* Tops usually take time to form. Spike tops are less common compared to spike bottoms. Tops are marked by extreme movements in medium and small stocks. They will rise by even 20% in a day. These are called blow offs. Because of this short-selling on extreme top is risky.

* Divergences will appear at the top but they cannot be used for timing the trade. Time cycles shall indicate when the actual reversal will start.

* In a bull market watch for a correction which is greater in both price and time than previous corrections in the up-move. (Opposite in down-moves).

* Highest probability of support is that the corrections in the uptrend will all be very close to equal.

* Swing objectives – add the range to move to the top of that move to find out the target for the next upmove or reverse in the bear market.

* Square of numbers and 50% of the difference between those squares are significant support and resistance, but cannot be traded by themselves.

Gann says that there can be nine mathematical proofs of any point of resistance:

1. Geometric Angles from swing tops and bottoms

2. Angles running horizontally i.e. the previous tops and bottoms

3. Time cycles (vertical angles) (Press a short sale if there are three or four days of sideways movement after a high day and this is followed by a down day with high volume where low is lower than the low of the sideways movement and when this coincides with expiry of time cycles)

4. Crossing of important angles originating at zero

5. Crossing or coming together of angles from double or triple tops or bottoms

6. Crossing of double or triple tops or bottoms

7. Past resistance/support (a.k.a. market structure)

8. Volume of sales

9. Squaring of time and price.

Weak markets will generally not rally until either a test of first bottom or a higher bottom is made by the market (that's why AD line is a lagging indicator and generally moves up in the third wave) making the third move trying to break consolidation top/bottom so important. If it fails, a fast move in the other direction may be expected.

False breakouts from consolidation result in very fast moves. False breakout occurs when a move outside the consolidation zone fails to sustain in the following week and where the price has not gone beyond three points above the top. These false moves start with high momentum.

A breakout from a three-four day consolidation in a very narrow range results in sharp three day move.

Faster moves start from third of fourth higher bottom. It will be strong move if there is space between the third or fourth bottom and the previous top.

Trend and trend following techniques: In fast advancing markets, in the last stage of the campaign, reactions get smaller as stocks work to higher level, until the final run has ended. Then comes a sharp reaction and a reversal in the trend. Same happens in the bear market. Once you are convinced that a trend is in force, do not wait too long to go with the trade. Early in the trend buy/sell a stock which is already strong/weak. Fast moves generally come from bear market bottoms.

These moves usually run three weeks or longer, then move sideways 3 to 5 more weeks and then accelerate followed by another side movement. Under fast moves the first signal to trend change is overbalance i.e. reaction gets larger compared to the earlier ones, specially in the fifth wave. Watch the changes in momentum of price – is the market/stock gaining less points in more time? If the market is up-trending, then it should go up more in time vs going down, and vice versa.

Any reversal pattern should be seen in conjunction with the time cycles. Do not pay attention to the news and financial press.

Use the simple trading filter of not entering the market on a 3rd day of a move.

Read more about making money trading commodities by W D Gann