The Hindu Business Line : Trader's Corner

Mr W. D. Gann is one of the best known names in technical analysis. He gained fame and notoriety through the huge profit that he is said to have amassed from trading in the stock markets. But his theories and concepts remain inscrutable to this day, so much so, that many have outright called his methods a sham. The aura of mystery is, perhaps, compounded by his cryptic writing style that few could understand. Gann fan is one of the trading tools that Mr Gann formulated. Most technical analysis software have the provision to draw a Gann fan once the peak or the trough from which the fan has to be drawn is selected.

The Gann fan contains nine lines fanning out of the selected peak or trough. Each of these lines is based on a particular relationship between one unit of time and one unit of price. The central and the most important line (as per Gann) is the one drawn with a 1 X 1 relationship. The angle of this line would be 45 degrees. Mr Gann believed that the bull market would continue to be in place as long as the stock moved above this 45 degree line and the up trend is threatened once the stock price moves below.

The other lines in the fan are drawn with other time and price relationships, which are 1 X 8 (82.5 degrees), 1 X 4 (75 degrees), 1 X 3 (71.25 degrees), 1 X 2 (63.75 degrees), 2 X 1 (26.25 degrees), 3 X 1 (18.75 degrees), 4 X 1 (15 degrees) and 8 X 1 (7.5 degrees). Once the gradient of the trend moves beyond any of the lines of the fan, it is expected to face resistance from the fan line above or support from the line below it. The most useful feature of this tool is to identify support and resistance levels.

Though Mr Gann swore by the 45 degree line, stocks follow the 26.25 degree line and the 18.75 degree line for most part of the up-trend. Another drawback with Gann fans is that since the unit of price and time tend to stay constant in a chart, this tool can not be applied in long-term chart since these relationships become irrelevant as the price moves higher. — Lokeshwarri S. K.