Saturday, August 27, 2016

WD Gann: A Founding Father of Modern Day Trading Methods

by Chart Shark

Every successful trader knows that at one point in his career, he, too, was an apprentice, and if it were not for the wisdom passed along by his respective mentor, he may not have enjoyed the measure of success that he has presently achieved. However, we rarely pay homage to the pioneers of our trade, those historical figures who broke from the pack and whose studies formed the foundation of technical analysis and the modern day trading methods that benefit us all in the present tense.

One of these colorful characters was William Delbert Gann (1878 –1955), an eminent stock and commodity trader and considered by some as the greatest trader of all times. His pioneering “Gann studies” were the initial steps toward a complex approach using traditional chart formations and technical analysis to generate unique trading signals. He was a prolific writer, and one of the first to publish a daily market newsletter. His methods do have critics, but his contribution to the art of trading using quantitative methods to gain market insights cannot be denied.

WD Gann was born on a farm in 1878 outside of Lufkin, Texas. He never graduated from grammar or high school, choosing to work on the farm instead, but eventually began working in a local brokerage while attending business school in the evening. At the age of 25, he moved to New York and opened his on brokerage firm in 1903. He began publishing his daily newsletter in 1919 and astounded the public with the accuracy of his predictions. Among other things, he is credited with forecasting the market crash in 1929 and the attack on Pearl Harbor by the Japanese.

His prowess at forecasting movements in the market was chronicled in his daily newsletter. It is said that he had a host of analysts reviewing charts for specific angles, patterns and support/resistance levels similar to more modern day Fibonacci studies. To test his new strategy, he opened two accounts, one for $300 and another for $150. The former produced $25,000 in three months while the latter delivered $12,000 in thirty days. After his results were verified, he became famous on Wall Street as one of the best forecasters of all time. His methods have evolved over time and are widely used today, especially by traders in the forex market.

Gann’s published techniques are derived from three principles and areas of study:

  • Price, time and range are the only three factors that must be considered. Studies revolve around support and resistance lines, pivot points and angles;
  • Financial markets are cyclical in nature. Studies focus on historically reoccurring dates, derived by natural and social means;
  • Financial markets are geometric in design and in function. Studies incorporate reviews of market swings using trendlines and reversal patterns.

Financial markets do move in trends. Gann discovered that the most significant trendlines occur around an angle of 45º. He noted that a trendline at a sharper angle suggests that a rally is unsustainable. Conversely, a trendline at a lower level indicates that a trend is close to reversing. In his study of angles, Gann purports that when an up-trending price reverses and breaks under an ascending angle, the tendency of the price is to go to the next nearest angle below it. Likewise, when a down-trending price reverses and breaks up through a descending angle, the tendency of the price is to go to the next nearest angle above it.

Some of Gann’s processes are empirical in nature, such as determining time units, choosing high and low points of trends from which to draw lines and angles, choosing the right geometric pattern, drawing the pattern, or searching for when the pattern will repeat further down the chart. Each step requires a degree of experience and guided insight to be successful, as with any other interpretive art form of analysis. Gann critics tend to want more specificity in his methods requiring less work on their part. Those who look for easy shortcuts, especially in currency trading techniques, are doomed from the start of their journey. No method is infallible. Consistency in beating the odds is the primary objective.

Although Gann’s critics have questioned the legitimacy of his various techniques, his pioneering work has formed the underpinnings of today’s quantitative methods of technical analysis and trading. Cycles and trends do repeat. Movements resemble waves due to natural laws of physics influenced by the psychology of traders on a cumulative basis. Markets have drastically changed since the 1920’s in complexity, size and diversity, yet these principles persist. Perhaps, his contribution to quantitative trading is the reason why the picture of W. D. Gann greets you as you enter the New York Stock Exchange, one reason that even his severest critics must acknowledge.

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