Introduction
If you are interested in technical analysis, you may have heard of Gann indicators, named after the legendary trader W.D. Gann, a legendary and prolific trader, market analyst and researcher, who used geometry, mathematics and astrology to forecast price movements, and who developed many innovative techniques and tools to analyze the markets. One of his most popular tools is the Gann Swing Chart, which is a simple but effective way to identify the trend and its turning points.
Gann Swing Charts are composed of price bars that represent the high and low of each period (such as a day, a week, or a month). The main purpose of Gann Swing Charts is to identify the start and end of trends by connecting the turning points with trend lines. A trend line is drawn from a low point to a high point when there is an up day followed by a down day, or from a high point to a low point when there is a down day followed by an up day. These points are called pivot points or swing points.
Gann Swing Charts are a type of technical analysis tool that can help traders identify trends, support and resistance levels, and potential entry and exit points for a trade. Gann Swing Charts are based on the idea that markets move in cycles and angles, and that when an angle is broken, the price tends to move towards the next one. Gann Swing Charts can also remove the element of time from the price data, and focus only on the price action.
What is a Gann Swing Chart
A Gann Swing Chart is a type of chart that shows only the significant price movements or swings of an asset. It filters out the minor fluctuations or noise that can confuse traders and obscure the true direction of the market. A Gann Swing Chart consists of a series of up days and down days, which are defined as follows:
1. An up day is a day when the asset makes a higher high and a higher low than the previous day.
2. A down day is a day when the asset makes a lower high and a lower low than the previous day.
3. An inside day is a day when the asset makes a lower high and a higher low than the previous day, meaning that it is contained within the range of the previous day.
4. An outside day is a day when the asset makes a higher high and a lower low than the previous day, meaning that it breaks out of the range of the previous day.
Rules for constructing a Gann Swing Chart
1. Identify the turning points on the price chart. A turning point is a change in the direction of the swing, which occurs when an up day is followed by a down day, or vice versa. A turning point marks the end of one trend and the beginning of another.
2. Ignore inside days as they are neutral and do not indicate any change in the trend.
3. Treat outside days as “wait and see” days, as they can signal either a continuation or a reversal of the trend, depending on the subsequent price action.
Trading with Gann Swing Charts
Gann Swing Charts can help traders to identify and follow the trend, as well as to spot potential entry and exit points. To trade using Gann Swing Charts, you can use the following rules:
1. Buy when an up day is followed by a down day, and place a stop-loss below the low of the down day. This indicates that the market has resumed its uptrend after a minor correction.
2. Sell when a down day is followed by an up day, and place a stop-loss above the high of the up day. This indicates that the market has resumed its downtrend after a minor rally.
3. Exit when your stop-loss is hit, or when another trend change occurs.
The basic principles of trading with Gann Swing Charts are:
Trade in the direction of the prevailing trend
A series of higher highs and higher lows indicates an uptrend, while a series of lower highs and lower lows indicates a downtrend. A series of equal highs and lows indicates a sideways or consolidating market.
To trade with the main trend, enter long positions when an uptrend line is broken to the upside, or enter short positions when a downtrend line is broken to the downside.
To trade against the main trend, enter long positions when a downtrend line is broken to the upside, or enter short positions when an uptrend line is broken to the downside. However, this is riskier and requires more confirmation from other indicators or signals.
To trade pullbacks within the main trend, enter long positions when the price retraces to an uptrend line after breaking it to the upside, or enter short positions when the price retraces to a downtrend line after breaking it to the downside. Use stop-loss orders below or above the trend line to protect your trades.
Enter a trade when a new swing begins
If you are trading an uptrend, you can buy when an up day follows a down day, which signals that a new upswing has started. Similarly, if you are trading a downtrend, you can sell when a down day follows an up day, which signals that a new downswing has started.
Exit a trade when the trend changes or when your target or stop loss is hit
If you are long in an uptrend, you can exit when a down day follows an up day, which signals that the uptrend has ended and a new downtrend has begun. Alternatively, you can exit when your profit target or stop loss level is reached, based on your risk-reward ratio and money management rules.
Advantages & Limitations of Gann Swing Charts
Gann Swing Charts are a technical tool that aim to capture market price trends and detect possible market reversals. Here are some advantages and limitations of using Gann Swing Charts in trading.
Advantages
- User-Friendly: Gann Swing Charts are user-friendly and can be easily understood by traders with different levels of experience.
- Objective: Gann Swing Charts rely on objective criteria and mathematical calculations to identify trend lines, support and resistance levels, and potential market reversals. This makes them less susceptible to biases and subjectivity compared to other technical analysis tools.
- Customizable: Traders can customize Gann Swing Charts to fit their specific trading styles and time frames. They can adjust the parameters of the chart to meet their needs and preferences.
- Effective in Trending Markets: Gann Swing Charts can be highly effective in trending markets where price movements are relatively predictable and consistent. They can assist traders in identifying the trend direction and potential entry and exit points.
Limitations
- Subject to Interpretation: Despite relying on objective criteria, Gann Swing Charts can still be open to different interpretations among traders. This can result in confusion and inconsistent trading decisions.
- Ineffective in Choppy Markets: Gann Swing Charts may not be as effective in choppy markets where price movements are erratic and unpredictable. In such markets, the charts can generate false signals and lead to trading losses.
- Not a Standalone Tool: Gann Swing Charts should not be used as the sole tool for trading decisions. Traders should use them in combination with other technical analysis tools and fundamental analysis to make informed trading decisions.
- Historical Data Only: Gann Swing Charts depend on historical price data to predict future price movements. While past price movements can assist in predicting future trends, they do not always provide a reliable indicator of future performance.
Gann Swing Charts are a widely used technical analysis tool that can help traders identify potential market trends and reversals. They offer several benefits such as ease of use, objectivity, customization, and effectiveness in trending markets, allowing traders to make informed decisions and improve their trading success.
Trading in the market carries inherent risks, and Gann Swing Charts should not be considered a foolproof or standalone tool for trading decisions. It is crucial to use them in conjunction with other technical and fundamental analysis tools, and not to rely on them entirely. Furthermore, historical performance may not always accurately predict future outcomes, and traders should always conduct thorough research and analysis before making any trading decisions.
