Gann fan trategy Guide
Gann fan levels is an analytical tool created by the famous US trader William Delbert Gann. He affected a lot in the development of the technical analysis. However, while Gann was trading in exchanges, he discovered laws and patterns related to time and price movements. And based on that, he developed this tool and named it Gann fan or Gann angles. In this course, we will shed the light on Gann fan tool, understand Gann fan levels, and how to trade Gann fan strategy.
Gann fan FAQ
What are Gann fan levels ?
Gann Fan which is a kind of analysis tool consists of a series of diagonal lines named Gann angles. They display in the chart to show the different support and resistance levels. The angles’ fans are drawn from one point (the main tops and main bottoms) and then go in several directions. This drawing tool works to divide time and price movements proportionally. However, traders and technical analysts employ them to forecast S&R areas, future price action, and basic tops and bottoms. Besides, the chart should be properly scaled to ensure that there is a square relationship in the market.
Indeed, the most important Gann angle is the 45°, or known as the 1×1 angle, which denotes one unit of price for one unit of time. According to W. D. Gann this angle presents the ideal time and price in the chart. And he believed the 1×1 trendline or above represents a bullish trend and the area below this trendline represents a bearish trend. Moreover, there are other angles besides the 1×1 angle such as 1×2, 2×1, 1×3, 3×1, etc.
How does it work ?
Gann fan consists of 9 diagonal lines acting as support/ resistance lines and superposed as follows: a central line which is a 45° angle, and the other 8 lines are located above and below this 1×1 trendline, based on relations of price and time. Therefore, if the price is located above the 1×1 line this means that the market is in a bullish trend, if it is below, indicates that the market is in a bearish trend.
Angles above the 45° angle:
There are four lines located above the 1×1 line and they present the greatest slope. However, they are useful when trading in the short term, for the starting of a trend, or for very prominent stock trends. These lines are called: 1×2, 1×3, 1×4, and 1×8. You read them from right to left. Also instead of putting “×”, you can put colons which will be like that: 1:2, 1:3, 1:4, 1:8. Moreover, these Gann lines illustrate units of time per unit of price. For instance, if we take the 1:3 line, we read this as follows: the price move by three units for each unit of time.
Angles below the 45° angle:
Similar to the angles situated above the 1:1 line, there are 4 angles located below the 45° line. They present a lower slope and longer term. These lines are more useful and are employed for the general market trends. However, they called: 2×1, 3×1, 4×1, and 8×1. Also, they are read from the right to the left, and it can be colon “: “rather than “×”. These will be: 2:1, 3:1, 4:1, 8:1. If we want to interpret one of them, take for example 4:1, we say that the price move by one unit for each 4 units of time.
How to calculate those levels ?
Gann Fan is a mathematically based theory. W. D. Gann made 9 angles at a certain ratio. Each angle of the trendline has a specific ratio. These lines allow traders to forecast the price with respect to time. Therefore, Gann fans employ proportions of time and price to compute an angle. And calculate ratios from time and price units. For instance, the 63.75° is computed from 1/2 ratio of time and price. the calculation ratios are as follows:
1:8 line: 82.5°: price moves by eight units each day (unit of time).
1:4 line: 75°: price moves by four units each day.
1:3 line: 71.25°: price moves by three units each day.
1:2 line: 63.75°: price moves by two units each day.
1:1 line: 45°
2:1 line: 26.25°: price moves by one unit every two days.
4:1 line: 15°: price moves by one unit every four days.
3:1 line: 18.75°: price moves by one unit every three days.
8:1 line: 7.5°: price moves by one unit every eight days.
To obtain angles corresponding to the slopes in degrees as mentioned above, you have to ensure that the X axis and the Y axix have the same scales. This implies that a unit interval on the time axis (X axis) must match the unit interval on the price axis (Y axis). The easiest way to examine the calibration of the chart is to check the slope of the 1:1 line which must be 45°.
How to use gann fan levels ?
As we said earlier Gann fan levels are support and resistance levels. However, upward angles specify support levels while downward angles specify resistance levels. So let’s take an example to understand how to use the Gann fan levels similar to Andrew Pitchfork Levels. Suppose that the price in the chart is located above an ascending angle and does not break below this level. This means that there is a bullish trend in the market. Likewise, when the price is located below a descending angle and does not break above this level. This means that there is a bearish trend in the market.
The Gann fan theory is based on the notion that the market rotates from one angle to another as the price jump to the next angle above it when the uptrend price reverses and breaks below an ascending angle. Likewise, the price jumps to the next angle above it when a downtrend price reverses and breaks above a descending angle. For example when the market is in an uptrend which means that the 1:1 line (or any other line) acts as a support line. If the price falls below this line, it indicates that the trend is reversing. Therefore according to gann, the price should drop towards the next angle, in this case it is the 2:1 line, then breaking it.
Trading examples
Gann fan trading strategies are very good and they work the same in all time frames. But it is preferable to not go lower than 1h chart. As these lower time frames can not help you to pick significant swing high points. Therefore to trade the Gann fan you can follow these instructions:
Entry strategy
To enter a trade using Gann fan you can use breakouts and predict bouncing from the trend lines. On one hand, to trade breakouts, forex traders have to open a trade in the direction of the breakout when the price breaks a line of the Gann fan lines. Nevertheless, traders must take their time and do not hurry to enter a trade when the first candle closes beyond a Gann fan line. They should wait until the second candle breaks a trend line. This is very important as traders can fall into a trap because of the inaccuracy of the interactions between the levels. On the other hand, to trade bounces, forex traders can open a trade when the price bounces from a line. But it is also important to wait for confirmation.
Take profit strategy
When trading Gann fan breakout the take-profit strategy indicates that traders should wait until the price reach the next Gann fan S&R level. from the other side, when trading bounces the take-profit strategy suggests that traders should wait until the price reach the previous Gann fan S&R level.
Stop-loss strategy
Traders can set stop-loss orders above (below) a previous top (bottom) when trading breakouts. Whilst when trading bounces they can put stop-loss orders above (below) the top (bottom) of the most recent swing made at the time of the bounce.
How to draw those levels ?
You can draw Gann fan lines automatically in your chart on MT 4 or MT5 platforms by following these simple steps:
- Open the platform that you want to trade in.
- Head to the principal menu and click “insert”.
- Click on”Gann” then “Gann fan”.
- Place it on the chart and identify the beginning point (choose any significant swing high or swing low). When the market is in an uptrend, you should put the starting point at the local low from where the uptrend began, then the Gann fan lines will run upwards. When the market is in a downtrend, the starting point should be placed at the local high from where a descending impulse began, the trend lines of Gann fans will head downwards.
Once you draw the Gann fan on the chart you can double click on the Gann lines, then a right-click on the mouse and select Gann fan properties and a box will appear in which you can customize your trend lines. Therefore, you can change the width or the color of the lines. Moreover, with a double click on the 1:1 line, you can change the slope of the angles by moving them up or down.
Conclusion
Gann fan is a very effective tool to identify support and resistance levels with respect to time. However, the Gann forex strategy is based on the employ of the Gann lines to predict the behavior of the price. This tool consists of 9 lines, a central line and 4 lines above, and 4 lines below it. The central line which is called 1:1 line considered the most important line as it indicates one unit of price for one unit of time.