What Is the Gann Theory?

William Delbert Gann astounded many in his time by the accuracy of his trade calls using his own theories. What was so remarkable about the Gann Theory? Find out.

The Gann Theory refers to a series of methods of technical analysis based on geometrical, astrological and mathematical formulae devised by William Delbert Gann over his fifty-year trading career.

The underlying principle of his theory was that the market moved in cycles, and that the markets moved in response to natural laws. This led him to develop technical tools of market analysis:

a)      Gann angles

b)      Square of 9

c)       Hexagon

d)      Circle of 60

History of the Gann Theory

It was while he was working as a broker that Gann noticed that prices of stocks and commodities fell and rose in a pattern that showed regular periodicity. This led to several knowledge-gathering travels and an in-depth study of the sciences, especially ancient Mathematics, astronomy and geometry. As a result of his studies, Gann postulated what became known as the Law of Vibration, which enabled him to predict the levels to which stock prices would rise and fall in a given time frame.

The use of the Gann angles was first described in 1935 in his book The Basis of My Forecasting Method. In this book, he described the use of the Gann angles for calculating stock prices by the use of lines and geometric angles to divide time and prices on charts into equal units, with the most important one being the 1 X 1 chart that represented one unit of time against one unit of price.

One aspect of the Gann Theory also stated that if given the time and prices of historical occasions at which market prices made tops and bottoms, future market turning points could be predicted using mathematical and geometrical calculations. This is in correlation with Gann’s belief that the market operates in cycles. He accurately used this technique to predict the stock market crash of 1929, and was also noted as having made an incredibly accurate prediction of the price of a bag of wheat. On September 30^th 1909, Gann predicted that a bag of wheat would close at $1.20 at the close of business. By the close of the day, he was vindicated as price of wheat climbed to $1.20 per bag.

Gann is reported to have had an 85% success rate from the use of the Gann Theory in his trading activities.

How Can Traders Make Use of the Gann Theory in Modern-Day Trading?

Even though Gann never fully explained how his theories worked and was particularly secretive about them, there are a few things about his theory that modern day traders could imbibe in modern day forex trading.

His theory about the market operating in cycles is as true today as it was then. Markets rise and fall as traders buy and sell instruments as a result of market forces.

Gann angles can be used as modified trend lines. A Gann angle is a diagonal line that possesses uniform rates of speed. By using the Gann angle, the future direction and speed of a trend can be calculated. Indeed, when a Gann angle is plotted, it shows the past, present and future (expected) prices. The Gann angles can then be used to forecast support and resistance levels, the strength of direction and the timing of the market extremes.

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