How to Use the Gann System when Day Trading - dummies

How to Use the Gann System when Day Trading

The Gann system of stock trading was developed by William Gann who supposedly made $50 million in the stock and commodities markets in the first half of the 20th century by using a system that he may or may not have taught to others before his death.

Mystery surrounds the Gann system; some traders rely on what they perceive to be his method, whereas others dismiss it, in part because Gann relied on astrology to build his forecasts.

The Gann system, as it is defined nowadays, looks at the relationship between price and time. If a security moves one point in one day, that’s a 1 × 1 Gann angle, and that’s normal trading. If a security moves two points in one day, it is said to create a 2 × 1 Gann angle, which is bullish. An angle of less than 1 × 1 is bearish.

Furthermore, Gann recognized that the market moves back and forth while in a general upward or downward cycle, but some of those fluctuations are more positive than others. Just as the system looks for price movements over time with even proportions (1 × 1, 2 × 1, and so on), it also looks for orderly retracements.

When a security moves back 50 percent, say from a low of $20 to a high of $40 and then back to $30, it would be a good time to buy under the Gann system.

Many traders swear by the 50-percent retracement guide — even those who think that Gann is otherwise a crazy system. This may be the origin of one hoary trading chestnut: Buy whenever a price dips, because it’s likely to be heading on its way back up.