Originally developed by W.D. Gann, the Gann fan (also referred to as Gann angles) is a very popular tool used by traders to analyze and understand an asset’s direction over time. Just like an old-fashioned Chinese fan, when overlaid on the price-action of chart, Gann fans help to determine where key levels are and how strong or weak a trend is over a measured period of time.
a Gann line is a diagonal linear ray that is set to measure a specified amount of a change in price versus a specified change in time
Not to be confused with trend lines despite giving vital information about trends, a Gann line is a diagonal linear ray that is set to measure a specified amount of a change in price versus a specified change in time. By using these levels, investors are better able to determine the strength of the trend and when prices are expected to hit certain levels.
Key Levels
Gann lines area commonly employed technical to discover where potential support and resistance levels lie based on the three main Gann angles defined as 1x2, 1x1, and 2x1from the tops or bottoms during specified time periods. The first and most important line is 1x1 or the 45.00° line (or angle). This line basically is used to represent a 1 point change over 1 measured period of time, usually one day as this was traditionally applied to stocks.
For the 2x1 line (63.75°), it represents a 2 point change over 1 period of time while the 1x2 line (26.25°) indicates a 1 point move over 2 periods of time. There are additional popular lines that are used to assemble the fan depending on the strategy up to 8x1 (82.50°) and 1x8 (7.50°).
Setting Up the Fan
The idea is that fans define past, present, and future price action through angles
Fans are typically established at highs or lows in the price action after the onset of a reversal or a change in trend. The idea is that it defines the past, present, and future price action through the use of angles, thus measuring how prices and trends are evolving over time and the strength of directional movements.
Additionally, when both upward and downward fans are combined at levels that define highs and lows over a time period in a process known as “squaring,” it helps to understand potential times when asset prices may shift. However, this is a more complicated strategy that is used for longer-term charts.
The Strategy
When applying this indicator to a trading strategy, the Gann fan can be especially useful for defining potential entry and exit points. However, the first task is to understand just how bearish or bullish an asset’s momentum is. Gann lines that are trending upwards are typically used to denote support whereas
Once one Gann line is broken, the next line becomes the relevant level for price trend
Gann lines that are trending lower represent potential resistance levels for the asset. Typically the strategy is then to establish bullish positions at the support levels defined by Gann lines whereas bearish positions would be initiated at resistance levels designated by the downward diagonal Gann lines.
Additionally, price action in a downward facing fan that rises above the 1x1 line would be viewed as bullish whereas an upward facing fan with prices falling below the 1x1 line would be viewed as a bearish development.
Once one Gann line is broken, the next line higher or lower becomes the relevant level for prices to trend towards. Just like support and resistance levels, once a level is broken support turns into resistance and resistance to support, with the level break seeing the price action move either higher or lower to the next relevant level.
Notes
Price scale and timing can vary widely based on the Volatility of the underlying asset being traded. Therefore the time scale that a trader using the Gann fan applies to stocks may not have the same characteristics as those used in commodities or currencies, meaning the indicator’s inputs should be fine-tuned for each asset class it is applied to.
Idan is the VP trading for anyoption.com. He is a seasoned professional with years of experience trading and has a vast knowledge of the financial markets. An expert in the binary options hedging field - Idan provides insights, guidance and coordination in business planning, Risk Management and technology strategies. He holds a BA in Economics Management and is now busy finishing his MBA in Finance.
