back start next
[start]              [ 14 ]                                                                            
the half and full years from those significant prices. Then I use the overlays to more refine the analysis.
One of the main reasons for analysis of monthly charts is to determine the extent of the move. Since the normal move on the monthly chart is three months, your attempting to determine if that is a probability.
, On the monthly charts you will apply the famous Gann square of 144, whioh is 12 months times 12 years, and the square of 90. the square of 144 geometric divisions are quite interesting. One eighth is 18 months, 1/4 is 36 months, 3/8 is 54 months, 1/2 is 72 months, 5/8 is 90 months, 3/4 is 108 months, and 7/8 is 126 months. This square is discussed later in the text.
Realize that the counts or cycles are all related. On the monthly charts, you have 270 months equals 22 1/2 years or 1080 months (3 times 360) equals 90 years, or 2160 hours (6 times 360) equals 90 days. The wheel, with a wheel, with a wheel with spokes equal geometric proportion apart.
Gann spoke of many long term cycles in his work and indicated that these cycles are important in his mystical fashion. The long term cycles whioh he used in his work a the 90, 60, 50, 30, 20, 10, and 5 year cycles. The 60 year cycles is found in both Jewish and Christian teachings, which the most probable reason for finding ite presence in Ganns work. The teachings indicate that you should forgive debts every 60 yeers. History shows this to be a time of defaults on debt and financial stress.
In the appendix is a chapter on forecasting written by Mr. Gann. You should, now, study that section.
In the remainder of this text, I will assume that the cycle of years is valid, and that it is worked out in the price-time relationship of the market. You will have to show yourself that this is true. There are other long term cycles whioh are well documented, such as the Kondratieff cycle which reflects not only financial but also sociological and political occurrences in its repetition. The obvious recurrence of this cycle is a very strong inflationary binge, follow by a deflationary plateau which culminates with a financial disaster and many defaults on debt. But. that cycle is not of precision timing as these cycles test out to be.
GEOMETRIC CHARTS, ANGLES AND PRICE SQUARES
The first time I saw a Gann chart with the counts, the angles, and the squares on it, I said, "Ok, great, you have so many things going on here that something is going to have to work." It was only after years that I found that all of the information on the charts had a common basis. The counts, I found, came from the cycle of years, and the angles are a geometric relationship between prioe and time.
These charts have a square relationship between the horizontal and vertical factors of what is being charted. This grid pattern has been applied to almost all methods of charting from map making to stock and commodity market analysis. What is important here is the relationship that Gann used between the factors on the two axes of the chart.
This geometric principle of an identical unit representing both time and price gives the user of Ganns methods the so called "squared" charts. For instance, on a monthly chart for an index or stock one point or dollar is equivalent to one time period. Commodities present different looks depending upon the price units in whioh they trade.
Gann kept monthly, weekly and daily charts. He, also,in some oases kept yearly and quarterly charts and, although these charts do have value, most people cannot obtain such data or do not have the patience to use such charts which are not very tradable. So, for the normal trader, the monthly charts are the most important charts, and although you may never trade from them alone, after you work with them, and see the set ups, you will realize their value as a trading tool. These long term charts should have at a minimum 15 years of price data, hopefully more, and give you the perspective of what the market is doing now, from a historical basis. Also, by using them in conjunction with a basic trading plan, you will be able to have a muoh better idea of what type of market is likely in the coming years. A note to intra-day traders-your trading will improve through the use of monthly and weekly charts. What if you were told the market would be trending up for the next three months, with the largest correction not to exceed 11.5 points and 10 days. And the next three days the market will be straight up and not even get close to the previous days low. Ok, go trade it. Wouldnt that make intra-day trading an easier task? You can only acquire that knowledge from longer term charts.
If you have the discipline and patience necessary to trade from the monthly and weekly setups, which I will present later in this book, and to use the daily charts for entry into planned
trades, you will find your percentage of successful trades to be very high.
Weekly charts are excellent trading tools. The setups that you get from them are times that the stock will give you a good move in a very short period of time. A weekly chart should have at least five years of price action on it for reference purposes. The normal change in trend from a weekly setup is possibly three weeks. You should also use these charts to verify time periods and price levels for entry into the longer term trades from the monthly charts.
The daily oharts are probably the most glamorous charts, and the most dangerous. You will find yourself spending five times as much time on the daily charts, in posting price action and general maintenance, as you do on the weekly charts, and maybe twenty times as much as on a monthly chart. The danger lies in having this exceptionally short term trading indicator become the most important part of your psychology because of its constant presence in your work. This obviously goes double for intra-day oharts. But they all work together to, at times, give a very clear picture. The minimum would be one year data on daily charts.
I have found that on daily charts using the one dollar per day format is unwieldy, and I prefer to have a scale that places the prioe action in a proportion that is common to most charting. For fast moving stocks above 150 dollars I do use one point. Below 150 but above §0 I use 1/2 point per day, for stocks under 90 but above 30, 1/4 point per day, and for those priced under 30, in some cases, 1/8 point per day. Stock indexes work well at one dollar per day. The T-Bond contract works best on a daily chart at .10 per day.
You will find that when you apply the methods presented in this book to daily charts, you can find almost every change in trend in a stock or market. That is a danger. Trading in hindsight is significantly different from real time trading. If
rou attempt to trade every movement a market makes, you will very ikely have problems. Trade only what you know and understand, trade the setups, not the markets.
Probably the most difficult chart to trade from is the intra-day chart. Actually, it can be quite simple if viewed from the proper perspective. Stocks use 1/8 point scale. S&P Futures use .125 per half hour, or per box if you use a different time series. I will go into the reasons for these scaling difference later in the book as this knowledge is critical to understanding Gann theory,
A final note about the charts, is that one of the advantages to using geometric charts is the tremendous amount of technical data you can show on each hand done chart. I know Gann students whose charts resemble works of art and are enclosed in plastic. I doubt they do very well trading, if they trade at all. Your charts should have notes and probabilities written on them so you do not need to do the same analysis twice. If you do
[start]              [ 14 ]