Gann Studies: Reality Behind Legend

A Live Legend of All Times

Even in the boisterous world of finance, where there never seems to be a dearth of men of renown, it is rather seldom that figures of this size and reputation appear: Mr. William Gann has been referred to as a trading legend and the most successful trader since the early 1920-s. For the sake of justice, one should mention that probably since about the same time he has been called none other than a lucky marketer of ideas by some others. In any event, his unique predictive abilities and the forecasts he made on both trading and non-trading issues are still well-remembered and beyond any doubt. The somewhat mystical air that the alleged use of astrological concepts in his predictions made Gann an all the more mysterious figure and his theory more attractive to many.

William Delbert Gann was born to the family of a cotton rancher on a Texas farm June 6, 1878. Being obliged to provide for his numerous younger brothers and sisters, he had never attended grammar or high school. Having moved to NY at the age of 25, he set up a brokerage of his own called W.D. Gann & Co. Gann's major predictions include the end of WW1 in 1918, the end of the Great Depression in the States in 1932 and Perl Harbor. He is the author of 8 books and one of the most popular trading theories ever.

William Gann's ascension to the heights of the world of finance began in 1908 when he invented a theory called "the market time factor." By using his newly invented trading approach, he was able to make several tens of thousand dollars using two accounts that contained a total of just USD 450. A true Wall Street celebrity, Gann was a tremendous success as a commodities trader.

The Technology behind the Legend

The basis of Gann's theory was formed by the following three maxims:

1. There is nothing else to take into consideration besides price, time and range;
2. The markets move through certain cycles;
3. The markets are geometric in nature.

The theory could be used for three major types of predictions: price, time and pattern forecasts. To make a forecast, you first need to select a time period (normally an intermediate or short-term time period) and choose the high and low that will become the starting points for the Gann lines. Normally, the high and low are determined by employing some other technical analysis method. When the high and low are determined, a 1x1 or 1x2 pattern is applied, the difference being in the angle of the line being drawn. After the pattern or 'cycle" is completed by linking the two points, similar 'cycles" down the trend-line are searched for. Probably, this is what has been so fascinating about the Gann method - seemingly, it's like falling off a log, just tack a crack, and you are a success. But when you come to grips with the technique, all the ease is gone. To locate the low and high, Gann used some mathematical methods, including and similar to Fibonacci. His amazing command of those and, as is surmised now, some other clandestine methods, is what is responsible for most of his financial success.

During his life, Gann kept secret the astrological methods he used for predicting stock market actions. It is now said that all the astrological work for Gann was performed by two outstanding Canadian astrologists of the time - Lorne Edward Johndro and Kenneth Brown. All this says that there is a lot more to the Gann theory than what the average trader knows and can apply. Consequently, the average trader is highly unlikely to be able to hone the technique to the point when it starts bringing in the kind of profit it earned for its inventor. Most likely, the technique will serve him as just another method that allows drawing support and resistance lines. And unless you are prepared to spend years on research and mastering the technique, it is best to use the Gann studies as just another method in your combination that will help you prove a decision made by applying the whole of the combination. Or, better still, avoid using the method altogether.

Counting on the Waves: A New Look on the Celebrated Trading Method

The Elliott Wave theory has been a major thing in trading for decades now and, undoubtedly, Mr. Ralph Nelson Elliott should be held in high esteem by all those who trade the markets these days. However, while some steadfast followers consider his theory to be a highly effective pattern recognition technique able to help predict market developments, others are prone to regard Elliott's creation as a commonly used methodology, a brilliantly created means of seeing the recent past of the market, rendering this past with stunning clarity. Who's right and who's wrong?

The Elliott approach construes market actions as recurrent phases, comprised of two major moves: a five-wave advance and a three- wave decline, customarily referred to as the Impulse Wave and Corrective Wave. According to the Elliott theory, the market phases are scalable and the same market actions can constitute the same but larger or smaller phases and be considered over time periods that differ in duration significantly. By identifying the current position in the phase, it is possible to predict the kind of market action that will follow. This is made easier by the following interpretation rules for the counting of the waves:

1. Wave 2 should not end below the beginning of Wave 1;
2. Wave 3 should not be the shortest wave among Wave 1, 3 and 5;
3. Wave 4 should not overlap with Wave 1, except for wave 1, 5, a or c of a higher degree;
4. Rule of Alternation: Wave 2 and 4 should unfurl in two different wave forms.

One of the sub-waves 1, 3, 5 of the Impulsive Wave is supposed to be an extended wave. For a better understanding of the Corrective Wave phase, the Elliott theory delineates the following types of sub-waves that can make up the Corrective Wave: Zig-Zag, Flat, Irregular, Horizontal Triangle, Double Three, Triple Three. This stringently ordered, if a bit complicated in places, and revered by many theory seems to provide an effective means of analyzing market developments and only God knows what would happen if it worked completely as stated. Basically, all you have to do is determine which of the itemized wave forms is going to arise next. And here is where the pitfalls start. And God forbid we call into question the accuracy of Mr. Ellliott's concept, Fibonacci's Golden Ratio it is based on, or the laws of the Universe the latter claims to explain. The problems are a lot more trivial. How will you determine the starting point for your count of the waves? Out of five people who will look at the same chart two will most probably see the starting point differently. Right from the outset, the ticket for your journey to success seems to be hard to get hold of.

However, if you've been able to identify the starting point correctly, you will very soon understand that identifying waves as they are occurring is something altogether different from identifying waves when they have already occurred. And this is the second and biggest disadvantage of the Elliott theory. Unfortunately, there are several more. Is there going to be the fifth wave? Will the correction be flat or zigzag? Which of the waves will have the extension? All these are questions Elliott's theory has difficulty answering.

It is true that many experienced traders who have extensively dealt with the "bugs" the theory contains use the Elliott method as a predictive technique. However, all the above has caused many thinking traders to form a vision of the Elliott theory as of a methodology, rather than a predictive technique. In their opinion, this methodology has been extremely helpful in naming and identifying different states of the market: strong and week trends, complex and simple corrections. This can help gainfully use the other methods in your combination at the opportune time.

This view on the Elliott theory and the approach on which some of the thinking traders base their use of Elliott waves seems to be quite correct: the main value of the method is the possibility of determining the phase the market is currently in. And this is too valuable an addition to any thinking trader's arsenal to overlook or underestimate.

Candlesticks Technique: A Panacea Or A Big Frog In A Small Pond?

Just like a vast number of mind-boggling and revolutionary inventions, Candlesticks originate from Japan, where they were initially used by rice traders yet in the 17-th century. This gives the technique an air of Oriental charm, invoking associations with precision, technical eminence, and some innate, hidden ancient wisdom, which, of course, can never fail. Candlesticks were first introduced as a technical analysis technique by Steven Nison in his acclaimed book Japanese Candlestick Charting Techniques. Did the guy do the right thing? - new version - as a technical analysis technique by the esteemed Steven Nison in his acclaimed book Japanese Candlestick Charting Techniques. Did the man do the right thing? We think he did, but let's try to answer this question at a greater depth.

To create a candlestick pattern, you need a data set that will contain an open, a high, a low, and a close. A candlestick is formed by a "body" and two "tails" that grow out of this body. The four milestone points, passed by every trade, are located as follows:

In this pattern, the tails represent the whole range of prices, used during the trade, whilst the body represents the opening and closing prices for the selected period. If the closing price is higher than the opening one, the body will be colored blue or green; when the opposite is the case, the body will be colored red.

Basically, the Candlesticks pattern provides exactly the kind of information that you can observe on about any other kind of chart. The thing is definitely a lot more pleasant to look at than most of the other types of charts, but what's the big deal in terms of its usefulness?

The most powerful advantage that this technique can give is, undoubtedly, the easily discernible respective relationship between the four points that make up the pattern. One look is enough to size up the underlying price action in terms of the two key relationships.

But, the most important advantage, offered by Candlesticks, is that there are a number of sure (well, most of the time, you know) signs of a market development occurring that no other technique can offer. So what is this bag of tricks?

For example, if the body of your candlestick is green and rather prolonged, this means that buyers are very active - a definitely bullish sign. Conversely, a long red candlestick body will be a sure bearish sign.

Another useful sign, offered by the Candlesticks technique is Doji - the situation, when the opening and closing prices coincide. The so called Dragonfly variation of Doji, whereby the prices coincide at the top of the trading range, serves as a sign of trend reversal and a forthcoming upward advance.

An equally useful sign is the so called Piercing Line, whereby the closing price point of the green bar is just slightly higher than the middle of the preceding red candlestick. This situation signals a forthcoming reversal of a downward trend.

The technique offers several more eloquently referred to pattern variations, whose names sound like the names of some mortally dangerous jab or a bizarre and potentially lethal posture from an Oriental martial system. But are these tricks really as dependable as the great ancient fighting legacy of the Orient?

Of course, the technique is not infallible and just like any other trading method is a bit on the dodgy side. One of the main drawbacks of the technique is that despite it clearly shows the relationship between the opening and closing prices, it does not allow seeing how volatile the price action actually was during the different stages of the trade. Actually, some significantly different scenarios can be possible.

All told, a great many traders reckon candlesticks to be the primary trading method in technical analysis. Our opinion would be that although Candlesticks are, certainly, a lot more reliable than most of the other technical analysis methods, one shouldn't still rely entirely on this single method.