The Basics of Gann Theory

The basics of Gann’s theory’s lie in the concept of pattern, price and time and how the markets are affected by their relationship. Gann believed that these elements greatly influenced the future movement of the markets.

Gann’s main focus was on the fact that at various times these three elements had a large influence on the market. At times it is the price and time that is the overriding force in the market. At other times it could be a particular pattern of events that was the overriding force. The key to trading using some of Gann’s theories is their understanding.

In essence Gann’s theory is the identification of the best permutations of pattern, price and time to execute successful trades. While it may be true that any one of these elements can signal a trade a trader who concentrates on only one aspect may be less successful than a trader who is tolerant and watches for the best permutation of price, time and pattern.

Gann loved mathematics and he appreciated numbers and number theory. Many technicians claim that Gann’s theories revolve around mathematics and natural law.  The use of numbers in Gann’s trading analysis was a central aspect. Gann particularly liked the squares of 16, 25,36,49,64, 121 and 144 and he believed the markets movements followed a pattern that was responsive to these squares.  For example he might have utilized these numbers to determine a change of trend direction in 36 days or show resistance 36 pips from the top of a rally.

Gann also had a preference for some key numbers which are important in other areas apart from the financial markets. He favored numbers such as 12 which had a biblical and a zodiac connection. Numbers which Gann favored included 3, 5, 144 and 365.

Central to Gann’s pattern, price and time theories are charts called swing charts. Gann’s particular analysis used as a central theme the swing free forex charts because they used a correct scale between price and time allowing an analysts to make exact forecasts and compute the correct angles.

The scale between price and time is extremely important and should be correctly set and in a Gann formatted chart must be on a 1:1 scale or an equal amount of squares up and to the right. A line drawn from the corner of one grid to another will form a perfect 45 degree angle.