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Born in 1878, he was reputed to have made $50 million over the course
of his career. William D. Gann is a trading legend. In 1909 the magazine
'The ticker and Investment Digest" reported they had witnessed his
trading for October of that year and it included 286 winning trades
and 22 losing, a win rate of 92%.
Not
surprisingly, his notoriety still draws attention today and many of
you are probably familiar with his works from the HotTrader software.
His not-of-this-world approach (yes he theories include planetary
aspects), coupled with a fathomless writing style, makes studying
Gann an exercise that could drive one to kicking the family pet.
I once
spoke to a US trader Jim Twentyman, who told me he had only just discovered
a new trading insight in Gann's book 'How to Profit in Commodities'
- he'd been studying his work for two decades! Some say this was Gann's
intention, making his books frustratingly cryptic in order to draw
readers into attending one of his courses, which were supposedly the
equivalent in cost to buying a house. Another rumour about the man
says he was in fact a fraud and died a pauper.
Whatever
the reality, in the futures game it is almost impossible to combine
teaching and trading without courting some scepticism and controversy.
Therefore, like all technical analysis techniques, it's a matter of
'if the shoe fits'. In other words, if it works for you then its good.
Constructing a Swing Chart
A swing
chart is constructed by using Gann's Trend Indicator Line (TIL). A
TIL is usually applied to a daily chart and is based on the highs
and lows. The TIL moves up to the high of the day's range if the range
has a higher high than the previous day. If the next day's range has
a lower low and then TIL moves to the bottom of that range. Inside
days and outside days are the exception.
Outside Day
An outside
day occurs when the day's high is higher than the previous day and
the day's low is lower than the previous day. If the outside day occurs
after a series of higher high days, and the high occurs before the
low during the day, then connect the TIL to the high and draw down
to the low. The converse is true for outside days following lower
low days.
Inside Day
An inside
day, as the name suggests, is a trading day with a range where the
high is lower and the low is higher than the previous day's range.
Inside days are generally ignored all together. However, if an inside
day occurs after a lower low and is then followed by a higher high,
the TIL moves to the new high. If the inside day is followed by another
lower low, which does not exceed the existing TIL low, the TIL does
not move. Only when the existing TIL low is exceeded can the TIL continue
down. The converse is true for inside days following higher highs.
Applying the Swing Chart
Turning
a bar chart into a swing creates a smoothed price chart where a series
of higher tops and bottoms translates into a clear and obvious uptrend
and vice-verser for a series of lower tops and bottoms. The chart
below is a daily representation of the June Share Price Index, in
OHLC bars and as a Gann swing chart.
Swing Bottom
A bottom
occurs when the TIL has gone from the high price on the range to a
low price and then back to the high price on the next day's range.
Although this implies it would occur over a three-day period, it could
take longer. The trend is up when there are higher swing bottoms after
a swing top has been broken.
Swing Top
A top
occurs when the TIL has gone from a low price on the range to a high
price and then back to a low price. As for a bottom, it can take longer
then three days. The trend is down when there are lower swing tops
after a swing bottom has been broken.
The Entry Signal
According
to Gann, when the trend is up, a buy signal is given when a new high
is made after the swing bottom is established. Conversely when the
trend is down, a sell signal is given when a new low is made after
a swing top is established. Referring to the swing chart below, a
swing top was made on March 22 this year and a sell signal was given
when a new low was made around the 27th.
The
entry level for the sell was 3257 and is marked sell signal no.1 on
the swing chart. Gann defined a pyramiding technique where for instance
a short position is added to at the break of a new swing low. On SPI
swing chart, this would be on April 13 when the price broke 3163,
getting set at the open of the following day at 3120. A third sell
signal was generated at sell signal no.3 at a price of 3089. The swing
high that followed breached the old swing high by one point, from
3148 to 3149 - a false break-out. Working a stop a few points away
from key resistance levels avoids getting chopped on rogue ticks.
The Stop Loss Level
The
stop loss level for Gann swing trading is based on the recent swing
in the opposite direction. On the June SPI chart, the stop loss level
for sell signal no.1 would be just outside the swing high of 3299.
The stop loss level for the sell signal no.2 would be just outside
the swing high of 3244. Therefore, for the pyramid short position,
the stop would be moved from the first swing high, and then as the
no.2 entry signal is taken, the stop for all positions is moved to
the second swing high. When the third short position is added at 3089,
the stop for all the entire position is move to outside the swing
high of 3148.
Taking Profit
The
whole position is exited when the major trend changes. On the SPI
chart, a confirmation of a change in trend occurred when a swing bottom
was confirmed on May 29 when the price broke the swing high of 3026.
This trade would have yielded a profit of 230 points on the first
trade and 94 points on the second and 63 points for the third for
a total of 387 points or $9,675. The buy signal no.1 was not just
a profit taking level, but in fact the entry signal for a long position,
with a stop level underneath the last swing low at 3116.
Conclusions
Gann's
TIL is a simple tool. The swing chart provides the trader with distinct
entry and exit signals that enable safe entry points, smart stop levels,
and generous profits. The only downside is constructing a swing chart
can be a drag. If you are interested in a software program that does
the work for you, or finding out more about trading with Gann swings
check out Stewart Thallon's HotTrader software at www.gannswings.com.
The chart below is a representation of the above data with the HotTrader
software. Note the software not only generates the swing chart, but
identifies the entry and exit signals.
Happy
trading,
Solomon
Thallon
HotTrader, Australia
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