Stocks & Commodities V.

3:5 (177-183): Gann Lines and Angles by Robert Pardo

Gann Lines and Angles

by Robert Pardo

"Integrated use of Gann Lines and Angles. . . appreciably

enhances the accuracy of the identification and verification of
potential turning points. "

INTRODUCTION
Gann Lines and Gann Angles are technical charting methods for the projection of Forward Support and
Resistance. This article will discuss these techniques, their applications, the concept of Forward Support
and Resistance, and the Principle of Coincidence.
The projection of potential future turning points is one of the more interesting and rewarding applications
of Forward Support and Resistance. This article will outline an integrated use of Gann Lines and Angles.
This integration appreciably enhances the accuracy of the identification and verification of potential
turning points. It is a good example of the "sum exceeding the parts." It is also an excellent illustration of
the Principle of Coincidence.

THE MARGIN OF ERROR

Experience indicates that many traders are unaware of the LIMITATIONS of technical indicators and
their applications. Most traders know the proper application of a particular method. However, most do
not know how to determine at what point a method is being used beyond its inherent capabilities. The
result of this is inaccurate and misleading trading information. Application of the Principle of
Coincidence is one method that helps to reduce this effect.
There is a great deal of interest in precision entry techniques as well as in methods for predicting market
turning points. Gann Lines and Angles can both be used individually or jointly towards both of these
ends. When techniques are employed for these purposes, it is mandatory to fully appreciate the allowable
margin of error inherent in such methods. Since even the most accurate analytic methods possess an error
margin, it is worthwhile to work towards minimizing its impact on forecasts and market entry
calculations. Employing a well-chosen selection of indicators and methods balanced in an integrated
model is one such method. It is also at the heart of the Principle of Coincidence.

THE JOINT APPLICATION OF MULTIPLE TECHNIQUES

Three examples of technical decision models employing multiple techniques will be developed. These
models will consider the following techniques:
1. the Isolation of Significant High and Low Pivot Points in an attendant Price Space,
2. the Projection of Forward Support and Resistance (Gann Lines and Angles),
3. a Momentum Indicator (Relative Strength), and

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4. Pattern Recognition (Momentum/Price Divergence)

taken together in a complementary synthesis. An integrated use such as this constitutes an application of
the Principle of Coincidence.
The use of multiple, integrated techniques can lead to the following trading enhancements:
1. the Improvement of Precision,
2. a Greater Probability of Accuracy, and
3. Independent Cross Verification.
The isolation of future market turning points is the primary purpose of the method presented. A
secondary and equally important use of this method is the verification and categorization of established
turning points. Additionally, the three example studies will illustrate the concept and power of the
Principle of Coincidence.

THE PIVOT POINT

The Pivot Point Defined

A PIVOT POINT is a particular point in time and price at a particular level of price action when the trend
of the market has changed direction. There are Pivot Point HIGHS and Pivot Point LOWS. The three
Price Space Examples shown each display a Significant High (S2) and Low (S1) Pivot Point.

Pivot Point Levels

Pivot points can and do occur at all levels of significance down from major, medium, intermediate, minor
to micro turning points. It is essential to the effective use of Pivot Points that they be categorized by their
appropriate level. The Pivot Points identified in the examples cited are of medium-term level. Pivot
points can and do occur in tic-by-tic data, hourly bar charts, daily data on the short-term, "micro" level,
on the longer-term level where they can coincide with monthly and/or yearly highs and lows, in weekly
bar charts, etc. Pivot Points occur in any and all types of charts.

The Significance of the Pivot Point Level

The significance of the concept of the Pivot Point level is a question of both identification and
application. If one is trading short-term, an evaluation of short term Pivot Points will prove most useful.
If one is trading long term, such an evaluation will have a more limited applicability. These types of
examples can be proliferated ad infinitum. Suffice it to say that to achieve maximum performance, one
should evaluate Pivot Points on the level appropriate to one's central trading strategy. In other words,
long-term traders should focus on higher-level Pivot Points, and short-term traders should focus on lower
level Pivot Points. This is not to say that one should ignore all other Pivot Points as irrelevant. When
properly understood, the various levels of Pivot Points can and should be used together in a
complementary synthesis.

THE PRICE SPACE

Definition of a Price Space

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"Betting on a horse, that's gambling, betting you can make three spades that's entertainment, betting
that cotton will go up three points, that's business. See the difference?"

Chart 1:
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Chart 2:

Chart 3:
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Chart 4:

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A PRICE SPACE is a COMPLETED price action bounded by both a Low and a High Pivot Point of
equal term level. The Pivot Points that begin and end a Price Space are its boundaries, or Boundary
Points. The LEVEL of the Price Space is determined by the level of its Boundary Pivot Points. A Price
Space bounded by intermediate-level Pivot Points is an intermediate Price Space.

The Price Space, Elliott Wave and Dow Theory

Those familiar with the Elliott Wave and Dow theories will recognize waves and price swings in the
concept of the Price Space. There are similarities. Often, an Elliott wave or a price swing will correspond
to a Price Space. However, it is important to note that all Price Spaces do NOT correspond to an Elliott
wave or a Dow Theory price swing. Price spaces are more generic. The concept of the Price Space is
more all-encompassing. A Price Space is solely determined by its boundaries.

The "Dimensions" of a Price Space

Price Spaces have a price and a time dimension. The price, or "space" dimension, is its price "height," or,
the price distance traveled from its beginning boundary to its ending boundary. This discussion is
exclusively concerned with the price dimension.

Three Examples of Price Spaces

Price Space example #1 begins at Pivot Point Low S1 on 3/9/82 at a price of 786.10 and ends at Pivot
Point High S2 on 5/7/82 at a price of 875.50 for a height of 90.40 (876.50-786.10 = 90.40) points.
Price Space example #2 begins at Pivot Point Low S1 on 8/9/82 at a price of 769.90 and ends at Pivot
Point High S2 on 9/22/82 at a price of 951.10 for a height of 181.20 points. Price Space example #3
begins at Pivot Point Low S1 on 12/16/82 at a price of 983.30 and ends at Pivot Point High S2 on
1/12/83 at a price of 1105.10 for a height of 121.80 points.

The Relationship Between Pivot Points and Price Spaces

In summary, the boundaries of a Price Space are described by a High and a Low Pivot Point. A Price
Space is the base "unit" for analyses such as Gann Lines. Pivot Points are the base unit for analyses such
as Gann Angles.
An examination of the examples supplied will help "flesh out" a more intuitive notion of the concepts of
the Pivot Point and the Price Space.

THE CONCEPT OF FORWARD SUPPORT AND RESISTANCE

"Traditional" Support and Resistance

Traditionally, support and resistance are anticipated at price levels where the market previously exhibited
support and/or resistance. According to the old formula, when resistance is "broken" it becomes support
for a future decline from higher levels. The inverse is true for support. Additionally, support can be
anticipated at price levels reflecting established monthly, yearly, all-time, etc. "significant" lows. The
reverse is true for resistance and prior significant highs.
All of these things that hold for traditional support and resistance (TS/R) also hold true for Forward
Support and Resistance (FS/R). Also, the existence and use of FS/R is not a replacement for TS/R.

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Forward Support and Resistance is a complement and addition to Traditional Support and Resistance.

Forward Support and Resistance

FORWARD SUPPORT AND RESISTANCE price levels are calculated from previous price action. In
the case of Gann Angles, FS/R is projected forward from a prior Pivot Point. In the case of Gann Lines,
FS/R is projected forward from a prior Price Space. The distinction here is:
(1)TRADITIONAL Support and Resistance (TS/R) is projected forward from previously established
significant price levels, while
(2)FORWARD Support and Resistance (FS/R) is projected forward from CALCULATED price levels
derived from previously established price action.

The Advance Projection of Pivot Points

Before reading any further, review the Dow Jones Industrial Average, pork bellies, British pound and
Kansas City Value Line studies ( Charts 9, 10, 11, 12) featuring Gann Lines, and Gann Angles projected
forward from both the Pivot Point High and Low. In particular, examine the points of Gann Angle
intersection. Examine closely those angle intersection points that occur near Gann Lines. A large number
of significant market turns are indicated by these intersections. Space does not permit the in-depth
discussion of all of these market turns. However, the time you spend examining them will prove
interesting and worthwhile.
Even a cursory examination of these examples will supply ample food for thought as to why one of the
best and most powerful applications of Gann Lines and Angles is the advance projection of points in
price and time where potential trend reversals are likely to occur. There are problems of accuracy when
each of these techniques is used alone. However, when used together, there is a noticable enhancement.

GANN LINES

Gann Lines Defined

GANN LINES are Forward Support and Resistance lines. They are constructed by dividing a Price Space
into a selected number of equal divisions. A Gann Line study displays these price levels as horizontal
lines drawn at equidistant spaces.

Data Required to Construct a Gann Line Study

To construct a Gann Line study, four separate pieces of information are required:
1. a HIGH Pivot Point,
2. a LOW Pivot Point,
3. the HEIGHT of the Price Space defined by these two Pivot Points, and
4. the appropriate NUMBER OF DIVISIONS by which the Price Space is to be divided.
Points One and Two are arrived at by inspection. Point Three is arrived at by calculation. Point Four is
achieved through experience. Usually, divisions of eight or ten are a good starting point.

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Chart 6:

Chart 7:
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Chart 8:

Chart 9:
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How to Construct a Gann Line Study

Once these four points are known, the rest is easy. The height of the Price Space is divided into the
number of desired segments. Examine the "GANN LINES & PRICE LEVELS" example (Chart 4). The
Low Pivot Point, S1, formed on 12/16/82 at a price of 983.20. The High Pivot Point, S2, formed on
1/12/83 at a price of 1105.10. These two Pivot Points define a Price Space equal to 121.90 points
(1105.10 - 983.20 = 121.90). This Price Space was divided into eighths. Nine horizontal Gann Lines
were drawn dividing the Price Space into eight equal price divisions or zones. These price levels can be
calculated by either successively adding the "eighth" factor (i.e., 121.90 /8 = 15.238) starting from the
low, or inversely, subtracting this factor beginning from the high. In other words: 983.20 + 15.238 =
998.44 + 15.238 = 1013.68 + 15.238 = 1028.92, . . . eight times.

Selecting an Appropriate Price Space

To construct a Gann Line study applicable to long-term trading, it would be most appropriate to select a
Price Space defined by high-level Pivot Point boundaries. For example, the selection of the highest high
and the lowest low in a five-year period would define a Price Space appropriate for long-term
considerations. The selection of the level of the Price Space bears a definite relation to the type of
intended trading application. Skill must be employed in the accurate identification of a Price Space to
enhance the performance of the resulting Gann Line study.
Always bear in mind the fact that a Price Space represents a completed price action or movement, no
matter the level of price action. For example, the first thrust swing of a five count Elliott wave would
certainly qualify as an appropriate Price Space. The same considerations that apply to the selection and
definition of a Price Space are also effective guidelines for the selection of Pivot Points for the projection
of Gann Angles.

A Discussion of Gann Lines

Gann Lines have practical value because markets have a distinct tendency to retrace previous price action
in relation to certain proportions. For example, note the widespread use of the 50% and 61.8% price
retracements. Gann Lines take the retracement concept one step further. They divide an entire Price
Space into equal price divisions to reveal Forward Support and Resistance levels. Gann emphasized the
importance of the 50% retracement level. This price level is important. Frequently market corrections
will end right at or very near this 50% retracement level. Empirical observation, however, has shown that
too great a reliance on the 50% or 61.8% retracement levels can be dangerous. Both the British pound
and the pork belly studies present retracements that traveled well beyond these levels to 80% (the pound)
and 87.5% (the bellies). Overreliance on one retracement level for verification and action can blind a
trader to the true nature of the market action unfolding. This can in turn lead to inaccurate and ill-timed
market action.
A Gann Line study, which partitions an entire Price Space into equal price zones and Forward Support
and Resistance levels, provides a broad and detailed decision framework for analysis and market action.
This complete and comprehensive perspective helps to offset "tunnel-vision."
As market price action approaches these various levels of projected Forward Support and Resistance, the
prudent trader will be on the alert for a possible change in price trend.

GANN ANGLES

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Chart 10:

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Chart 12:
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Gann Angles Defined

GANN ANGLES (Chart 5) are descending and/or ascending lines drawn forward in time from key High
and/or Low Pivot Points at specific angles. Gann Angles were viewed by their author as an "unusual"
version of moving averages. Gann also viewed them as rates of projected price change. Electing a more
pragmatic approach, Gann Angles are descending or ascending Forward Support and Resistance levels.

Why Do Gann Angles Work?

Why Gann Angles can be effectively applied to the market is a bit of a mystery. It appears to have
something to do with the tendency of markets to maintain a certain price/time equilibrium. This was
Gann's cherished belief. This theory also has been born out to a certain extent by empirical evidence. You
will have to satisfy yourself in this regard as you experiment with these methods.

How Are Gann Angles Constructed

Like Gann Lines, Gann Angles are also relatively simple to construct. If one is using the Advanced
Chartist, it is only necessary to call the Gann Angle function and use the Live Cursor to specify the
selected Pivot Point. The computer does the rest.
For those of you doing manual charting, it is a bit more complicated. Gann Angles are "projected
forward," or started from, a key High and/or Low Pivot Point. Gann Angles are different rates of change.
In other words, they represent faster and slower rates of price change over a constant time period. A rate
of 1 1 stands for a change of one unit of price for one unit of time. The unit of measure for price and
time is the actual size of one "box" on the charting paper in use. In other words, a Gann Angle advancing
at a rate of 1 1 advances one square of price for each square of time. The rates of change favored by
Gann for review are the following: 1 8, 1 4, 1 2, 1 1 (Gann's famous 45 degree angle), 2 1, 4
1, and 8 1. Examine the "GANN ANGLES & RATIOS" example ( Chart 5). These seven Gann Angles
are projected forward and upward from a Low Pivot Point that formed on 12/16/83 at a price of 983.30.

A Discussion of Gann Angles

The use of Gann Angles in its simplest form is very similar to that of Gann Lines: namely, as Forward
Support and Resistance. As price action approaches the level of the nearest Gann Angle, some type of
support and/or resistance can be anticipated. The possibility of a trend change is considered. If none is
encountered, then the strength and health of the current price trend is considered to be intact and
reconfirmed. But as useful as these angle lines can prove to be in this capacity, they have yet an even
more interesting and useful application. And this application highlights the power of the Principle of
Coincidence.

Isolating Angle Intersections

Gann was very fond of the 90-degree angle and its broad range of applications to market action. Gann
Angles drawn from opposite and equal Pivot Points intersecting at a 90-degree angle often signal key
market trend changes. Examine Point P1 on the pork belly chart (Chart 10). The market topped out at a
price of 7250 on 8/18/83. The Gann Line L1 was at 7260. The 90-degree intersection of Angles A1 and
A2 occurred at 7280 on 8/23/83. Rather impressive. This implies a method of examining all angle
intersections; highlighting all 90-degree angle intersections; focusing on those 90-degree Gann Angle

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intersections that occur on or near a Gann Line.

Intersections that satisfy these criteria are prime candidates for trend change points. Non-90-degree angle
intersections are also significant. However, as a general method it is good to start by sorting by "degree."
Skillful use of these techniques requires practice. At minimum, as market action approaches these
COINCIDENCES of support and resistance, be mindful of a strong possibility of trend change.

THE PRINCIPLE OF COINCIDENCE

The Principle of Coincidence employs a selection of distinct technical indicators to analyze market action
and to make trading decisions. The Principle of Coincidence stipulates that:
1. Any technical indicator(s), pattern recognition signals, trading systems and Forward Support and
Resistance, among other things, can be used;
2. That these methods be employed in an internally consistent manner;
3. That each of the methods employed be optimized and
tested; and
4. That all of the methods employed will be used in the context of a tested and weighted decision
model.
Chances are that anyone who has ever been involved in market action has employed the Principle of
Coincidence in a casual manner. However, the concept applied rigorously becomes increasingly powerful.
Consider the following fact: If one proven indicator or technique has a reliability of, for example, 60%,
then a selection of three equivalent and statistically independent indicators taken together in an integrated
model will yield a significantly greater reliability, possibly well over 80%. This arcane fact of probability
is the basis of the Principle of Coincidence.
The particular indicators, signals and methods to be chosen are a function of personal choice, taste,
equity, trade, model design features, and market factors. It is essential however, that the selected
indicators and methods are:
1. mutually independent,
2. optimized individually,
3. optimized collectively, and
4. integrated and weighted in an effective decision model.
The first two examples discussed illustrated the enhanced performance that results from the integrated
use of Gann Lines and two sets of Gann Angles. The third example adds relative strength and divergence.
As an overall and general technique, the Principle of Coincidence is essentially multiple,
cross-verification. In other words, if one support line is good, two are better and three are better yet.
A high degree of discretion must be employed in the selection of the technical indicators to be utilized if
the Principle of Coincidence is to be fruitfully employed. To effectively derive the synergy that can result
from the integration of a selection of technical indicators, one needs to choose indicators that are as

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different from one another as possible. The need for this results from the need for statistical
independence. For example, a selection of stochastics, relative strength and a moving average crossover
would be much better than the use of two different moving average crossovers and an oscillator. The first
selection will most likely exhibit greater statistical independence than the second.
When selecting techniques for the forward analysis of support and resistance, employ methods that are as
different as possible.

FOUR STEPS TO A GANN LINE AND ANGLE STUDY

Step #1 - Isolate a Price Space (Chart 6)
This, of course, is a two-step process. First, Significant High and Low Pivot Points of equal level must be
isolated. These Pivot Points determine the boundary of the Price Space. In STEP #1, a Low Pivot Point,
S1, was isolated on 12/10/84 at 1154.70, and a High Pivot Point was found on 3/1/85 at 1282.60 defining
a Price Space equal to 127.90 points.
Step #2 - Construct Gann Lines (Chart 7)
In STEP #2, eight Gann Line divisions were constructed based on the 127.90 point price space isolated in
STEP #1.
Step #3 - Add Uptrending Gann Angles From Significant Low (Chart 8)
Seven Gann Angles were projected upward and forward from the Low Pivot Point, S1, on 12/10/84 at
1154.70.
Step #4 - Add Downtrending Gann Angles From Significant High (Chart 9)
Seven Gann Angles were projected downward and forward from the High Pivot Point, S2, on 3/1/85
from 1282.60.
The execution of these four steps completes the process of constructing a Gann Line and Gann Angle
study. This process was performed for each of three example studies: bellies, pound, and Value Line.

STUDY #1: PORK BELLIES 3/1/83-10/28/83 (CHART 10)

The SIGNIFICANT HIGH, S1, was made on 4/13/83 at a price of 7590. The SIGNIFICANT LOW, S2,
was established on 7/19/83 at a price of 5125. These points defined a PRICE SPACE equal to 2465
points and lasting 69 trading days. This PRICE SPACE was divided into eight equal price zones. Gann
Lines were drawn and Gann Angles were projected forward from these defining points. This example
illustrates an important point in the use of retracement techniques. Although it is somewhat uncommon,
price action can retrace much more than 50% of prior price action and still BE a retracement. This market
retraced to Point P1, a price of 7250 on 8/18/83. Our 87.5% Gann Line was at 7260. The 90-degree
intersection of Gann Angles A1 and A2 occurred on 8/23/83 at a price of 7280. Averaging these two
prices 7260 + 7280 .5 = 7270 we see a an extremely accurate market call. This is definitely usable.

STUDY #2: BRITISH POUNDS 3/1/83-10/28/83 (CHART 11)

The SIGNIFICANT LOW, S1, was made on 3/28/83 at a price of 14480. The SIGNIFICANT HIGH was
established on 5/31/83 at a price of 16090. These two points established a PRICE SPACE of 1610 points

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lasting 46 trading days. This PRICE SPACE was divided into ten price zones, Gann Lines were drawn,
and Gann Angles were projected forward. The retracement of the PRICE SPACE ended at approximately
the 80% level at point P1 on 8/11/83 at a price of 14770. The Gann Line at L1 was equal to 14805. The
intersection of Gann Angles A1 and A2 occurred on 8/9/83 at a price of 14705. Averaging these two
prices, we arrive at a price of 14755. The actual low was made at a price of 14770 on 8/11/83.
The price swing between points P1 (8/11/83, 14770) and P2 (8/23/83, 15380) defined a minor PRICE
SPACE of 610 points lasting eight trading days. The intersection of Gann Angles A3 and A4 occurred on
9/1/83 at a price of 15335. The price of Gann Line L2 is 15290 and L3 is 15445. The average of these
two lines is 15365. The actual price high was made at 15380 on 8/23/83. Also we can see from the chart
that the market rose to strong overhead resistance at the descending Gann Angle A4. This example
further highlights the utility of multiple support and resistance methods.

STUDY #3: KC VALUE LINE 7/11/83-10/28/83 (CHART 12)

This example will integrate relative strength together with Gann Lines and Angles. The SIGNIFICANT
HIGH, S1, was made on 7/27/83 at a price of 21050 and our SIGNIFICANT LOW was established on
8/9/83 at a price of 19140, defining a PRICE SPACE of 1910 points, occurring in nine trading days.
Gann Lines and Gann Angles were constructed and relative strength with a period of nine days was
plotted. A 75% retracement ended at point P2. Gann Line L1 was at price 20340. Gann Angles A1 and
A2 intersected at a price of 20550 on 10/3/83. The actual high terminating this retracement occurred on
10/10/83 at a price of 20560. As if this weren't impressive and strong enough in its own right, a strong
bearish signal was generated by a relative strength/price divergence. RS entered the sell zone (R1) two
days prior to the high at P1 (9/13/83, 20370). However, RS failed to make a higher high (R2) as price
made a new and final high at point P2 (10/10/83, 20560). This is the classic pattern of divergence or, as
some call it, non-confirmation.

CONCLUSION
It is this type of coordinated and integrated use of different support and resistance methods together with
technical indicators that is known as the Principle of Coincidence.
Robert Pardo is President of the Pardo Corporation, an Evanston, Ill. firm responsible for the Swing
Trader and Advanced Chartist software packages. All of this charts reproduced in this article were
created by the Advanced Chartist on an Apple IIe, courtesy of the Pardo Corporation.
This article was also published in the May/June 1985 issue of Wall Street Micro Investor, Suite 302, 11
Hanover Square, New York, N.Y., 10005.

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