GANN FOUNDATIONS

Bill McLaren 

The two charts below are prime examples of what I have been teaching for the past 20 years. It is a fact that you can understand "Gann Analysis" and not be able to make money in the markets. Unless you have a strong FOUNDATION in this business, unless you can qualify the risk by the "pattern of the trend" you will likely shoot yourself in the foot so many time you’ll lose confidence in your ability.

One should be able to trade/position successfully from the analysis a bar chart and volume. That KNOWLEDGE is the FOUNDATION to this business. Some examples of this knowledge are posted in the "McLaren Report" at www.mclarenreport.com.au.

These charts are produced with Gann Trader Software (see www.adest.com.au). The first chart is of the All Ordinaries, the red vertical lines are the 45 day cycle and the red horizontal lines are 45 point increments. The last low was 90 days (a completion cycle) by 360 points, an excellent "Gann Set-up" for a low. BUT, the trend is down, attempting to pick lows or bottoms to high momentum moves is high risk-low probability trading.

Most traders seem to use this as their primary strategy in the markets, picking tops and bottoms to high momentum movements. This type of trading has the lowest probability of success. As explained in the workshops and in the McLaren Report there are some strategies that will take most of the risk out of that type of high risk trading. One of those strategies is the "partial position" strategy. This is based upon the knowledge of counter trend movements. The normal counter trend in a fast trending market is three to four days. So whenever bottom or top picking, you must ask yourself, "If I am wrong and this rally is not a reversal in trend however a counter trend, how far will it go price and time? Under these circumstances the counter trend would fall into the three to four day category. So the safe strategy would be to exit ½ of the position on the third day up, and place a protective stop at cost on the second half.

Under these circumstances, if you are wrong about the low and the market continues to trend down, you would have made money. Yes, you can be wrong and make money if you know the probabilities and how to trade. What if it was a reversal in trend and the market kept going up? You would still have ½ the position and would be making money. You could lament having taken half off, however that would be a function of greed and not good trading.

The second chart is the S&P Cash Index. It also has the same counter trend probabilities, no more than three or four days against a trend in a fast trending market. As you can see the S&P 500 did 90 days and 180 points into the low, a great Gann "squaring of price and time." But the same strategy would need apply, exit ½ on the third day up. An understanding of counter trend movements is critical to your success. This is why we spend hours on this subject in the workshop.

Of course, if the trend is up the sell-off or first counter trend down will give a clue as to the probable strength of the trend. This again is normally three days. In many circumstances you can even assume if the low or high is not take out with in the same number of days it took to get there, the probabilities of breaking that point diminish.

One of the more difficult decisions in this business is where to place a protective stop. Most of the time this decision should be based upon an understanding of counter trends. Your purpose in this business is to find the start of a trend and to stay with that trend until it becomes at risk. An understanding of counter trends allows you to stay with a trend and also allows you to safely enter a trend.

Bill McLaren  (We'd love your  feedback on this article please click here>>)
February 1999

Probably the best known exponent of Gann in the World, Bill McLaren is entrusted with trading for a very large US Fund. Bill McLaren has been a trader for over 30 years.

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All charts in this article are created by GANN TRADER 3. More Information here.