Gann’s Stock Market Mathematics by James A. Maccaro This article was published in slightly different form on Traders.com. It is copyrighted, 2006, by Technical Analysis, Inc., and is used with the permission of the original publisher. William D. Gann was born in 1878 in rural Angelina County, Texas, where his father was a modestly-successful cotton farmer. Although he received a very limited formal education, attending school for only a few years, his devoutly religious mother taught him to read at a young age, using the family Bible as his textbook. Gann moved to New York at the turn-of-the century, eventually settling in Brooklyn, far from his east Texas roots, and apparently never looked back. He worked for many years as a stockbroker, but quit in 1919 to start a market research firm and to publish investment newsletters, most notably Supply and Demand. He also authored several books, which he self-published, including Wall Street Stock Selector (published in 1930) and Forty-five Years in Wall Street (published in 1949). In the late 1930’s, Gann became interested in the Florida real estate market. He invested in residential and commercial properties in a small way, and split his time between Florida and New York. Gann was a master self-promoter. He had a knack for publicity, relentlessly using the press to spread the idea that he was extremely wealthy and that his publishing activities were solely motivated by an altruistic desire to spread his wisdom. While Gann clearly was prosperous, it seems far- fetched that he was worth $50 million as he claimed. Such a sum is of course amble today, to put it mildly, but was humongous in Gann’s day, comparable to the great fortunes of that era, and completely out of keeping with Gann’s comfortable but not lavish Brooklyn lifestyle. His knack for ballyhoo has caused some to dismiss Gann as an untrustworthy source of market insights. The fact that he embraced spiritualism and astrology has not helped matters, nor has his claim that he derived many of his ideas from a study of “natural law” and of ancient Greek, Roman, Egyptian and Babylonian mathematics. He also claimed to have special religious insights. For example, in a 1927 advertisement for his self-published novel, Tunnel Thru the Air, Gann claimed to have discovered “the cycles and rules found in the Bible for forecasting the future of nations and (of) stock and commodity markets.” Such boasts seem out of place when developing an objective scientific approach to the stock market. Yet Gann had many original ideas that have inspired a legion of successful investors for several generations. Gann’s strategy was to identify the support and resistance levels of particular stocks through charting, that is, to determine the range within which a stock trades over time, and to profit by buying at the floor price and selling at the ceiling price. This approach is called swing trading and, according to Gann, “greater profits can be made in swing trading than in any other way of trading.” Swing trading is distinguishable from day trading in that the investor’s expectation is to hold a stock for up to a few days (but typically not more than four or five days). Gann was interested in swings of about three to four percent. “Do not trade or invest if motivated by hope, greed or fear,” Gann declared. Instead, rely on an analysis of stock price trends. “Do not buck the trend,” he asserted, “never buy or sell if you are not sure of the trend …” Gann added, “when in doubt, get out, and don’t get in when in doubt.” Also, Gann cautioned against placing more than ten percent of a portfolio in any one security. To determine a trend, Gann relied on price changes over time, focusing on the ratio of price changes to units of time as reflected in the angle of the trend line when it is charted. For example, a 1:1 ratio means that in one unit of time (usually a trading day, which Gann referred to as a “degree”), the stock moved up or down one point. When charted, the result is a line at a 45 degree angle, which Gann asserted is the strongest indicator of a continuing trend. As Gann believed that the significance of a trend is shown by its angle when charted, his followers refer to “Gann angles.” Other angles indicative of the strength of a trend, according to Gann, are (in order of importance) the angles created by ratios of 2:1, 1:2, 4:1, 1:4, 8:1 and 1:8. Gann believed that the angles formed over 30 day periods would ideally show the resistance and support levels. Alternatively, if the 30 day period is not conclusive, Gann recommended that 90, 120, 180, 240, 270 and 360 day periods be used. He also stated that the overall market moves in various cycles that range from ten to 100 years in length. Article is Continued After Sponsors' Messages Gann noticed that every fifth year of a decade (i.e., every year ending in an “0” or a “5”) was a bullish year for the Dow Jones industrial index, which was true from 1905 until 1995 (and was most recently true in the past year). Most investors find that it is harder to make the decision to sell a stock than it is to buy. Gann advised flexibility: “When you make a trade, your object should be to make profits and there is no way that you can determine in advance how much profit you can expect … The market itself determines the amount of your profit, and the thing that you must do is to be ready to get out and accept a profit whenever the trend changes, and not before.” Gann advised that stop loss orders should be used to prevent large losses on a particular trade and that they should also be used to preserve gains. “Never let a profit run into a loss,” he declared. The mathematical formulas and geometric principles set forth by Gann are frequently complicated and ambiguous, which have caused numerous and sometimes contradictory interpretations to be developed. The fact that he referred to trading days as “degrees” while also focusing on the mathematical degrees of an angle formed by a trend line only adds to the complication. In 1944, Gann had a heart attack, which slowed him down. In 1955, he was diagnosed with stomach cancer and returned to Brooklyn to live with his son. He died soon after, leaving a large trove of literature for future investors to mull over. HOME LINKS |
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