What is Gann Fan Trading Strategy and How to Use It?
Have you heard of the Gann Fan trading strategy? It’s based on the Gann Fan technical indicator, a very useful tool for determining support and resistance levels. It consists of a series of lines. These lines are called Gann angles. So if you want to add one more technical tool to your arsenal and be more precise in your market price movement predictions, keep reading and find out more about Gann Fan trading strategy.
What are Gann Fans?
In the world of trading, the name of William Delbert Gann is one of the best known. This mathematician, dubbed as a trader famous for his study of cycles, has developed a technical indicator.
The Gann technical indicator refers to angles that quantify the slope of a trend relative to a main trend, called the equilibrium trend. A progression of one-course unit per unit of time characterizes this. In a line graph, the equilibrium trend, which is noted 1×1, follows a slope of 45° on average, a line of support or resistance.
Focus on what you need to know about the Gann technical indicator, which is one of the most used technical trend indicators.
Gann technical indicator
Mathematician and trader William Delbert Gann highlighted the relationship between time and the price of an asset. According to his theory, during a unit of time, the price will improve by one unit of price.
What does this mean? Geometrically in a line graph, it will follow a slope of 45°. Hence the central line or equilibrium trend was noted as 1 x 1 (45°). Obviously, this evolution is not linear, and the price will have oscillations bringing it to other intermediate lines constituting resistance lines or support lines around the central line. Thus, the course will evolve according to a geometric diagram which will be composed of straight lines forming angles or a grid.
Gann technical indicator calculation method
What the Gann fan tool offers is to divide a price movement with trend lines. We are talking more about Gann angles. In order to trace these trend lines, it is necessary to have two or three points. But to represent these angles well, it will be necessary to have a pivot point which can be a high point or point bans, considered as the starting point of a new tendency. 9 significant angles, including the 45° angle (1×1), have been identified by Gann:
- 1×8 = 82.5 degrees;
- 1×4 = 75 degrees;
- 1 x 3 = 71.25 degrees;
- 1 x 2 = 63.75 degrees;
- 1 x 1 = 45 degrees (equilibrium tendency);
- 2×1 = 26.25 degrees;
- 3 x 1 = 18.75 degrees;
- 4 x 1 = 15 degrees;
- 8 x 1 = 7.5 degrees.
The central line 1 x 1 indicates that we are in a bull market in the event that the prices are above the trend line. Or that we are in a bearish market in the event that the prices are below. In addition, this line offers major support in an uptrend, and if it is broken, it indicates a major trend reversal point.
Properly drawing Gann fans in mt4
In Meta Trader 4, you need to choose “Insert – Lines – Trendline by Angle” and draw the line at the angle of 45° from the Low Value (upward) or the High Value (downward). Then choose “Insert – Gann – Gann fan” and apply the balance line of a fan to the Gann line that you have already built.
How to use the Gann Fans strategy? Gann Fans’ strategy trading rules
In his books, WD Gann lays down 24 trading rules, the most important of which are:
1. Divide your risk capital into 10 equal parts and use them in different markets.
2. The safest buy is the one made in the second reaction when the asset has broken above a weekly high, and the biggest correction has been made.
3. Use a stop-loss order for every trade and never risk more than 10% of your capital.
4. Never allow a profit to turn into a loss.
5. Use a stop at break even when the position is between three to five points in the profit zone, depending on volatility.
6. Use a trailing stop to protect your profits and let the market decide.
7. Don’t go against the market trend and trade in liquid markets.
8. Don’t buy additional shares of a losing position to reduce an average loss.
9. Increase your winning position only if the market has fallen below the resistance line and volume is low.
Working with stop loss orders was very important to Gann. According to him, the most frequent losses were the consequence of over-trading and a lack of stop loss.
How to trade Gann fans
Never enter a market order without placing a stop loss.
A stop order is an order to sell at the market as soon as the fixed price is reached.
If you buy at 100 and place a sell order at 95 “stop”, this means that as soon as the price of 95 is traded on the market, your order becomes a sell order at the market, i.e. execution at the next quoted price.
It can be above 95, but most often, it will be slightly below. It can sometimes be very low. But in this case, the market will likely experience a sharp decline, and you will be among the first to exit.
A “good” analysis has led you to a decision to buy this or that Value or this or that commodity. As soon as you buy, or a few days later, the market drops below the buy price. What to do?
The majority keeps waiting to review the purchase price because “we do not lose until we have sold”. But what to do when the loss reaches 5, 10 or even 20 or 30%?
We risk losing patience, being afraid, and liquidating when the tension becomes unbearable.
Very often, we will have sold in a moment of collective nervousness at the lowest.
A healthy attitude is to decide in advance what maximum loss you are willing to accept.
This sum must always be the same with each new session in order to equalize the chances.
Once the decision has been made, it must be translated into reality. Therefore, we will give the broker the order to sell at such a stop price.
If your broker is not equipped to deal with this type of order, you should enter your stop order on your trade sheet and monitor the market very closely as soon as the market approaches your stop price.
Give the sell order as soon as the price is reached (discipline).
Above all, do not give in to the temptation to postpone the decision until the next day in the hope of some improvement. If it’s bad, it’s bad and could be worse tomorrow. At least you will sleep peacefully. For one case where you would have been right to wait, there will be 99 cases where the decision to leave will have been the right one.
Think before you act.
Have you wondered what will happen if the market does the opposite of your expectations? Have you made the effort of reflection and analysis, which consists in determining the long-term trend? And above all, have you studied the support that the prices should not break if the market is really bullish?
You will see that, very often, a simple chart examination will enlighten you on what to do.
You will be able to determine the breakout price. Very often, the daily price will be too far from the breakout price, and the sum to be lost in case of failure will be too great; you will then renounce the project of your own accord.
(2% to 5%?), depending on your style, allows you to calculate the size of the position you can take, quite simply, by dividing the maximum capital loss (this is Gann’s first rule) that you agree to risk by the possible theoretical unit loss.
So, once all these calculations are done, you know where you are going and what you are risking.
You can rest easy because you are now disciplined. You made your own rule, and you stuck to it.
Of course, the same reasoning applies to short sales by reversing the terms. To the extent that operational discipline is applied, short-selling transactions present the same risks as taking long positions.
Limitations of Using the Gann Fan
There are charting platforms providing Gann Fan indicators, but still, some flaws may occur. Sometimes you won’t be able to find an angle tool for setting a 45-degree line at a true 45 degree angle.
Different securities have different prices, so they could be scaled differently.
When analyzing multiple charts with a Gann fan, it may be apparent that the tool is not always useful.
The price might remain between its levels or continue to increase even if it is below the 1:1 line. These drawn lines might not make significant support or resistance levels, and the price may go against the fan levels.
