Studying the writings of traders who were active in the first three or four decades of this century has often inspired me to do additional research. This has allowed me to develop additional tools and theories. In reality, what I present in this segment will not "pure" Gann. Instead, I will present applications and approaches which I have found to be useful and successful. Hopefully, this will provide a foundation for anyone who wants to study further on his/her own.
Many of the successful traders from the first half of this century have a reputation of being almost mystical. To many, this is especially true of W.D. Gann. Trader after trader has searched for Gann's "secret" to unlock the mysteries of the market. Many of his tools, and mine as well, are relatively simple and are not secrets. However, after delving into his writings, I have come to the conclusion that his biggest "secret" consisted of two things: HARD WORK and COMMON SENSE. Unfortunately, many would-be traders seem unwilling to do the first and lack the ability to use the latter.
Probably the easiest place to start explaining analytical tools is with a simple method to determine support and resistance levels. To locate what should be among the most important areas of support and resistance in a market, divide the move from one extreme to the other by eight.
As an example, oats posted a high in the summer of 1988 which may hold for some time to come. The monthly oats chart shows the range from the all-time low near 14 posted in 1932 to 393, the 1988 high, divided by eight. These eight points should prove to be important areas of support and resistance for years to come. One way to check this range is to examine whether the eight points have proven significant in previous action. In the oats, it is fairly clear the eighth points have been effective in previous years, which should give one a high degree of confidence these levels will be important in the future.
Gann indicated that the 1/3 and 2/3 divisions of a range (broken lines on monthly oats chart) were important as well. I have found the 1/3 and 2/3 points to be significant, but they will generally take a secondary role to the eighth points.
The divisions of price, primarily the eighth points, can be placed on not only the long-term monthly and weekly charts but on the daily charts as well. As the daily perpetual chart of December oats reveals, the long-term levels of support and resistance are significant to daily action. It was no surprise to see December oats find support at the 250 level as manifested during July and August, 1988. Since the point of the all-time range at 250 had been clearly broken, one would have expected to see this market fall to the level near 202 (which it later did).
The divisions of a range are not limited to the move from all- time low to all-time high. Any sizable range of movement can be divided by eight to determine lesser-degree levels of support and resistance. Note the upmove in 1991 in December silver from February to early June. Following the June high, the eighth points provided reasonable areas of support and resistance on the ensuing decline. The boxed area on the weekly December silver chart represents the action shown on the daily chart. The weekly chart didn't indicate this range was very significant, essentially a corrective rally; yet, the eight divisions still provided valuable reference points.
The power of this tool is obvious.The large-degree eighth points are invaluable as reference tools for support and resistance. Yet, the same principle we'll work on daily charts, smaller ranges and, yes, even intraday charts.
Credit to Glen Ring for this work
i think Gann liked the 8ths because, perhaps, they jumped off the page at him. Or perhaps he had not heard of Fibonacci (never have read Gann). Oh, I see it now, yes he did teach Fibonacci sometimes.
Quite possibly we could use Sevenths and find historical justification for that also. We must remember that there ARE many studies which show that these resistance and support theories are hardly more reliable than pure chance. We ought not to rely on them overmuch, for they are not reliable enough to risk big money on.
I was wondering. For what it takes to figure out 8ths, why not use fibonacci numbers. 8ths from 0 to 100% so close to the fibonacci numbers, why bother with 8's. We know the strong relationship of fibonacci numbers. Most charting programs have fibonacci tools but no 8ths tools. I realize the fibonacci's that correspond to the 1/8th and 7/8th usually not displayed in fibonacci but they can be interpolated if you want then.
Slap on the fibonacci lines and look how close they fall:
8ths Fibonacci
1/8 = 12.5% .................. usually not displayed
2/8 = 25%..................... 23.6%
3/8 = 37.5%................... 38.2%
4/8 = 50%..................... 50%
5/8 = 62.5%................... 61.8%
6/8 = 75%..................... 77%
7/8 = 87.5%................... usually not displayed
My point 8ths are great but why bother calculating them when they are so close to Fibonacci retracements
Glen
Where can i find charting that will show Fibonacci points on any chart?
That would be on MarketClub.
Give support at call at 410-867-2100 I am sure they can help you.
All the best,
Adam
Great ideas and patterns repeat.
Gann & Fib numbers for both retracement and extensions closely mimic each other (5/8 ~ 61.8%, 3/8 ~ 38.2% etc).
But,
There is no exact precision in the markets, only strong tendencies.
All observations after the fact have clarity and simplicity.
Projecting to the right prior to the event is not easy.
Adam's post, Divisions of 8, is based on a booklet Glen produced some 15 years ago. Glen's work is based on Gann.
From my own studies, Divisions of 8 has many variations. Clue: The high/low can be for just about any historical period of time. i.e. for gold, plot a modified Fibonacci from 1000 to 0, or somewhere in that range and see how it looks. It can also be plotted on an annual high/low, or quarterly, or monthly, etc.
I too would appreciate a bit more clarification on how the 1/8 rule works. I trade stock options only, but I assume the principle is the same for stock charts. Are we measuring both anticipated time and price levels for future support/resistance?
Yes, where DOES one find the historical high and low of a stock issue or a Forex pair or a commodity?
Very nice blog, can't believe I just found it.
Will be reading regularly, cheers.
did'nt quiet understand this about the 8s but , will re-read to try get some sence of it for me .
thank you
terrence lane
Glen, two questions:
First, how does one find the historical high and low of an object, when most of our charts only go back a few years?
Second, what do you do with a contract like gold, oil or platinum which keep going to new highs?
Adam, totally agree. I offer a free system called the 4 T's system which essentially takes traders back to the basics, of trend, trigger, trade and terminate, and the system itself is really simple. The HARD WORK and COMMON SENSE is where people keep slipping up, even with such a basic system, because there is a reluctance do the necassary preperation first. I just love simplicity.