The Gann fan is a technical analysis tool that is made up of trend lines with different angles of inclination.
A traditional stock trend line is a line that connects at least two points. The Gann fan does not follow traditional layout rules. The plot in this case is governed by the angles with respect to the ordinate axis. That is, with respect to the vertical axis. Its appearance is as follows:
The angles are named after their creator WD Gann. Gann was a stock market analyst who in the 20th century wrote his fundamentals for trading in his book "The basis of My Forecasting Method." This work, which consists of just over 30 pages as a manual, was published in 1935.
Gann fan angles
Gann established a baseline trend line. That line is the 45 degree slant trend line. From it the other lines are generated. The Gann fan is made up of 8 lines in addition to the 45-degree line.
Trend lines above 45 degrees
There are 4 lines above the 45 degree one. They are the trend lines with the greatest inclination and are useful for the short term, for the beginning of a trend or for very pronounced stock trends. They are called from right to left: 1 × 2, 1 × 3, 1 × 4 and 1 × 8. Sometimes instead of an x it is also named such that: 1: 2, 1: 3, 1: 4 and 1: 8.
They represent units of time by units of price. For example line 1 × 2, you want to move two units in price for each unit of time.
Trend lines below 45 degrees
In the same way, there are 4 lines below the 45 degree line. These lines are longer term lines, they are much more useful and are used for the general market trend.
It is called from right to left: 2 × 1, 3 × 1, 4 × 1 and 8 × 1. Sometimes instead of an x it is also named such that: 2: 1, 3: 1, 4: 1 and 8: 1.
They represent units of time by units of price. For example, the 2 × 1 line, you want to cycle one unit of the price for every two units of time.
Trading Gann angles
The usefulness of the techniques proposed by Gann has been highly questioned by both traders and technical analysts. However, it is a very popular and widely used tool today. Gann established his method three factors to study that are reflected in the angles:
- Price study.
- Time study.
- Analysis of chart patterns.
In this sense, Gann used these lines as support and resistance. And, after that, it was helped by complementary patterns to operate on daily, weekly and monthly charts. One of the simplest uses is to first establish the general trend of the market. For instance:
In the previous graph, it established that the trend was bullish, through various different tools at its angles. With this in mind, I would use the 45 degree lines and the ones below as support:
It would fan out from the benchmark low and enter long when price bounced off the lines representing the angles.