The Brilliance of Gann in Today's Markets

By David Burton   ISSUE 403 | MARCH 2005

Born in 1878, W.D. Gann was one of the pioneers of technical analysis and one of the most successful traders of his time. His concepts and techniques still apply to trading today. Gann was foremost a financial astrologer and spent countless hours studying cycles, numbers and Gematria to predict not only movements in stock and commodity markets with great success, but also horse racing and the Cuban lottery. The Gann system is the one I prefer to use in my own trading for predicting cycles, markets and trends. It can give you a roadmap of the markets--if you take the time to unlock its secrets.

Gann had become somewhat of a legend even before his death in 1955 for his predictive abilities. He forecast the exact top and price in the cotton market on September 8, 1927, (in his book “Tunnel Thru the Air”) and it’s even said he predicted World War I in 1914 as well as the resulting panic in stocks. He was often correct about commodity market trends back in the 1920s and 1930s, and his track record of winning trades was extraordinary indeed. He had accumulated more than $50 million dollars until his death, an impressive sum for that era.

Gann believed to successfully trade the commodities markets, you must follow a defined set of rules, never to be violated. His “28 Valuable Rules” are still valid for traders today, and I read them every day. Usually when I’ve been unsuccessful trading, I’ve found it’s because I’ve broken one of the rules. I’ll outline a few of Gann’s 28 rules in this article, but I encourage you to seek out and study all of them further.

History Always Repeats

Gann wrote: “Time cycles repeat because human nature does not change.” That is really the backbone of much of his predictive market analysis. “The trend is your friend” is truly Gann philosophy at its most basic. Gann always looked at the big picture first and felt if you study the past, the future will become an open book. The big cycles, the great cycles, are where the most money has been made, so follow the main trend.

He studied the CRB Index (a commodity index), the Dow Jones Industrial Average and the bond market, which he felt were the three main indicators for boom-and-bust cycles in the economy. He pored over data back to 1259 A.D. in the wheat market and back 400 years in the cotton market. He used wheat to predict war periods—he found when wheat was booming, there was usually war.

Health, Knowledge, Money Management, Capital and Patience

Gann’s 28 rules are based on these five things. Gann believed that you are what you eat, and because he studied long and hard, he wanted to have a very alert and astute mind. He was very health-conscious and did not smoke or drink. Gann felt one should never trade when sick or stressed, because your judgment becomes impaired and you make the wrong choices. When that is the case, it’s time to take care of yourself and go on holiday to rejuvenate your body and mind.

Gann also believed you can take away all a person’s money, but not his knowledge. So, you must gain understanding of the markets before you trade. If you are starting out, it will be advantageous to paper trade for a time to see if your system works. You’ll then be a step ahead of everyone else. Study the history of stocks, commodities and interest rates, wars, elections and weather. Gann studied these all of the time. Understand the tools of the trade, and understand the main market cycle you are in.

Gann never believed in debt. He felt you should work on being debt-free before you are 45 years old, to save and prepare for retirement. You should also have at least a year’s wages in the bank in case you lose your job. This was recommended 100 years ago, and is still good advice today. Gann said you should never have more than 5 percent of your net worth in the market, and when trading futures, he recommended you have three times the initial margin per contract. For example, if the initial margin is $1,200 for one contract for soybeans, you would have available per contract a total of $3,600.

It is also important to always keep your trading capital separate from your living capital and assets, and never borrow against assets to trade. Save up money for your trading capital. As mentioned previously, trading capital should be no more than 5 percent of your net worth. If you can’t make money out of your trading account, there is no point in throwing good money after bad.

Patience is a virtue. Gann suggested that you trade three to four times per year, per commodity. For this, you will obviously need patience and discipline! If you follow Gann's 28 rules, this will also help you to be patient. Wait for major setups as more money is made in long bull or bear campaigns.

A few more Gann-based rules I live by:

• Always have a maximum 3 percent stop loss
• Divide your capital into 10 equal parts
• Only trade trending markets—always leave dead markets alone; trade markets with at least 30 years of data, so you can track long-term cycles
• Read Gann’s 28 rules at least once every day, and make sure you don’t break any. They are found on page 43 of Gann’s book, “How to Make Profits in Commodities.”

Gann's Tools

Gann's system is highly complex and a lot of his writings were veiled in secrecy. He used a combination of methods to determine future trends of the markets which included:

1.	Resistance levels made by market fluctuations
2.	Geometrical angles
3.	Time cycles and time periods (Gann’s cycles were 90, 84, 60, 30, 20, 13, 10, nine, seven, five, three and one-year)
4.	Squaring out price with time from tops and bottoms
5.	Odd and even squares and the halfway points between both odd and even squares
6.	Weekly high and low charts, angles that form
7.	Monthly high and low charts, angles that form from tops and bottoms
8.	Natural time cycles based on the 360-degree master chart
9.	Time and price using the square of 9 and 12 charts
11.	Seasonal tendencies
12.	Market patterns

For a current market example of Gann cycle analysis, the wheat market shows bearish patterns this year. I subtract these large cycles from the current year (2005). These cycles proved low years in 1645, 1915, 1945 and 1975.

360-year cycle from 1645 points to a low in 2005 (4x90)

90-year cycle from 1915 points to a low in 2005

60-year cycle from 1945 points to a low in 2005

30-year cycle from 1975 points to a low in 2005

Gann never revealed his secrets to anyone unless they did the work, including his own son. His philosophy was basically, work hard and the secrets will come to you. Gann coded his books so his followers would work hard to gain the knowledge contained in them. You can download an eight-page partial decoding of his book, “Tunnel Thru the Air” at www.schoolofgann.com. Here you’ll also find more information about Gann for further study. As Gann once said, “Knock on the door and it will be opened unto you, seek and you shall find.”

David Burton is managing director of Commodity Hedging Company and offers workshops and home study courses on Gann's methods through his Web site, www.schoolofgann.com.

Kristina Zurla Landgraf is editor of Lind eWire. She can be reached by email at editor@lind-waldock.com.

You can review a fascinating webinar on this topic given by David on February 24, 2005, sponsored by Lind-Waldock and the Chicago Board of Trade. It has been archived at Events, where you can access it free of charge.

Futures trading involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

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