Born in 1878, WD Gann was one of the pioneers of technical analysis and one of the most successful traders of his time. His concepts and techniques are still applied to trading today. Gann was first and foremost a financial astrologer (this is where he lost me) and spent countless hours studying cycles, numbers to predict movements in the stock and commodity markets with great success. Some of Gann’s insights that I use at certain times in my own trading to predict market cycles and trends. In this article, I will go over a simple Gann system to use when the market is in a tight channel. However, before we start with the technique, it is important to emphasize that Gann believed that in order to trade successfully in the commodity markets, he must follow a defined set of rules, which he must never violate. His “28 Valuable Rules” still hold true for today’s traders, and if you want to read the time-tested rules of yesteryear, go to my blog and check them out there. A graphical view of this article will also be posted there.

The technique is slightly different on shorter and longer time frames. This article will focus on the one hour time frame. I consider a tight consolidation to be about 70 pips from the top of the range to the bottom of the range. A consolidation period is longer than 7 bars, the longer the better would mean that the market is really setting up for an explosive move once it breaks out in general. Seven is a Gann Number, the time cycles and the time periods of the Gann cycles are 90, 84,60, 30, 20, 13, 10, nine, seven, five, three. (FYI) What we want to do is put a horizontal line at the higher high and a line at the lower low of the consolidation. Once the market breaks through the upper line, we can buy the market and place a stop loss at the bottom of the range. Here is Gann’s big trick: we want to see three higher closes in a row and Gann’s rule would apply. Your target would be Range multiplied by three. On each bar that closes is higher than the last four bars that closed (as the market moves up) before it, mark the lower low of those bars and move your stop loss to that low. If you get three higher closes followed by three lower closes, get out of the trade because the market is not ready to take the rally. The opposite would happen if we were to break the bottom of the range. I would sell that break looking for three times the range to the downside. You would look for three closes to the downside, if you get three closes to the upside after the breakout to the downside, get out of the trade because the downside may not continue. At each low close that is less than the previous four bars, move your stop loss down to the highest high of those bars.

This technique is simple to use and Gann used it in periods of consolidation. He would always read which way the overall trend was, so if the market broke down but the overall trend was down, he would look for the rally to fail. If he didn’t and he hit his target of three times the range, the market would be telling him that maybe there was a change in trend, or that his time frame might be pulling away a bit.

Here’s a sampling of Ganns’ truisms “Time cycles repeat because human nature doesn’t change.” “The trend is your friend” is truly the Gann philosophy in its most basic form. Gann always looked at the big picture first and felt that if you study the past, the future will become easy reading.

I know this is hard to read, if you want to see a video on the technique go to my blog and it will be much easier to understand.