WD Gann is a name that many professional traders know well. Gann’s 1942 book How to Make Profits in Commodities is a classic trading text that is full of sound advice covering topics ranging from market trends to isolated highs and lows, swing trading, volume analysis, individual psychology and money management. Gann talked about the importance of studying the difference between the opening price and the closing price over a period of time long before other analysts talked about the information that we now know is embedded in candlestick charts.
Despite his insistence on “never bucking the trend,” Gann is best known for his countertrend theory that markets move in one-eighth increments. He believed that if one took an entire market move from top to bottom and divided it into eight equal sections and then extended those levels into the future, they would have predictive value.
The levels would take turns providing both resistance and support, with the four-eighths, or 50 percent, level having particular significance in determining the trend. The three-eighths and five-eighths levels are also of particular importance in providing fundamental levels and determining the trend. When a market stalled at a one-eighth Gann level, it usually meant the market would retrace to the previous level, and when a market closed through a Gann level, it usually meant it would continue its current direction to the next level. Gann also viewed the seven-eighths level as significant resistance and the one-eighth level as significant support.
Ironically, Gann’s extension teachings on the benefits of trading with the trend, his theory of dividing market moves by 12.5, and his belief in the value of swing trading led many of his followers to focus on countertrend trading. . The drawbacks to following Gann’s tactics today stem not from his original works, but from the interpretations of those works by analysts and brokers trying to capitalize on the Gann name.
Gann was also credited with using astrology in his analysis, largely as a result of his followers’ interpretations. Gann also believed that fractal geometry worked in markets, with the distance between larger one-eighth sections breaking down into smaller one-eighth sections.
