How to Use Gann Fan for Investment Decisions

Summary:

Also called Gann Grid or Gann Angle, Gann Fan refers to the technical analysis tool that is used in the domain of financial markets to study and make forecasts regarding price movements. It helps investors to plan their trading more effectively.  

Introduction to Gann Fan

Also called Gann Grid or Gann Angle, Gann Fan refers to the technical analysis tool that is used in the domain of financial markets to study and make forecasts regarding price movements. It was developed by W.D. Gannits, a well-known analyst and trader, in the early 20th century. Gannits is credited with having developed several trading tools and strategies in his lifetime.

The Gann Fan comprises a sequence of diagonal lines drawn on a price chart. The lines are usually drawn from a significant pivot point — typically a major low or high in the asset's price. The main feature of the Gann Fan lines is the specific angles at which they are drawn. W.D. Gann considered the main angle (45°) to be the most important one. The reasoning was that price-time harmony takes place at the 1:1 (45°) level. Here, an increase of one price point takes place for one time unit (per day). Some of the other angles, which include 1:2 (63.75°) and 1:4 (75°) are used to find potential resistance and support levels. The other angles which are considered are:

• 1:3
• 1:8
• 2:1
• 3:1
• 4:1
• 8:1

Uses of Gann Fan:

Investors use the Gann Fan to find potential price targets, along with resistance and levels and trends. The angles of the lines are perceived to indicate the specific angles of movements in price and time. Usually, the 1:1 line is believed to represent a price movement at an angle of 45 degrees, indicating that there will be a strong trend. For traders, it is a tool for technical analysis in financial markets for various purposes. The following are the primary uses of the Gann Fan:

• Identification of trends: One of the main uses of the Gann Fan is to identify trends in price movements. The fan lines' angles assist investors to determine the direction and strength of a particular trend. For example, the line which is at 45 degrees (1:1) is typically perceived to represent a sustainable and strong trend.
• Resistance and support levels: Investors rely on the use of the Gann Fan to find potential resistance and support levels. When the price nears a Gann Fan line, it is believed to be a potential area of resistance or support. This usually depends on the price movement and its direction with regard to the angle of the line.
• Target price: The chart is used to estimate future price targets. Investors keep an eye out for intersections between the current or future price levels with the fan lines to find the potential price targets of an asset.
• Time analysis: Even though it is used mainly for price analysis, the Gann Fan is also applicable for time analysis. Investors use the Gann Fan angles to make predictions regarding future time cycles and important dates for possible reversals in trends and/or price movements of significance.
• Identification of patterns: Gann Fan is used by investors along with other tools of technical analysis to find patterns in the chart, which includes channels, triangles and wedges. By studying these patterns, traders are able to make informed decisions.
• Risk management: By using the information from Gann Fan, traders set up stop-loss orders in order to manage risks. By finding potential resistance and support levels, it is possible to identify positions where stop-loss orders can be set up to limit losses.

How a Gann Fan chart is drawn:  

A Gann Fan chart is drawn using the following steps:

• Identification of a pivot point significant: First, a point is identified on the price chart that is perceived to be a specific low or high price.
• Drawing of the initial line: After selecting the pivot point, a line is drawn at a particular angle, which can be 45 degrees (1:1). This line is the Gann Fan's starting point.
• Drawing of additional lines: To depict the Gann Fan, other lines are drawn at other angles, such as 2:1 and 1:2, which extend from the specific pivot point. The potential support and resistance levels are represented by these lines. 

Strategies associated with Gann Fan:

The following are some of the common concepts and strategies associated with Gann Fan:

Trend identification:

• Angle analysis: Identification of the direction and strength of trends: bullish (above the lines) or bearish (below the lines)
• Alignment of time and price: Identification of target price levels where price and time align (indication of trend continuation or reversal)

Resistance and support levels:

• Intersection of fan lines: Identification of potential resistance and support levels to get entry or exit points
• Fan retracements: Identification of potential retracement levels during a correction within a trend. Investors may enter positions at these retracement levels, hoping that the trend will resume
  

Price targets:

• Fan angle projections: Estimation of future price targets
• Swing lows and highs: Identification of potential price targets to set profit-taking levels
  

Time cycles:

• Gann square of nine: Identification of possible time cycles and turning points in the market
  

Pattern recognition:

• Chart patterns: Identification of chart patterns such as channels, triangles and wedges.
  

Risk management:

• Stop placement: Determining where to position stop-loss orders to limit potential losses

Summing up

Investors often claim that strategies based on these charts are subjective and need a detailed understanding of W.D. Gannits’ other work. However, traders who are keen on using it effectively can combine it with other risk management strategies to reduce the margin of error. A more dynamic approach to reading and interpreting this chart helps investors to plan their trading more effectively.