W. D. Gann lived from 1878 to 1955. During the latter half of his career, he devoted his time to writing about his extremely complex mathematical techniques and delivering seminars about their use. The seductive thing about these and other similarly complex techniques is that they offer the practitioner the illusion of being able to see into the future. This speaks to the essence of trading as opposed to investing. A trader looks for a repetitive patterns in behavior to start to occur and then takes a position in the market in harmony with the way the market is behaving at that time. It is not possible to have any hardand- fast idea of where the stock really will end up 10, 30, or 120 minutes from the point of taking a position. What you can do is hold positions for as long as market conditions support that position being held.

When you start to take action based on complex mathematical techniques, you are putting yourself in the hands of the person who devised the formula, and you lose control over what you are doing. You are merely acting out what is prescribed by the formula. Einstein said it best by stating that elegance is for tailors. The message being that just because some theory has some mathematical beauty, it is not necessarily correct. It is my philosophy that you cannot say that a stock will move a half dollar, a dollar, or more in any given direction at any given time. All you can do is take a position when the trend suggests that you will win and stay with that trend until your judgment tells you that the trend you bought into shows signs of weakening. Anyway, let's look at what Gann had to say.

As with most of the truly seductive schemes, there is a liberal spattering of truth and value in what Gann did. To portray him as a person without a grasp of the markets would be unfair and inaccurate. It must be said, however, that many people have suspected he made more money out of seminars and writing than actually trading his techniques. One of the key concepts that can be attributed to Gann comes from his belief in the significance of historic highs and lows. Gann correctly identified the market behavior that respects these figures as areas of future resistance and support and noted that should those levels be breached, their roles as support or resistance reverse. We have already discussed this idea in the analysis of trend. Once Gann gets away from the simpler concepts, however, the day trader has to say good-bye to him. Gann used sophisticated formulas to attempt to predict future levels of support and resistance, and he coupled that with placing fan lines on a chart, which predicted future trendlines. Although books that promote this technique can come up with examples of securities that follow Gann's predictions to the letter, I can come up with just as many that don't. In fact, I can come up with a study that shows certain stocks gained in value each day this week that I turned left rather than right at the bottom of my road on my way to get a bagel. That doesn't mean that next week the behavior will be the same. This is the crux of technical analysis.

Chart reading is based on human behavior, not mathematical formula. Chart readings give only general indications of expected movements, not exact predictions. In addition, as already stressed, you do not take positions in securities unless a common pattern has been completed and the security is behaving as you expect. The goal of trading, especially day trading, is to get yourself in the position to react to market events, not to predict them. Predicting market events is for investors.

Let's at least cover the basics of Mr. Gann's method, so you know why to avoid these techniques. The first of Gann's popular techniques is to predict future areas of support and resistance by what is known as the cardinal square method. This method calls for you to place a security's all-time low price in the center of a piece of paper. Then, starting with a position immediately to the left of this value, write in the value of the all-time low plus $2. Continue this in a clockwise fashion until you fill out the square, as the below figure shows for a stock whose all-time low value is $20.

Clearly, the question is why $2 as an increment? Since there is no easy answer to that, one just selects a value that has best fit with historic areas of congestion and uses that to predict future areas of support and resistance. Conceptually, this is not too different from the idea of using a trendline to suggest a support or resistance level. However, trendlines are simple to draw and are, therefore, quickly interpreted, which is what you want.

Gann also placed significance on using the important angles in a circle to identify the number of days it would take a future market turn to appear, such as 90, 180, 360, etc. In addition, Gann would use the price of a security, when it reached a big round number, to predict the time going forward for the security to change direction. For argument's sake, let's say a security reaches $100 in value today. Gann would say that 100 days from now, that security will reverse.

What has probably gained more widespread use these days are the Gann angles which can be drawn with most of the computer-based technical analysis trading tools currently available. I think the Gann angles have gained popularity more because they look nice and computers are adept at drawing them, not for any real predictive value they possess. The idea behind Gann's angles is that they attempt to predict the next trendline that will act as support or resistance, depending on whether you are analyzing an upward trend or downward trend. For simplicity, let's assume an upward trend, as shown in the below figure.

In this figure, the origin of the fan lines is drawn at point A, the scene of the last recent bottom in the price action. From this point, a 45-degree line is drawn, which is a diagonal line that spans one horizontal box and one vertical box on the graph. In addition, the two horizontal to one vertical box line is drawn, along with the one horizontal to two vertical line. Gann believed that the 1×2 line would contain upward movements in the trend, and the 2×1 line would be an area of support should the 1×1 line be broken.

Like most technical techniques, it is best to get confirmation of signals from more than one source. Gann supplied a second method, based on retrenchment levels, that can be used in conjunction with his fan lines.

Retrenchment is actually a concept that Dow referred to in his editorials. The most important retrenchment value is the 50 percent retrenchment line, where it is believed significant support will be found if a security's price action retrenches 50 percent of the upward move from a major low point. So, if you drew Gann's fan lines and retrenchment lines, then the price action pulled back to a point where the 1×1 and the 50 percent retrenchment lines crossed, you would expect strong support there.

This is all a bit too much to swallow. There is not enough evidence to support its validity,parti­cularly on the intraday charts used by day traders.