Working the angles
In the chart used for the figures, price traded below the 45-degree trendline, indicating that the current rate of change likely will increase in the future, assuming the current trend persists, so that it moves back toward the historical average rate of change.
In addition to measuring the rate of change, the Gann fan trendlines also act as support and resistance levels, and, according to W.D. Gann, when one of these trendlines is broken, the price typically will move to the next trendline. For example, looking at our Gann fan chart in “Multi-view,” if price breaks the two-by-one trendline, it likely will move down and touch the three-by-one trendline, which will become the new support trendline while the previous two-by-one support will become resistance. If the opposite occurs and the one-by-one trendline is broken, the mirror image of this condition will play out, with one-by-two becoming the new resistance level and one-by-one becoming the new support level.
The Gann fan also can be used as an indicator of relative performance (compared to the market as a whole), depending on which angle the current price is above or below. According to W.D. Gann, the 45-degree angle is the average rate of change, so variation from this historical average can be viewed as relative over-performance or under-performance. That is, if the stock price is above the one-by-one angle, then it has been outperforming the market on a relative basis; if it has been trading below the one-by-one angle, then it has been underperforming the market on a relative basis.
According to Gann, the Gann fan should be drawn from important tops and bottoms, moving from the left of the chart to the right. Also, this should be done on a one-to-one basis (that is, the area that the Gann fan covers should be square), so that the Gann fan is proportional and accurate.
Alone, the Gann fan provides reliable information, but combining it with other technical analysis tools, such as percentage retracements, also can be beneficial because the tools can be used to help confirm a signal. For example, if percentage retracements are used with the Gann fan, then horizontal lines will be drawn on the chart as well. The horizontal lines (typically the 37.5%, 50% and 62.5% retracement lines), combined with the three most common Gann fan lines (the 26.25-degree, 45-degree, and 63.75-degree), identify the center of gravity of the chart, according to Gann. If there was a 50% retracement to the 45-degree trendline, the combination of the two indicators would increase the overall significance of the support level.
Kent Kofoed is a research analyst with Gecko Software.