Gann methodology is like an onion that needs to be peeled. The more you study, the more you learn.
For many years, disciples of W.D. Gann have taught his price and time methodology a certain way. Let’s say XYZ stock is trading at $30, simple Gann analysis states that for this instrument to square out it needs to move 30 points in 30 days, weeks or months. There are times when it will work out like this, but they are few and far between.
For this reason, many traders have come to the conclusion that there isn’t enough meat to develop a strategy based on Gann’s time-tested methodology. Many believe what worked in the old days when Gann was alive is no longer valid. Nothing could be further from the truth.
There are many variations of this methodology, which could open the door to opportunities you may not have recognized before.
Let’s start with an example on a large timeframe. On the longer-term weekly continuation chart for soybeans, the top was $17.94 in 2012 and it stopped going down at $8.44 in November 2015 (see “Beans in the teens,” below). This is a range of $9.50 (950 points). It rallied to June 2016.
As it got close, for those who follow this kind of methodology, the rally was 920 days off the top, then 930. When it got to 940, odds increased price and time could actually square out at 950 days. You can see from the picture that that is exactly what happened. But the close on the 950th day — the price action left an upper tail. In the immediate aftermath, the price action dropped 20% in the next two months. Price action never recovered for the rest of the year and still had a chance of going lower after another trading bounce late in the year.
How can this be valuable to the average trader? Look at the hourly chart of gold (see “Timing gold,” below). It’s just a coincidence this action materialized in June 2016 as well. Gold appears to be having an ordinary pullback that materializes on any chart with one difference. Price and time square out perfectly. This is a 36-hour pullback that stops going down at $1,236 per ounce. Price and time square outs can also be called a vibrational methodology because the chart ends up vibrating at a certain number. In this case it was 36. On the hourly this was an excellent move of approximately 40 points over the next few sessions.
Let's make a deal
Here are a couple of important concepts to introduce. When things don’t go well, traders realize something is working against them, but they don’t know what that is. One of the conditions coming against traders is an unexplained variation or variable change. Unexplained variation is taken from a statistical formula called the sum of squares. A statistics textbook states unexplained variation is part of a mathematical model that allows for variation within a defined data set that takes into account the total variance present within the process. The unexplained variation uses regression analysis. Most statistical models are known to be linear math. However, the movie 21 brought to national attention the Monty Hall problem from the popular show “Let’s Make A Deal.”
For the contestants on that show, they are given the choice of three doors. Behind one door there is a car and the other two contain a goat. What is the contestant's chances of picking the winning door? In a basic statistics course, the odds would be 33%. Let’s say door number one is picked. Monty Hall, who knows where the car is, opens door number three. A goat appears. Monty Hall offers the contestant the chance to switch doors. The question is whether it is to the contestant’s advantage to switch his choice to door number two. Overall if he doesn’t switch the chances are 33%. But if he switches the odds go up to 67%. Why is that?
There is a lot of controversy about this if one reads all the threads under this topic. Even after this complete problem with all the solutions appeared in Parade Magazine in Marilyn vos Savant’s “Ask Marilyn” column in 1990, nearly 1,000 PhDs wrote in to claim vos Savant was wrong. The reason vos Savant is correct is because of the behavior of the game show host, who knows where the car is and allows the contestant to switch at key points in the game. You can follow this up on the site MarilynvosSavant.com/game-show-problem. That is what converts a linear problem to nonlinear, which is what financial markets are. It’s the value of new information.
Why is this important to the trader? Simply put, what the trader does not know will hurt him. Price and time vibrational work will allow the trader to deliberately reduce the odds of what is coming against him. To be clear, there are many more possibilities given there are 100 numbers potentially on the price handle side (using last two digits) and the time side. For instance, a price that ends in 64 can match at 64, 164 or 564 time units.