Gann Theory and Support and Resistance

These levels of support and resistance are calculated by dividing the price
movement into octaves (1/8, 2/8, 3/8, 4/8, 5/8, 6/8, 7/8, 8/8) and thirds (1/3 and
2/3), thus obtaining a series of percentages that constitute the most frequent
levels of retraction.

The most important of these divisions is certainly 4/8 (50%), followed by 3/8
(37.5%) and 5/8 (62.5%), which are essentially equivalent to Fibonacci
retracements of 50%, 38.2%, and 61.8%.

A method used by Gann Thoery to calculate the probable levels of support and
resistance is based on the use of geometric angles.

Starting from a significant minimum or maximum, trendlines are drawn whose

angular coefficients are obtained by combining price and time.

The most important of these corners is certainly 45°, as it represents a perfect

balance between the movement of prices and the passage of time.
According to Gann Theory, it is not enough to analyze the pure evolution of
prices using Japanese candles. The time factor plays a crucial role in studying the
behavior of financial markets.

Gann then constructed some indicators which, together with price movements
and the passage of time.

Gann identifies not only the levels of resistance and support of some importance
but also the time areas during which prices could reverse their trend.

One of these indicators is Gann Square.

Gann Square
At the center of the Gann, Square square is the minimum price recorded on the
market, and every minimum price increase is recorded clockwise in the various
boxes.

Numbers falling inside the row and center column of this square are the most
critical levels of support and endurance, levels that must be reached after a
precise number of sessions.

Gann then used several geometric shapes such as circles, triangles, and squares
to determine potential time areas where changes in price trends could occur.

Gann considering the circular geometric shape as the harmonic shape par
excellence.

He built the so-called Gann Hexagon. Starting from a minimum or a maximum

calculates after how many days there may be a reversal.

Gann Theory Market Cycle

To better understand this cyclical/repetitive trend of financial markets, a recurring
pattern of analysis can be used, which tries to identify the current characteristics
of the various market movements.
In particular, the indications provided by the quantitative analysis can be
combined with the study of sentiment on the market.

In this way, six cyclic phases can be identified, the characteristics of which are
described below.

To describe this repetitive cycle, we hypothesize that prices, after an absolute

increase of a sure consistency, stop their growth.

The climb is very often interrupted by a reduction in upward pressure, with

buyers reducing their purchases, as they do not feel like opening up new long
positions.

In a climate of optimism, a short-term maximum is formed, with indicators that

first record excesses (overbought) and then draw negative divergences from price
developments.

At a later stage, there is a strengthening of the downward pressure, with some

buyers liquidating the long positions opened during the previous upward
momentum, while other operators open short positions because they believe that
the market can accuse.

In this way, the market is undergoing a short-term downward trend, with

(directional) indicators entering the short term.