GANN MASTER FOREX

Trading Course
Section 1
Basic Tools
• When we study the technical analysis we risk to
consider that the theoretical elements are not so easily
applicable to the market conditions.
• There is the tendency of many traders to consider that
the theory is good but the practice does not always
respect the theories. The truth is always halfway:
• The theoretical elements occur upon the concrete
studies.
• The theoreticians have studied along the time the
evolution of the markets and determined price evolution
models which appear repeatedly.
• As I have said in a previous course material, these
models which we are studying are the ideal
presentations of such a pattern. But they may be
searched for and found quite often in the market.
• The important aspect is for us to educate our eye and
know where and what we are looking for.
• We were saying at the beginning of this course that we will
try to present as practically as possible the theoretical
elements.
• In the 4th course we learned of the double bottom double
top patterns. (reversal patterns)
• We posted in the course two examples of such patterns in
the development. In order to see if the theory is applicable
to the real market we will look at the EUR/USD and
USD/CHF pairs in order to see how the two pairs evolved
and if the patterns we presented in a theoretical way, have
functioned in the real market.
• In the analysis we posted back then, we marked the
fact that in our swing Gann chart, the EUR/USD pair
formed a double top around the 1.3993 area and is very
likely that the price continues its descending movement
after the retesting of the neckline in the area of 1.3670.
• When we studied the double top model we saw that in
order to determine the following target level we must
measure the height between the neckline and the
second top. And project this height from the penetration
point of the neckline.
• If we will check the chart we can easily see that the
price tested the neckline after which it continued its
descending move up to our first target level.
• Such an area is extremely important for a trader
because we must take managing decisions around
these areas.
• Also in course number 4 we presented the swing Gann
chart on the Swiss currency versus American dollar, in
which we presented theoretically the double bottom model.
If we will check our chart we will notice that the price
penetrated the neckline but moved slower than in the case
of the European currency, the target determined by us
through the measuring of the height between the support
and neckline was not yet touched and once we made this
analysis, the price is found at approximately 61.8% of the
price movement towards our estimated target.
• Although in the last days the Swiss currency was in a
sideways consolidation area, we must notice that on our 4
hour chart, the trend continues to be ascending offering us
higher and higher tops and higher minimum levels. In this
context we keep our option for long and the hope that our
target will be reached.
• I wanted to update these two examples because I wanted
to illustrate that we do not only study theoretical examples
without immediate application to the capital market. All we
are learning has application and these price models which
we are already accustomed to, are extremely efficient in
current trading.
• But in order to realize this efficiency we will look at
some statistic studies meant to determine the
probability degree in the reaching of the targets of
these price models.
• The head and shoulders model as I have said, is a
reversal model and is formed at the beginning or the
end of a trend.
• According to the statistics, this reversal model has
a probability of reaching the target of 74%.
• We must specify something regarding the safety of the
head and shoulders model when it is formed in the top
or in the bottom. The head and shoulders model formed
in the top has a safety of “1” (on a scale from one to
eight) while the head and shoulders model formed at
the bottom has a safety of only 4.
• The double top double bottom model is also a model of
a trend reversal with a pretty high degree of probability:
72% . The safety of this figure (generally speaking) is 2 (on
a scale from 1-8)in the case of a double top,5 in the case of
a double top, double bottom, type Adam and Adam. Also in
the case of Adam and Adam, the likely-hood of a double
bottom, or double top to reach its target is of 66%. Adam
and Eve (top) 69%; (bottom) 66% ; Eve and Adam (top)
72%; (bottom) 66%; Eve and Eve (top) 73%; (bottom)
67%
• Why are these statistics important? Because when we
will see that a double top type “Eve and Eve” is formed,
it is very likely that the target be touched.
• This will offer us confidence but it will also help us
determine the volume of our transaction. Knowing the
probabilities we will know when it’s best to risk a higher
volume or when it is well to trade a small or moderate
volume.
• We have seen that the double top, double bottom
model had a degree of 72-73% likelihood of reaching
the target. Unlike these models, the triple top, triple
bottom model has a smaller degree of probability:
(top) 68%; (bottom) 64%.
• Bump & Run reversal model has a probability of 78%
when it is formed on top and of 68% when it occurs at
the bottom.
• Let us regard the continuation models also (but some of
them also of reversal)
• Symmetrical triangle: 75%
• Ascending triangle: 69%
• Descending triangle:69%
• Wedge:51% when it is a continuation model and 68%
when it is a trend direction change model.
• Flag: 64%
• Pennant: 56%
• Rectangle:82% when there is an upwards
penetration and 60% when there is a downwards
penetration.
• Diamond: 75% when there is an upwards
penetration,69% when there is a downwards
penetration.
• We have presented these statistic elements out of the
wish of understanding clearly that not all price models
are equally significant and not all price models must
offer us the same degree of confidence. We must learn
these price models, but in equal parts we must be
extremely careful when we are managing our positions.
We said both in the course materials and the letters
which we have sent to you that the most important
aspects of our trading is the management of our
financial resources.
• We must permanently be alert in the decision making of
opening a position when the estimated price potential is
at least twice as big then the risk we are taking. William
Delbert Gann, in his trading rules underlined a capital
factor:
• We must never let a winning position become a
losing position.
• What did William Delbert Gann actually mean by this?
• Let us take a concrete example in order to understand.
• Let’s say that on the USD/CHF pair, the price breaks
the resistance area of the neckline from the double
bottom pattern. A level formed at 0.8952. Let us also
say that at this level we decided to take a long position
and the price grew up to the 0.9036 level.
• We have a profit of approximately 80 pips.
• The price is rejected from this level and enters the
correction level threatening to enter underneath the
neckline where we came in.
• What should we do?
• Maintain our long position, confident that the double
bottom model will touch the target which we estimated
at 0.9200? Or mark the profit partially and move the
stop loss level at the break even point?
• The answer is offered by William Delbert Gann. We will
never let the winning position, which already offered us
a profit of approximately 80 pips to turn into a losing
one. We will mark the profit partially, when we will have
a signal on the small charts that a correction is in
course, we will move the stop loss level to break even.
And if the price will lower beneath our entry level, the
position will close without manifesting a loss with a
small profit marked partially, but also with the possibility
of opening a new long position at a better price range.
• If we will check our 4 hour swing chart, we will notice that
the price entered the correction level around 0.9036. We
notice that from 0.9036 the price entered a correction level
of approximately 80 pips.
• If we wouldn’t have done as we have said above, we should
have taken the risk of losing 100 pips. Thus, we protected
our winnings and we opened up for the opportunity of
0.8854 to enter a new long position ( in the case in which
we are aggressive traders, or at the penetration of the
neckline, in the case in which we are conservative traders)
• Let’s say that we are conservative traders and we enter
around the area of the neckline penetration. The
question which we should ask ourselves is :
• WHERE should we have placed the stop loss level?
What is the risk that we could take for ourselves?
• 1. We know that the price potential is of approximately 245
pips around the 0.9200 area. A conservative stop loss level
may be 100 pips lower (0.8850) and the risk profit ratio
would be of 1/2,5 .
• Having a risk- profit ratio that is bigger than 2, we could
have evidently decided the entry level of this position.
• If we would have decided to enter aggressively around the
area of 0.8850 we would have had to place the stop loss
underneath the support level where the double bottom
formed, approximately 50 pips lower for a potential profit of
approximately 350 pips.
• As you can see, the risk- profit ratio is approximately
the same.
• Each trader must, in time, set what his “risk appetite” is.
• The important to realize that once we have determined
what the target is, what the stop loss level is, that we
don’t intervene to modify the rules during the game.
• What do I mean by this?
• We have done the analysis, we have determined the
stop loss level which we must take for ourselves and
once we see that the market is turning against us and
our stop loss level is on the verge of being executed, I
decided to make the stop loss level wider, in hopes that
the price will go back to the direction which we
analyzed.
• It is a fundamental mistake, maybe the most common
mistake in beginner traders.
• Nobody can be certain of what the market is going
to do next. We study technical analysis elements in
order to more easily determine the highest probabilities
of the price evolution. But we will never have a 100%
accuracy of these probabilities.
• There will always be unexpected factors within the
market. I will give you an example.
• When the World Trade Center twin tours were
attacked, I was in the market and I was trading long
USD. I also had a small profit of approximately 200
pips.
• Once the planes hit the towers, the market made a
downwards gap over my stop loss level and I was
following the platform and how the loss is growing and
growing and my attempt of stopping the position was
unsuccessful because the servers weren’t taking
anymore commands.
• I had no means of knowing what was going to happen
next. I made my analysis as I did everyday, I was
confident but I did not know what would follow. This is
certainly an extreme example, but with many teachings.
• A trader may never know exactly how well the market is
set. There may always be a war occuring, or a natural
cataclysm or a politician may be making a statement, or
a broker may at anytime enter an order in the market
by mistake and generate a market spike.
• 9-11 is probably one of the most defining moments in United
States history. Following the attack, U.S. STOCK MARKETS
closed and remained that way for the rest of the week. Once the
market re-opened, the S&P lost 11.6% in four trading days.
• The panic selling, however, was short-lived and the Dow Jones
(DJI: ^DJI), S&P (SNP: ^GSPC), Nasdaq (Nasdaq: ^IXIC), and
Russell 2000 (Chicago Options: ^RUT) recovered to pre-9-11
levels within a month. It is often omitted that the S&P had
already lost 16% before the planes hit the World TRADE Center.
• The third largest one-day point drop in DJIA history,
and largest at the time, occurred on September 17,
2001, the first day of trading after the September 11,
2001 attacks, when the Dow fell 684.81 points, or
7.1%. However, the Dow had been in a downward trend
for virtually all of 2001 prior to September 11, losing
well over 1000 points between January 2 and
September 10, and had lost 187.51 points on
September 6, followed by losing 235.4 points on
September 7.
• By the end of that week, the Dow had fallen 1,369.70
points, or 14.3%. However, the Dow began an upward
trend shortly after the attacks and quickly regained all
lost ground to close above the 10,000 level for the year.
• Because I gave you this example which I have
personally experienced on my own, and on my capital, I
would like to discuss a few aspects that are generally
disregarded by traders.
• A beginner trader will say:
• “My position is on profit, I placed a stop loss level at the
breakeven, and I am not risking anything currently. The
truth is however different.”
• The stop loss placed in the platform is not so certain as
the brokers would like to make us believe they are.
• If the price will go lower as is normal, pips by pips and will
reach our stop loss level, the platform will execute the stop
loss level.
• In a case as the one illustrated by me above, the price did
not go pips by pips, but it simply made a gap many times
above my stop loss. The platform did not see my stop loss
and did not automatically execute the closing level of my
position.
• It did not protect my profit and I was left exposed to
losing it all.
• Luckily enough, the market decided to close, and the
brokerage house with whom I transacted analyzed
position by position for each trader which it represented
and closed them at the levels set by the traders.
• In other words, the second day I noticed that the
brokerage house closed my position on the profit level
set by my positive stop loss.
• But not all brokerage houses do the same however. That is
why it is extremely important for us to be careful when we
choose our brokerage house.
• It is important for that brokerage house to be certified
by the financial organisms of market control of the
country in which it has its headquarters.
• It is important that the brokerage house to have a
contact person, by telephone or permanent chat by
which means we can maintain contact.
• It is important that the brokerage house make the
payments as quickly as possible when we mark our
profits.