What Are Gann Fans?
Gann fans are a form of technical analysis based on the idea that the market is geometric and cyclical in nature. A Gann fan consists of a series of lines called Gann angles. These angles are superimposed over a price chart to show potential support and resistance levels. The resulting image is supposed to help technical analysts predict price changes.
- The Gann fan, created by early market technician W.D. Gann, consists of a series of angled lines. The trader selects the starting point and the lines extend out into the future.
- Gann believed the 45-degree angle to be most important, but the Gann fan also draws angles at 82.5, 75, 71.25, 63.75, 26.25, 18.75, 15, and 7.5 degrees.
- The Gann fan originates at a low or high point. The resulting lines show areas of potential future support and resistance.
How to Calculate Gann Fans
Gann fans don't require a formula although they do require an understanding of slope degrees.
Think of a piece of graph paper with lots of little squares or grids on it. If the price ascends the height of the square, within a one square time frame, a line can be drawn from the bottom left to the top right of the square. That line's slope degree will be 45.
If it takes two time boxes to ascend the height of one box (2:1), the angle of ascent will be flatter than 45 degrees. If the price ascends two box heights within the time frame of one box (1:2), that angle is steeper than 45 degrees. The Gann fan incorporates angles based on price-to-time moves in the following ratios: 1:8, 1:4, 1:3, 1:2, 1:1, 2:1, 3:1, 4:1, and 8:1.
W.D. Gann, the creator of Gann fans, found the 45-degree angle to be the ideal angle for charting based on his theories regarding the balance of time and price.
How Gann Fans Work
Angled lines are drawn above and below a central 45-degree line to help determine trend direction and strength. Gann fans are drawn from a central 45-degree angle line that extends out from a specified trend reversal level. Traders will draw a Gann fan at a reversal point to see support and resistance levels extended into the future.
The 45-degree line is known as the 1:1 line because the price will rise or fall at a 45-degree angle when the price moves up/down one unit for each unit of time. All other lines in the Gann fan are drawn above and below the 1:1 line. Traders can use a varying number of lines above and below the 1:1 line in a Gann fan chart. The other angles are associated with 2:1, 3:1, 4:1, 8:1 and 1:8, 1:4, 1:3, and 1:2 time-to-price moves.
The 45-degree angle line of the Gann fan should be aligned with a 45-degree angle on the chart. To find the 45-degree angle, use the degree angle tool on your charting platform.
The 1:1 line is the primary indicator. However, chartists have choices for adding additional lines at their discretion. In both an uptrend and a downtrend, the 1:1 line can help to detect a reversal. In a downtrend, a price that stays below the 1:1 line is considered bearish. In an uptrend, a price that stays above the 1:1 line is considered bullish. Thus the 1:1 line can serve as a resistance and support line.
Additional lines drawn in a Gann fan diagram are also used as resistance and support lines. Gann believed that if the price moved through one angle, it would likely head to the next angle. For example, if the price dropped below the 45-degree angle (1:1), it would drop to the 26.25-degree angle (2:1).
A price that drops below 1:1 doesn't necessarily mean the overall uptrend is over. The price may find support at 2:1 and then keep rising. That said, the fall below 1:1 could indicate at least short-term weakness if the price drops to the 2:1 line.
Gann Fan vs. Trendlines
The Gann fan is a series of lines drawn at specific angles. The 45-degree line should extend out 45-degrees from the starting point. A hand-drawn trendline connects a swing low to a swing low, or a swing high to swing high, and then extends out the right. The trendline is matched to recent price action and is not drawn at a specific angle.
A Gann angle is thus a diagonal line that moves at a uniform rate of speed. A trendline is created by connecting bottoms to bottoms, in the case of an uptrend, and tops to tops, in the case of a downtrend. The benefit of drawing a Gann angle compared to a trendline is that it moves at a uniform rate of speed. This allows the analyst to forecast where the price is going to be on a particular date in the future.
This is not to say that a Gann angle always predicts where the market will be. Rather, the analyst will know where the Gann angle will be, which will help gauge the strength and direction of the trend.
A trendline, on the other hand, does have some predictive value. However, because of the constant adjustments that usually take place, it's unreliable for making long-term forecasts.
Limitations of Using the Gann Fan
While some charting platforms may provide the Gann fan, they may not provide an angle tool in order to set the 45-degree line at a true 45-degree angle for that chart. Since different assets have different prices, they may not be scaled at 1:1 ($1 for one day, for example). They could be scaled quite differently.
Upon placing the Gann fan on multiple charts, it is evident that the Gann fan isn't always useful. The price may stay between the levels, but not reach them, or the price may continue to rise even though it is below the 1:1 line, for example. The lines may not mark important support or resistance areas, and the price may seemingly disregard the fan levels.
The lines continually spread out over time, making the distance between the lines extremely large. The distance between the lines may become so large that the indicator does not function for trading purposes since the price would need to move a considerable distance before reaching the next level/trading signal.
Gann fans should be used in conjunction with other technical indicators, price action, and other forms of analysis.