What are Gann Fans
Gann fans are a form of technical analysis based on the ideas that the market is geometric and cyclical in nature. A Gann fan consists of a series of diagonal lines called Gann angles. These angles are superimposed over a price chart to show a security's support and resistance levels. The resulting image is supposed to help technical analysts predict price changes.
BREAKING DOWN Gann Fans
Gann fan charts are broadly available across technical analysis software systems to support technical analyst trading. Diagonal lines are drawn above and below a central 45-degree line to help detect price indicators.
Gann Fan Construction
Gann fans were developed by W. D. Gann. In his research, he found the 45-degree angle to be the ideal angle for charting based on his theories regarding the balance of time and price. The three premises Gann based his Gann fan diagrams on were: i) price, time and range integration, ii) cyclical markets, and iii) geometric market design.
Gann fans are drawn from a central 45-degree angle line that spans from a specified trend reversal level. Traders will draw a Gann fan at a reversal point to seek to detect the direction of a security’s price going forward. The central 45-degree line is drawn from a parallel line extending through the chart at the peak or trough level. The 45-degree line is known as the 1/1 line. 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. (See also: What is the Gann Fans formula and how is it calculated?)
The 1/1 line is the primary indicator however chartists have subjective choices for adding additional lines at their discretion. The 1/1 line can provide a great deal of insight on a security price’s trend. In both a bullish and a bearish trend, the 1/1 line can help to detect a reversal. In a downtrend, a price that stays below the 1/1 line is considered to be bearish. In an uptrend, a price that stays above the 1/1 line is considered to be 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. For example, a 2/1 line can be used as a second indicator for resistance if a downtrending bearish pattern breaks across its 1/1 line. Once the price breaks through the 1/1 line it is expected to see new resistance at the 2/1 line.
See also: How to Use Gann Indicators