by Rick Ratchford
Just as there is night from day, we find two camps in relation to the teachings of William D. Gann. There are some who feel he was the greatest market trader and analyst of all time, and those who believe the contrary. You won’t find many in middle territory.
Regardless of which way you tend to lean about this man, much can be learned from his writings. Even if the rumors are true that he left out the real secrets to trading successfully, much can be gleaned from his writings.
It matters not whether W. D. Gann made millions from trading or simply providing trading courses at $5,000 a pop (compared to today, that is quite a sum for the early part of this century.) He was without a doubt a gifted student of the markets, and was recognized as such, especially by those willing to pay such large amounts for his knowledge.
“Grace is given of God, but knowledge is bought in the market.” The Bothie of Toberna Vuolich (1848) pt. 4,1.159.
In this article, we will focus on a small fraction of his talents dealing with price pressure points. Taken from page 34 and 35 of his book, “How to Make Profits Trading in Commodities,” originally completed in 1942, under the subheading “Resistance Levels.”
“If we wish to avert failure in speculation, we must deal with causes. Everything in existence is based on exact proportion and perfect relation. There is no chance in nature, because mathematical principles of the highest order are at the foundation of all things. Faraday said: “There is nothing in the Universe but mathematical points of force.”
When I was a small boy, there were times when I’d climb to the top of a backstop at the local baseball field, and just lie there staring at the stars at night. This was a perfect time to reflect about the world around us. The stars, why don’t they fall on us? How come the earth keeps coming back to the same spot each day, instead of drifting away from the sun and moon? Why are we not floating off this planet into space as the earth continues to spin? I’m sure these are the thoughts most young people have before they let life itself take over their daily thoughts and forget the wonders of the things around us.
Former astronaut John Glenn once noted “the orderliness of the whole universe about us,” and that the galaxies were “all traveling in prescribed orbits in relation to one another.”
The universe is so precisely organized that man can use the heavenly bodies as the basis for his timekeeping. Rocket expert, Wernher von Braun went a step further when he stated: “The natural laws of the universe are so precise that we have no difficulty building a spaceship to fly to the moon and can time the flight with the precision of a fraction of a second.”
Among the many precise conditions vital to life on earth is the amount of light and heat received from the sun. The earth gets only a small fraction of the sun’s energy, just the right amount required to sustain life. This is because the earth is just the right distance from the sun, an average of 93,000,000 miles. If it were much closer or farther away, life would cease to exist here. We can look deeper into these laws of nature and become even more convinced of its influence on everything pertaining to life.
The earth is tilted 23.5 degrees in relation to the sun, which gives us change of seasons. Rotates once every 24-hours, which gives us day and night. Travels at 66,600 miles an hour, just the right amount of speed to offset the gravitational pull of the sun and keep the earth at the proper distance from the sun. Our atmosphere is made up of just the right ratios of oxygen (about 21%) and other gases; some of these gases by themselves would be deadly. The most predominant gas that makes up our atmosphere is nitrogen, about 78%.
W. D. Gann understood that our actions here on earth, and how we affect the patterns of the markets, are all connected mathematically with the universe around us. Our moods can change based on just the color of the sky. Ever notice how a gray sky may bring you down, while a sunny day may raise your spirits higher?
Weather can affect the way you feel and act, and we know that weather is affected by external influences. To a large degree, weather can be forecasted. News of drought, floods, fires and other forces of nature affect how we act. Is it any wonder how all these things tend to show up in market patterns? People move the markets, and nature moves the people.
Ever read how a full moon causes a change in moods and personalities in people? Crime rises, unrest in mental wards, are all attributed by some draw from the moon. It is said that the moon causes the tide to rise and fall in the world’s water supply. And considering that we are made up mostly of water, this affect from such a distant mass shouldn’t surprise us.
W. D. Gann further said in page 34, “Every commodity makes a top or bottom on some exact mathematical point in proportion to some previous high or low level.”
If the movement of these outside bodies of mass can be timed with precision due to natural laws, then their affect on nature and man itself should be something we can plot to some degree. There are think tanks in government that are paid to anticipate how people will react to various external stimuli.
Mass psychology is not a new study, but one that goes back ages. If one were to make a career of this, one thing they would learn early on is to examine the Past and note how people reacted to various situations. It has been said, “History repeats itself.” King Solomon once said “there is nothing new under the sun.” W. D. Gann was known to quote this from time to time.
One of the powerful known factors of natural law is the numerical relationship of various things in nature. Various plants can be used to demonstrate a direct mathematical relationship with the proportions of the human body. These relationships are also found in the pyramids of Egypt and that of the common seashell. This subject alone would fill volumes.
W. D. Gann focused on the relationships of these ratios found in market prices. He suggested that there are pressure points where price is likely to temporarily find difficult to penetrate. By noting these points on our price charts, it may provide additional insight as to what the market may do next.
“By carefully watching these Resistance Levels in connection with time periods, you can make a greater success and trade with closer stop loss orders.”
As a student of the markets, and one who has discovered some unique properties of market behavior useful in analysis, I certainly have to agree with Mr. Gann’s statement above. By determining where these pressure areas are in advance, we increase our probability of success by using them to place our stop loss orders if price turns away from them. This is an advantage over using a fixed dollar amount, or some other technique that does not take into account the natural laws controlling the markets.
“12½ or 1/8: Take the extreme low and extreme high of any important move. Subtract the low from the high to get the range. Then divide the range of fluctuation by 8 to get the 1/8-points ...” This is a simple technique, which I have found quite useful. Note these pressure price areas found at each 1/8-increment of a previous important range.
“After dividing a commodity by 8 to get the 1/8-points, the next important thing to do is to divide the range of fluctuation by 3 to get the S and T-points. These S and T-points are very strong, especially if they fall near other Resistance Points of previous moves or when they are divisions of a very wide range.”
What Gann is suggesting here is to divide an important range into thirds. He suggests that these are important if they fall near prices of previous moves. This means we would not be comparing them to the move that we just divided by 8, but rather a move made earlier than we divided by 8. Therefore, you certainly don’t want to throw away prior calculations if current price is still within the range of a previous important move. If we find a close match, this is worth watching when price comes close to meeting it.
He also indicated that the S and T price level is very strong alone when calculated against a very wide range, say the yearly high and low. Therefore, you may wish to get the long term high and low, as well as the yearly high and low and calculate for both.
“Next in importance is the division of the highest price at which a commodity has ever sold and each lower top.”
In other words, he suggests that we simply take the highest high price and divide that price alone by 8. Also, do this with each lower top as well. “. . . And also divide by 3 to get the S and T-points.”
So how does this all work in the real world? Curious? Well then, grab a price chart and start experimenting. Here are some results using these gems of W. D. Gann.
Applied to the monthly and weekly charts, I found that price being close to a [-line was still too far away when viewed on a daily chart. It is my opinion that it may have limited value here for most. However, the daily chart did provide some interesting results.
Using a continuous price chart of Soybeans (values may differ on your charts as the ones I’m using are reverse adjusted, which changes previous prices while keeping the relationships of past and present tops and the bottoms), I took the low of 421.25 of July 9, 1999 to the top of 533.25 on Sept 7, 1999 and divided this by 8. I then divided the top of 533.25 by 8 and overlapped the two sets of values. This showed one price zone that nearly overlapped that being 463.50 and 466.50.
The price range of 421.25 to 533.25 provided support for 7/16, 7/29, 8/30, 9/24, 10/4, 10/27 - 11/1, 11/12. One thing I’ve noticed is that if you use 16ths rather than 8ths, there are much better results. Many reversals occurred at 50% distance between 8ths.
Certainly, this is just one tool, and by itself would be of limited use. However, this was all taken from just page 34 of a book that is over 400 pages. So there are other gems in which to use in conjunction with this. I would also like to add that, when using such price aids with time calculations, it tends to narrow down the price area in which we would focus on, making the other divisions less important while in that narrow time window.
His book does deal with Time, mostly in relation with the anniversary of a previous turn, or dividing the year into 8ths and so forth. I highly recommend reading the book, but doing so more for digging out those gems as part of your continuing education rather than as expecting it to be the last word on the subject of natural law and the markets.