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The methods of analysis employed by Gann can best be described as the study of pattern, price and time and how their relationships affect the market. Gann treated these as the most important aspects which influenced the future movements of any market.

The main focus of Gann theory is to understand that at various times, different aspects will influence the market. For example, a pattern may have a large influence on the market while at another time it will be price and time that will provide a dominating force on the market. Understanding these relationships is the key to trading with more success using Gann theory.

Gann theory tries to identify the best combinations of price, pattern and time to initiate successful trades. It is true that trades may be signaled by each element individually. A trader who places too much emphasis on only a single aspect may experience less success than a trader who patiently waits for the best combination of all three aspects, being price, pattern and time.

Mathematics
Gann was an outstanding mathematician, he had a love of numbers and number theory. It is often said that Gann theory revolves around natural law and mathematics.

Gann used various numbers throughout his trading analysis, these numbers had a dominant place amongst his trading methods. For example the square of numbers was a very important set of numbers for Gann, in particular the numbers 16, 25, 36, 49, 64, 121 and 144. He believed that the market moved in patterns which were sensitive to the price movement of these squares. As an application example he would have used these numbers to determine that a specific rally may find resistance 64 cents or 64 days from the bottom.

Key Numbers
Gann also liked certain key numbers. The numbers which Gann favoured had significance in other areas. For example Gann liked the number 12 which also has biblical(12 disciples) and astrological (12 houses of the zodiac) merit. Other numbers which Gann liked included 3.5, 144 and 365.

Charts
As mentioned earlier, the method of analysis employed by Gann involved price, pattern and time. Central to this is special charts called "swing-charts". The construction of a swing-chart is central to Gann analysis as it uses a correct scale between price and time which allows the analyst to properly calculate angles and thus make accurate predictions.

It is vitally important that the scale between price and time is set correctly. Price and time in a Gann-format chart needs to be in 1:1 scale, or an equal number of squares in the grid up and to the right. A line drawn diagonally from one corner of the grid to the other will produce a perfect 45 degree angle.

Gann used special charts called swing-charts to perform his analysis. The first part of the Gann chart is the construction of the price plot.

You can see from the picture above the way Gann plotted price data on a swing-chart. This price plot includes all the parameters of price (open, high, low and close) and is the traditional method which Gann plotted price action on his charts.

This forms the foundation for Gann charts. It is advisable to plot charts in multiple time frames (daily, monthly etc) as markets can display swings in various time frames, an analyst needs to be able to identify these swings by using the correct time frame chart.

Following on from the price plot, Gann constructed a swing-chart by drawing additional lines on the chart which represented the up and down movement of the security. The swing-chart lines are drawn over the top of the existing price plot and are used to remove undue noise from the securities price movement.

Construction of the Swing-Chart
The first type of swing-chart that can be constructed is the one-bar swing-chart, this chart is also known as the minor swing-chart. The technique is simple, a trend line is drawn from each individual price plot to indicate the trend of the security, this is shown in the picture below.

As shown in the picture above is a minor swing-chart. A trend line is drawn from each price bar to the next, the destination of the trend line is significant if the price makes a higher high or a lower low. If the price bar does not make a new high or low the trend line continues in the same direction terminating at the same point of the next bar.

A higher high will result in a green trend line being drawn to the high of the bar and a lower low results in a red trend line being drawn to the low of the bar. This is the basis of the swing-chart as constructed by Gann.

Swing-charts can be drawn for all time scales, what has been shown here is the simplest form of swing-chart.

Gann wrote many books during his lifetime which have been used by analysts to try and identify the exact way he performed his analysis. His books remain as the only instructional mediums which indicate his exact analysis technique. The books written by Gann include:

- 45 Years in Wall Street
- How to Make Profits in Commodities
- Truth of the Stock Tape and Wall Street Stock Selector
- The New Stock Trend Detector
- Tunnel Thru the Air
- The Magic Word

For recommendations of suitable Gann compliant charting software please read our review of Gannalyst.