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What is Gann Theory And How Does it Help in Stock Trading

Introduction:

Intraday or swing trading allows you to earn high profits in short durations with limited capital. However, you need to have the required set of knowledge and expertise. Indulging in stock trading without adequate knowledge is like shooting in the dark. Therefore, as a trader, you must be diligent and make the right moves to maximize your profit.

There are several theories and strategies that you can use to predict the price movements of stocks and attain trading positions accordingly. One such theory is the Gann theory. Developed by an American investor and stock market theorist in 1935, this theory has helped investors for decades.

Continue reading to understand the basics of the Gann theory and how you can use it for stock market trading.

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What is the Gann Theory?

The inventor of the Gann Theory, William D. Gann, believed stock prices tend to change with angles. As per his observations, price changes are related to prevalent geometric shapes, and studying them can help you predict the future movements of a stock. That is why the Gann theory is also known as the ‘Gann Angle Theory’.

The Gann theory is based on ancient mathematics, astrology, and natural geometry principles. You can use the strategies based on this theory to predict market movements that are up to 90% accurate. However, the accuracy of your results depends on whether you’re applying the strategies correctly or not.

Understanding Gann theory with the help of Gann angles

William D. Gann introduced several unique techniques for predicting stock price movements. He believed every angle and pattern comprises unique characteristics, and studying all of them can help in accurate market predictions.

On a Gann’s chart, a series of angles are drawn at various price points. These angles indicate the behavior of a stock at different points in time. By connecting all price points on the Gann’s chart, you can calculate the Gann angles.

As per the Gann theory, the stock price and time are at their best when they rise or fall at a relative angle of 45 degrees. This angle can draw a trendline on your stock analysis chart. If the price of a stock is above the trendline, it indicates a bullish market; if the price is below the trendline, it is a sign of a bearish market.

The Gann theory also states the trendline acts as a major support or resistance during a trade. If the price of a stock touches the trendline while falling, it means the stock is at the support level. Similarly, if the price of a stock touches the trendline while moving upwards, it means the stock is at the resistance level. So, in case the trendline gets broken, it indicates a major reversal of the current movement.

Understanding the Gann theory with an example

Now, let’s take an example to understand the use of Gann theory in stock trading. Suppose you are in the middle of a bullish market, and the price of a stock continues to remain above the trendline. It indicates the stock will continue to move upwards at the same angle in the upcoming period.

However, if you are amid a bearish market and the stock price remains below the descending triangle, the Gann theory indicates the price of the stock will continue to decline with time. But in case the price approaches the trendline, you can expect a reversal in the trend.

The applications of the Gann theory

You can apply the Gann theory to study the following patterns:

  • Price Study

With the help of the Gann angles, you can predict a stock's price movements in the short term. You can also identify the support and resistance levels to determine your trade(s) entry and exit points.

  • Time Study

You can use Gann’s time study model to get an idea of the time taken by a stock to recover from a downtrend. You can analyze the historical data and look at the stock’s price at different points to draw an angular pattern. This pattern can help you predict the direction of the short-term movement of a stock.

  • Pattern Study

You can find patterns of stock behavior over time. Pattern study can help you determine suitable entry and exit points for intraday and swing trades.

To conclude

As a trader, you can benefit immensely from the Gann theory. It can help you predict stock price movements with high accuracy. However, knowing the correct way of applying it is equally crucial.

If you need a Demat account to start your stock trading journey, you can get it free with Motilal Oswal and enjoy several exclusive features.

 

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