Summary
This article was inspired by the mathematical approach of one of the most renowned traders of the early 20th century, William Delbert Gann, often referred to simply as W.D. Gann in the literature. The American trader and analyst was born on June 6, 1878, and passed away on June 18, 1955.
Gann became well-known for his work in technical analysis and his innovative approach to the financial markets. He developed numerous trading methods and techniques, often based on mathematical formulas, geometric concepts, and astrological principles.
His spectacular predictions of market cycles and price movements were particularly notable and brought him fame.
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Gann's Market Predictions
One of the most prominent and publicly accessible records of Gann's market predictions is an article by Richard D. Wyckoff from December 1909. The article was published in Volume 5 (Number 2) of the Ticker and Investment Digest magazine, a very influential financial publication of that time.
The publication can be viewed online for free and is available at: Ticker and Investment Digest
The article reports that the publication received a lot of attention because it had previously published forecasts by Gann, in which he predicted precise price targets in advance for various stocks and commodities.
Further in the article, an interview with Gann is included, providing insight into Gann's general methods of market analysis.
Later in the article, Wyckoff reports on the findings of William E. Gilley, who was brought in to verify Gann's trading methods.
Gilley, an Import Inspector in New York with 25 years of market experience, observed Gann's transactions in October 1909 over a period of 25 trading days. During this time, Gann executed 286 trades, both long and short, in various markets. Of these, 264 resulted in a profit, and 22 in a loss, amounting to a success rate of 92 percent!
He managed to double his invested capital ten times within this period.
Gilley reports in the article on specific trades Gann conducted during this time.
One of the most remarkable trades he cites was a transaction in wheat. Gann predicted that wheat would sell at $1.20 in September, meaning it had to reach that value before the end of the month. At 12:00 noon on September 30, the option was trading below $1.08, and it appeared his prediction might not be fulfilled.
Gann said:
"If it doesn’t reach $1.20 by the close of trading, it proves that something is wrong with my entire calculation method. I don’t care what the price is now, it must go there."
W.D. Gann
September wheat surprised everyone by reaching exactly $1.20 in the very last hour of trading, selling at that price and closing there without exceeding it.
The Interview
Part of the article in the Ticker and Investment Digest magazine also included an interview in which Gann provided insight into his trading methods.
He explained that, in his early days, he lost thousands of dollars until he realized that all successful people, whether doctors, lawyers, or scientists, spent many years on their education before earning money from their professions.
Due to his work as a broker, he had access to other traders' accounts and observed that over 90 percent of those who traded without a solid knowledge base ultimately lost money.
He noted that stocks and commodities periodically rose and fell, leading him to conclude that market movements were based on a natural law.
He then decided to dedicate the next 10 years to studying natural laws and science. He discovered that the "Law of Vibration" enabled him to determine the exact points at which stocks and commodities should rise or fall for a specific period.
He further explained that it was impossible to detail how he applied the Law of Vibration to the markets but stated that it is the fundamental law behind inventions like wireless telegraphy, wireless phones, and phonographs.
Without the existence of the Law of Vibration, these inventions would not have been possible.
By knowing the exact vibration of each individual stock, he was able to identify the precise support and resistance levels for each stock.
Gann elaborated further:
From my extensive research, studies, and applied tests, I have found that not only do various stocks vibrate, but also the forces driving these stocks are in a state of vibration. These vibrational forces can only be observed through the movements they impart on stocks and their values in the market.
A renowned scientist has stated that we have come to believe that the diversity of phenomenal nature in its various fields is closely related to numerical relationships. Numbers are not mixed in a chaotic, random manner but follow a regular periodicity. We also observe that changes and developments in many cases are wave-like.
Thus, I assert that every class of phenomena, whether in nature or the stock market, must be subject to the universal law of causality and harmony. Every effect must have a proper cause. If we are to prevent speculative failures, we must concern ourselves with causes. Everything that exists is based on exact proportions and perfect relationships. There is no chance in nature, for the foundation of all things is mathematical principles of the highest order.
Vibrations are fundamental. Nothing is exempt from this law. It is universal and thus applicable to every class of phenomena on the globe. Through the Law of Vibration, each stock in the market moves within its own unique field of influence in terms of intensity, volume, and direction. All essential attributes of its development are defined by its own rate of vibration.
Stocks are like atoms; in reality, they are centers of energy and are therefore governed mathematically. Stocks create their own field of action and their own force. The power to attract and repel explains why certain stocks lead the market at specific times and are "dead" at others. Therefore, to speculate scientifically, it is absolutely necessary to follow the law of nature.
After years of patient study, I have proven to my utmost satisfaction and shown others that vibration explains every possible phase and state of the market.
W.D. Gann
Summary
After initial losses, Gann realized that successful trading is based on solid knowledge.
As a broker, he observed that over 90 percent of traders without a strong knowledge foundation incurred losses. Observing periodic fluctuations in stocks and commodities, Gann came to believe in a natural law governing market reactions.
He then dedicated 10 years to studying natural laws and discovered the "Law of Vibration." This law enabled him to predict precise points at which stocks and commodities should rise or fall. Although he did not detail how he applied this law, he emphasized its fundamental role in inventions like wireless telegraphy and telephony.
Gann claimed that knowing the exact vibration of each stock allowed him to identify precise support and resistance levels. His research showed that not only stocks but also the forces driving them are in a state of vibration. He argued that numerical relationships and regular periodicity exist in natural phenomena and the market.
For Gann, vibrations are universal and applicable to all types of phenomena. The Law of Vibration explains that stocks, like energy centers, are mathematically governed and create their own force. To speculate successfully, he believed it was necessary to follow this natural law. After years of study, he confidently claimed that the Law of Vibration could explain every phase and state of the market.
The Law of Cause and Effect
The Law of Cause and Effect, also known as causality, is a fundamental principle in science, indicating that every event or phenomenon has a cause, which in turn leads to a specific effect. This principle is highly significant across various scientific fields.
The Law of Cause and Effect can be summarized in two statements:
- Every effect must have a cause.
- Every cause has one or more effects.
In physics, the Law of Cause and Effect is closely related to the fundamental principles of classical mechanics, particularly Newton's laws of motion. Newton's third law states that every action has an equal and opposite reaction. This principle illustrates causality in relation to forces and motion.
Gann's Foundations
When examining Gann's publications, it quickly becomes clear that the Bible had a strong influence on the development of his trading strategies.
He frequently described the Bible as the most important book of all and often quoted various Bible verses.
It’s likely that he discovered foundational principles in the Bible, which he combined with scientific knowledge and historical market data to define entry points and price targets.
One of the key Bible verses comes from the Book of Ecclesiastes, Chapter 1, Verse 9:
The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun.
King James Bible
Gann seemed to interpret this verse to mean that everything occurs in cycles, and this principle can be applied universally, even to stock prices.
In his book "The Tunnel Thru the Air," the protagonist of the story explains how he makes his predictions for the stock market or any other future event.
In essence, he searches for records of the past, in the case of a stock market, historical charts, analyzes past cycles, and projects these into the future.
He further elaborates:
The mathematical science, the only real science upon which the entire civilized world agrees, furnishes indisputable proof that history repeats itself and shows that the cycle theory or harmonic analysis is the only thing upon which we can rely to ascertain the future.
In predicting future cycles, it is most important to begin correctly, for if we have the correct beginning, we will also get the correct ending. If we know the cause of the effect, then there can be no doubt about forecasting the future event or effect.
I have always sought causes, and once I have established a cause, I can always be sure of the effect or the future event I am predicting.
Time is the great factor that proves all things. The measurement of time has its origin and is based on the Earth's rotation on its axis. One of the smallest cycles or time factors, which regularly repeats itself in things that are very active and have a high vibration, is the four-minute cycle. This is because the Earth moves one degree every four minutes. The next cycle is 24 hours, the total time required for the Earth to complete one rotation on its axis. Thus, man has measured his daily cycle. The next important cycle is a year, the time it takes for the Earth to orbit the Sun. This results in the four seasons of the year. These are the smaller cycles.
W.D. Gann
Genesis Chapter 1, Verses 14 to 18
And God said, Let there be lights in the firmament of the heaven to divide the day from the night; and let them be for signs, and for seasons, and for days, and years:
And let them be for lights in the firmament of the heaven to give light upon the earth: and it was so.
And God made two great lights; the greater light to rule the day, and the lesser light to rule the night: he made the stars also.
And God set them in the firmament of the heaven to give light upon the earth, and to rule over the day and over the night, and to divide the light from the darkness: and God saw that it was good.
King James Bible
Matthew Chapter 16, Verse 3
And in the morning, It will be foul weather to day: for the sky is red and lowering. O ye hypocrites, ye can discern the face of the sky; but can ye not discern the signs of the times?
King James Bible
Gann likely interpreted these verses to mean that the "signs of the times" could be read from the "lights in the firmament of the heavens," that is, from the stars and planets, as well as their movement and rotation.
Whether one classifies this approach as astrology or astronomy is left up to the individual. Astrology is not recognized by the scientific community as scientific, since its foundations are not based on empirical evidence.
Astronomy, on the other hand, teaches us that the gravitational force of the Moon affects the Earth, particularly the water masses in the oceans. These gravitational forces cause the tides.
We also know that the Earth orbits the Sun, taking 365.25636 days to complete one revolution. Additionally, the Earth rotates once on its axis within 24 hours. We know the exact times other planets need to orbit the Sun as well.
The list of scientifically recognized astronomical findings is very long and will not be expanded unnecessarily here.
However, it is clear that the Earth's movement controls the cycle of the seasons, the Moon is responsible for the tides, and the Earth's rotation leads to the day-night cycle.
Why shouldn't other planets also have an influence on cycles?
In addition to the cycles that, according to Gann’s assumptions, can be read from the past and projected onto the future, geometry and mathematics were also important approaches.
Movement by Measure
A trend consists of movement and correction phases. Often, in a trend, the movement phases have similar or identical intensity and duration.
The following image shows a 4-hour chart of the EURUSD pair.
To measure the movement phase, a trendline was drawn from the low to the high of the movement.
In the following image, the created trendline was moved to the next movement phase, and it can be seen that the following movement phase shows almost identical intensity and duration.
This phenomenon is found across all markets and occurs quite frequently. This technique can be used to determine possible price targets.
From this, it can be deduced that every trend has its own dynamic, achieving a certain price increase over a defined timeframe, or in the case of a downtrend, reaching a specific price decline.