How to use Gann’s Pyramid
Gann’s Pyramid is a trading system developed during the 1920s by a certain William Gann. Although his theory was never published in a scientific journal and some traders view it as something close to astrology, Gann has many followers. Given the complexity of the system, however, there are not many traders who fully understand the theory.
In essence Gann’s pyramid is a way of utilizing geometry as well as numerical relationships in an attempt to predict future market behaviour. Gann’s methods make use of historical cycles and tendencies and underlying his pyramid model is therefore the belief that the market will repeat past behaviour in the future. This, Gann believed, is because human sentiment drives the markets and humans tend to repeat the same behaviour over and over.
It has to be mentioned, however, that several authors who have attempted to apply Gann’s principles in practice have pointed out that his methods are not supposed to be used in isolation, but rather in conjunction with one another.
Fig. 10.19(a) below is a typical example of a Gann pyramid.
The red squares are considered to be the most important. If a currency or a stock should breach the 81 level, for example, the system predicts that it would go on to reach 121 (in the third quadrant formed by the blue cross and the circle).
The yellow squares are not as important as the red ones, but they are still considered to be very important. The way to use the yellow squares differs from when one interprets the red squares. If the price of a currency or stock, for example, should breach the 101 level (second quadrant), Gann’s system predicts that it would go the next corner, which is of course 111.
The blue squares are also very important. The way to interpret the chart here is that if the price, for example, breaches the level of 116 (in the lower part of the blue cross), it will go the left corner, i.e. it will proceed to 121.
Although the green squares are not very important, they are still considered to be important under certain circumstances. According to Gann they are useful to determine potential resistance and reversal points. If the price should, for example, breach the 154 level (in the fourth quadrant) it will proceed to the nearest corner, which is 157.
There are a few points to take into account when attempting to use the Gann Pyramid in trading activities. Firstly it was never really designed for day trading. Those were the days before computerised trading and the system was therefore developed for longer-term traders. It is a trend following system that could be very useful in predicting potential support and resistance levels.
What if the price of a trading asset is not an integer, but for example something such as $0.81? The way to get around this is to simply go to $81 on the Gann Pyramid, from where it becomes clear that the price is in a strong bull trend and should proceed to $1.21 (121 on the Gann Pyramid).