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Learn to Trade Like Some of History's Greats.

You can learn a lot from successful traders of the past. "Trade with History's Greats," a group of articles compiled by Jim Wyckoff and offered through RJO Futures, provides traders with some additional "nuggets" of wisdom from W.D. Gann, Jesse Livermore and Richard Wyckoff.

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Hello again Fast Break readers. It's been my privilege to provide you with some of my market analysis and educational features, and I am very pleased to be providing Fast Break issues on behalf of RJO Futures. In producing each Fast Break report, it's my mission to ensure that you will take away at least one valuable trading "nugget" that will enhance your own trading methodology.

In today's issue, I'm going to discuss the trading and analysis methods of the legendary William Delbert (W.D.) Gann. This is a must-read Fast Break issue for any trader of any market!

Gann is regarded as one of the pioneers of technical analysis and market behavior. He wrote several books on stock and commodity trading, and developed the well-known "Gann Angles" and "Gann Fans."

Gann, Jesse Livermore and Richard D. Wyckoff all were market mavens of the early to mid-1900s. Their work is still valid and renowned by successful traders of all markets worldwide. (If you'd like to read more about these three famous traders of the early 20th century, you can sign up to receive "Trade with History's Greats" from RJO Futures.)

Gann was born on a farm near Lufkin, Texas, in 1878. His rise to trading fame is a remarkable story. He was the oldest of many children on the farm, and did not even finish grade school. Back then, it was not uncommon for the oldest boy to quit school at a relatively young age and stay at home to help out on the farm.

However, he did not want to be a farmer; he wanted to be a businessman. He worked at a brokerage in Texas for a short period of time, while attending business school at night. He then set out for New York City in 1903.

In 1919, at the age of 41, Gann quit his job with a stock brokerage and set out on his own. He began publishing a daily market newsletter called "Supply and Demand Letter." The newsletter covered both stocks and commodities, and provided traders with his annual market forecasts.

Gann's first book, "Truth of the Stock Tape," was published in 1924. A pioneering work on chart reading, it is still regarded as one of the best books ever written on the subject.

Gann's market forecasts during the Roaring '20s were reportedly 85% accurate. The stock market in the 1920s was skyrocketing, but Gann didn't think the bull run would last. In his forecast for 1929, Gann predicted the stock market would hit new highs until early April, then experience a sharp break, and then resume with new highs until early September. He also predicted that it then would top, and that afterward would come the biggest stock market crash in history.
 
After around 20 years in New York City, Gann moved to Miami, Florida for reasons of both health and personal preference. His "How to make Profits in Commodities" book came out shortly thereafter.

Following are the general tenets of Gann's trading philosophies and methods. I won't go into great detail on his specific methods in this feature. (For more about Gann's specific trading methods, I suggest you read his books or books written about Gann.)

Gann designed several unique techniques for studying price charts. His main theory uses three parameters to project changes in price trend and market direction. They are: pattern, price and time. These parameters can exert their influence individually, with one or the other being more determinate under different conditions. But they are best applied in a balanced manner. The basic idea is that specific geometric price patterns and angles have special properties that can be used to predict future prices.

He believed the markets are geometric in design and in function, and they follow geometric laws when they're charted. All of Gann's techniques require that equal time and price intervals be used on the charts. Thus, a rise of one price unit over one period of time (1 x 1) will always equal a 45-degree angle. Gann believed that the ideal balance between time and price exists when prices rise or fall at a 45-degree angle, relative to the time axis. This is called a 1 x 1 angle.

Gann angles are drawn between a significant bottom and top (or vice versa) at various angles. Deemed the most important by Gann, the 1 x 1 trendline signifies a bull market if prices are above the trendline or a bear market if below the trendline. Gann felt a 1 x 1 trendline provides major support during an uptrend -- and when the trendline is broken it signifies a major reversal in the trend. Gann identified nine significant angles, with the 1 x 1 being the most important.

Gann said each of his predetermined angles provide support and resistance, depending on the trend. For example, the 1 x 1 angle tends to provide major support during an uptrend. A major reversal is signaled when prices fall below the 1 x 1 angled trendline. Prices should then be expected to fall to the next trendline (the 2 x 1 angle). As one angle is penetrated, expect prices to move and consolidate at the next Gann angle.

Prices have a way of repeating themselves -- or "vibrating," as Gann put it. One can think of vibration in terms of periodic oscillation, the theory of waves, or cycles (as in cycle theory).

Gann said in his own words, "Through the law of vibration, every stock and commodity in the market place moves in its own distinctive sphere of activities, as to intensity, volume and direction. All the essential qualities of its evolution are characterized in its own rate of vibration. Stocks and commodities, like atoms, are really centers of energy, and therefore, they are controlled mathematically. They create their own field of action and power -- power to attract and repel, which explains why certain stocks and commodities at times lead the market and turn dead at other times. Thus, to speculate scientifically it is absolutely necessary to follow Natural Law. Vibration is fundamental; nothing is except from its law. It is universal, therefore, applicable to every class of phenomena on the globe. Thus, I affirm, every class of phenomena whether in nature or in the markets, must be subject to the universal laws of causation, harmony and vibration."

There is no question that Gann's trading track record in the 1920s was truly remarkable. And his trading methodology certainly has merit. However, I think the most important tenets of Gann's success were stated in a paper published by Gann's grandson, edited excerpts of which are below:

"William Delbert Gann of Lufkin, Texas, started with nothing. He and his family had no money, no education, and no prospects. But less than 40-years after overhearing businessmen talk on railroad cars in Texas, W.D. Gann was known around the world.

"Hard work pays. W.D. Gann rose early, worked late, and approached his business with great energy. Virtually all his education was self-administered. This teacher, writer, and prescient forecaster had a third-grade formal education. But he never stopped reading.

"Unconventional thinking may have its merits. W.D. was intellectually curious to an extraordinary degree. He was unafraid of unorthodox ideas, whether in finance or in other areas of life. He wasn't always right -- none of us are -- but he dared to pursue a better idea.

"And finally, the only lesson for traders I will venture to offer is W.D. Gann never stopped studying the market. Even after his forecasts happened, even after he achieved international acclaim. Although he believed in cycles, he also knew that markets are always changing and that decisions must be made based on today's conditions, not yesterday's."

W.D. Gann's personal characteristics, as related by his grandson, are strikingly similar to two other famous traders of Gann's same era: Jesse Livermore and Richard Wyckoff. (As mentioned, you can read more about these three famous traders by signing up for a complimentary copy of "Trade with History's Greats" from RJO Futures.)

That's it for now. Next time we'll focus on another important issue on your road to trading success.

Learn to Trade Like Some of History's Greats.

You can learn a lot from successful traders of the past. "Trade with History's Greats," a group of articles compiled by Jim Wyckoff and offered through RJO Futures, provides traders with some additional "nuggets" of wisdom from W.D. Gann, Jesse Livermore and Richard Wyckoff.

Get Your Complimentary Copy.