Gann Fan Trading Strategy — What Is It? (Backtest)
Last Updated on April 18, 2023
You may have seen the Gann Fan in your trading platform and be wondering how to use the tool for trading. Well, you are not alone; many want to know the Gann fan trading strategy.
The Gann fan trading strategy is a complex support and resistance trading strategy that uses diagonal support and resistance levels derived from important highs and lows to analyze price movements and identify breakouts. It is based on the theory that movements in price follow geometric angles. The strategy uses Gann Fan, which is a technical analysis tool that consists of several lines going from one point in several directions, with the main Gann Angle at 45 degrees.
Here, we take a look at Gann fan (and make a Gann fan trading strategy) and how to use it.
Gann Fan Basics
The Gann Fan is a technical analysis tool invented by W.D. Gann, a stock and commodity trader who lived in the early 20th century. The tool is constructed by drawing a trendline between two significant price points, and then plotting a series of diagonal lines at different angles from the trendline. These lines are called “Gann angles” and are used to identify potential support and resistance levels.
The Gann Fan is based on the idea that prices move in predictable patterns and that these patterns can be identified and used to make trading decisions. Traders often use Gann Fans in conjunction with other technical analysis tools, such as chart patterns and indicators, to make trading decisions. Some traders use Gann Fans to identify potential entry and exit points, while others use them to identify potential price targets.
What is the Gann fan?
The Gann Fan is a technical analysis drawing tool that is used to indicate time and price movements from important highs and lows. It consists of several lines (9 diagonal lines) going from one point in several directions, with the main Gann Angle being 45 degrees. The series of lines are called Gann angles, and they fan out from the selected point. The Gann fan and Gann angles were created by legendary stockbroker W.D. (William Delbert) Gann.
The 45-degree line is known as the 1:1 line. The reason is that the price will rise or fall at a 45-degree angle when the price moves up/down one unit for each unit of time. The other lines in the Gann fan are drawn above and below the 1:1 line and are associated with 2:1, 3:1, 4:1, 8:1, plus 1:8, 1:4, 1:3, and 1:2 time-to-price moves.
The Gan fan indicator is plotted over a price chart to show potential support and resistance levels, which can help technical analysts predict where the price is likely to reverse or break out.
How to Use the Gann Fan Tool
The Gann Fan tool can be used in a few different ways, depending on the trader’s specific strategy. Here are a few examples of how the Gann Fan tool can be used:
- Identifying support and resistance levels: Gann angles can be used to identify potential levels of support and resistance. When prices reach a Gann angle, they may experience a bounce or a reversal.
- Measuring price movement: Gann angles can also be used to measure the strength of a price move. A steep angle indicates a strong move, while a shallow angle indicates a weak move.
- Predicting price targets: Traders can use the Gann Fan to predict potential price targets. By measuring the angle of a move and applying it to the trendline, traders can estimate where prices are likely to go.
- Identifying trend strength: The Gann Fan can also be used to identify the strength of a trend. A trend that is steeply angled and progressing quickly is considered strong, while a trend that is shallowly angled and progressing slowly is considered weak.
Gann Fan Trading Rules
The Gann fan is a set of angled lines that are used to identify potential support and resistance levels for a security. Here are the trading rules that guide the use of this tool:
- Identify the price trend of a security.
- Look for a high or low point in the security’s price action — this point will be the starting point for drawing the Gann fan.
- Draw a line from the starting point to the current price action — this first line is called the “1×1 line” and is drawn at an angle 45 degree.
- Draw additional lines at different angles from the starting point. These lines are called “Gann angles” and are typically associated with 2:1, 3:1, 4:1, 8:1, plus 1:8, 1:4, 1:3, and 1:2 time-to-price moves.
- Look for areas where the security’s price action intersects with the Gann angles — these areas can indicate potential support and resistance levels.
- Always use the Gann fan in conjunction with other technical analysis tools, such as trend lines and moving averages, to confirm the potential support and resistance levels.
Gann Fan Indicators and Oscillators
Gann fan indicators and oscillators are technical analysis tools, developed by Robert Krausz, which are based on the work of W.D. Gann and are used to identify potential support and resistance levels for a security.
- Gann fan indicator: This is a technical indicator that is based on Gann’s work and is used to identify support and resistance levels. The Gann fan indicator is typically plotted on a price chart and can be used in conjunction with other technical analysis tools to confirm potential support and resistance levels.
- Gann oscillator: This is a technical indicator that is based on the difference between two moving averages. The Gann oscillator is typically plotted on a separate window below the price chart and can be used to identify potential buy and sell signals.
- Gann HiLo Activator: This is an indicator developed by Robert Krausz based on the work of W.D. Gann. It is plotted as two lines, one above and one below the cand, it is used to identify the potential support and resistance points.
- Gann Swing Chart: This is a visual representation of the security’s price action, plotted using a combination of horizontal lines and diagonal lines. It is used to identify potential buy and sell signals and to confirm trends.
Gann Fan Trading Strategies
Here are a few potential Gann fan trading strategies:
- Trend-following strategy: With this strategy, if the security’s price is above the 1×1 line, you look for potential buy signals at the intersections of the Gann angles and the security’s price action. If the security’s price is below the 1×1 line, you look for potential sell signals.
- Breakout strategy: Here, you look for instances where the security’s price breaks through a key level of resistance or support, as indicated by the Gann fan. The direction of the breakout determines the direction you trade.
- Reversal strategy: This strategy involves using the Gann fan to identify potential reversal points at key levels of resistance or support.
Gann Fan Risk Management
When trading with the Gann fan tool, you should have some risk management techniques in place, such as stop-loss orders, position sizing, and risk-reward ratios. It is important to set clear entry and exit points and to have a plan in place for managing losses.
You should also consider using multiple timeframes and indicators when using Gann fan to make trading decisions. It may be important to diversify across different strategies, such as trend-following or breakout strategies.
Gann Fan vs. Other Technical Analysis Tools
Gann fan is a technical analysis tool that is based on the work of W.D. Gann; it uses angled lines to identify potential support and resistance levels. It compares well with other technical analysis tools, such as Fibonacci retracements, Elliott wave analysis, and so on
The best way to use Gann Fan is in conjunction with other technical analysis tools, such as trend lines and moving averages.
Gann Fan in Forex Trading
Gann Fan can be used in forex trading to identify potential support and resistance levels on currency pairs. It can also be used to confirm trends and to identify potential reversal points in the currency pair’s price action. Traders should use Gann fan in conjunction with other technical analysis tools and indicators, and they need to have a solid trading plan and risk management strategy.
Gann Fan Backtesting Results
Backtesting a Gann fan trading strategy can give an idea of its historical performance. Backtests help to identify how the strategy would have performed in the past with historical data to know if the strategy is profitable or not and also find out the potential drawbacks.
Ensure you get backtesting results of any Gann fan strategy you create. But you should keep in mind that past performance does not guarantee future results.
Gann Fan Trading Tips and Tricks
When using Gann fan for trading, it is important to:
- Identify the price trend of a security before plotting Gann Fan.
- Use Gann Fan in conjunction with other technical analysis tools, such as trend lines and moving averages, to confirm potential support and resistance levels.
- Use multiple timeframes and indicators when making trading decisions.
- Have a solid risk management plan in place.
- Use Gann fan in conjunction with other strategies, such as trend-following or breakout strategies.
- Backtest the strategy before applying it to the live market but note that past performance does not guarantee future results.
Gann Fan Trading Examples
In the chart below, you can see two trade setups with different Gann fan strategies. The first one (on the left) is a buy setup from a trend-following strategy. The second one is a reversal strategy where the price hit the 1/1 line and reversed, giving a short-selling signal.
What is a Gann fan strategy?
The Gann fan trading strategy is a complex support and resistance trading strategy that uses diagonal support and resistance levels derived from important highs and lows to analyze price movements and identify breakouts. It is based on the theory that movements in price follow geometric angles.
The strategy uses the Gann Fan, which plots about nine angled lines from a selected swing point — a swing high or a swing low. The slopes of the lines show the relationship of the price movements to time. The movement may be relatively fast or relatively slow, depending on the size of the Gann angle. Traders use the angled lines to identify dynamic support and resistance levels, which help them to predict price changes, such as a potential reversal or breakout.
According to W.D. Gann, certain geometric patterns and angles held unique characteristics that could be used to predict actions in both price and time correctly. He believes that the lines can indicate future instances of time and price movements from important highs and lows, and thus, help identify possible price breakout levels.
Based on Gann’s technique, the price moving along or above a trendline of 1×1, which is at an angle of 45 degrees, represents a strong bull market. On the other hand, the price breaking below this trendline could signal the emergence of a bearish market.
In essence, Gann’s technique expects equal time and price intervals, which is the case the prices rise or fall at an angle of 45 degrees in relation to the time axis — one price unit rises for each time unit (which is why it is called the 1×1 line).
Gann fan vs. Fibonacci fan
While both the Gann fan and the Fibonacci fan are based on mathematical sequences, they don’t represent the same thing. The Fibonacci fan is based on the Fibonacci ratios, such as 23.6%, 38.2%, 50%, 61.8%, 78.6%, and so on.
The Gann fan, on the other hand, is based on a price-time relationship, with the 45-degree line representing a 1:1 relationship (when the price moves up/down one unit for each unit of time). All other lines in the Gann fan are drawn above and below the 1:1 line, in accordance with their own ratios, such as 2:1, 3:1, 4:1, 8:1 and 1:8, 1:4, 1:3, and 1:2 time-to-price moves.
Gann fan accuracy
As with all trading indicators, the Gann fan is not always accurate. There is no rule that keeps the price moving at any specific angle, as price movements are often random. The various levels indicated by the Gann angles may or may not signify any support or resistance level.
Nonetheless, the Gann tool offers another way of looking at price movements and analyzing the slopes of price trends. Before you think of using it in your trading, make sure you back-test it to know whether it has any merit.
Gann Fan Pros and Cons
Gann Fan Pros:
- It can help identify key levels of support and resistance
- It can be used to identify trend changes and potential reversal points
- It can be used in conjunction with other technical analysis tools
Gann Fan Cons:
- Its reliance on past price data may not accurately predict future price movements
- Subjectivity in the placement of the fan lines can lead to inconsistent results
- It can produce false signals in a choppy market
Gann fan strategy (backtest)
Unfortunately, we are not able to make a meaningful backtest of the Gann fan strategy. Any backtest requires strict trading rules and some additional settings, but because this is a somewhat subjective pattern, we are not able to jot down what is needed. It’s simply too many rules that are needed.
Because of the lack of objectivity, we believe traders are better off NOT trading on classical chart patterns. Why spend time on something that is mostly based on subjectivity and not any objective standards? How do you know a pattern is profitable if you have not backtested it?
Backtesting is no sure thing, but at least you have an idea that something has worked in the past. If it has not worked in the past, you can skip it immediately. If you know how to backtest you can develop a portfolio of trading strategies pretty fast. There is no best trading strategy because you need many to smooth returns.
(If you are new to backtesting and it looks like a daunting task, you might be interested in our backtesting course.)
We believe you can get many trading ideas to form a trading strategy by looking at what we have to offer. We have hundreds of different trading strategies on this website – all of them backtested with strict trading rules. You find all our products in our shop.