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DOES GANN'S YEARLY DIVISION STRATEGY REALLY WORK FOR MARKET TIMING?

Market timing is the act of finding the right 'time' to buy and sell that will produce the most profits with the least amount of risk.

For over 20 years, I have spent the majority of my professional life focusing on one thing in relation to trading...Market TIMING. The reason is simple; I have a very low tolerance for risk and big draw-downs of capital. 

Market timing is the act of finding the right 'time' to buy and sell that will produce the most profits with the least amount of risk. Yet, most who write about market 'timing' tend to focus more on PRICE, not TIME. Note that TIME, not PRICE, is highlighted in the words "Market Timing". 

Most serious students of the markets have heard of W. D. Gann, with various levels of belief, disbelief and respect. Since this article is not about the person of Gann, I'll leave it at that, with the exception that I personally consider him an authority on the subject of 'market timing'.

Gann's teachings stressed one important fact; TIME is more important than PRICE. Below is one such quote from Gann:

"Time periods from high or low levels are of greater importance than price resistance levels...".

 I have found this to be logical and true. When dealing with price resistance levels, they often cause price to react when touched. However, the length of 'time' of that reaction is anywhere from momentary to a complete reversal in trend. More often than not, it is closer to momentary than it is to an outright reversal. 

For example, we have all seen price reach some price resistance level, perhaps react to it for some small period of time (minutes, a few hours), then break through it and head towards the next price level, and then the next. While knowing what the price resistance levels are is important and valuable, knowing 'when' the market is likely to make a top or bottom is even MORE IMPORTANT AND VALUABLE.

There are many special methods and techniques that will provide you with the 'time' when a top or bottom is most likely to occur. In my book (not a Gann book), "Market Forecasting Secrets", I reveal methods found to be amazing. In this article, I will be discussing one of Gann's market timing methods that deals with yearly time divisions.

Much of what Gann taught had to do with dividing time periods into equal parts. Usually, this would be dividing some whole part by 8. If dealing with the degrees of a circle (360), he would suggest dividing it by 8. When dealing with the price range from bottom to top, he would suggest dividing it by 8 to get price levels. And when it came to the calendar year (365 days), he also suggested that it be divided by 8. And that is what we are going to do in this demonstration.

Our focus is going to be on the WEEKLY time-frame chart, where each price bar represents one trading week. Since each week has 5 trading days, we will use Friday of that week for the date of that week.

If you divide the year by 8 and convert the resultant days into weeks, you end up with 8 weekly periods from 1/8 to 8/8 of the year. According to Gann, he states that all "of these periods are important to watch for a change in trend". However, he further states that the most important are 13, 17, 26, 35, 39 and 52.

Obviously we cannot expect that each and every year a significant market top or bottom is going to occur at EVERY single one of these time periods. However, if this information is to be useful to us, it has to be a lot better than picking arbitrary values out of mid-air. Also, we cannot expect an important top or bottom to always fall exactly at those intervals. A more reasonable expectation, in order to be useful for market timing, is to allow a little 'wiggle-room'. So we will allow for the weekly top or bottom to be no more than ONE weekly bar early or late. Besides, some of those weekly intervals are not exact divisions of a year as we had to 'round them' from the daily counts.

Gann stated that we are to start from "extreme low and extreme high dates". We may all have different views as what constitutes an 'extreme' low or high, so I will use dates that are hard to argue as being significant tops and bottoms in the SP500 market.

In my investigation of this method, I discovered that it worked quite well from some significant market tops and bottoms and not so well with others, even though some of these used were as 'extreme' as you can get. My conclusion from this experiment is that if you find the count series working quite well early in the series, you will really want to pay attention to the rest of the counts.

For example, the count series did not work well from the extreme top of week 10/12/2007, which was the final top before the market turned extremely bearish as the result of the economic crisis. However, the previous extreme top of week 7/20/2007, which arguably could have been 'the' official start of the crisis in the Stock Market, produced very good results.

The 10/12/2007 top formed 12-weeks following the first top of 7/20/2007. That is within 1 bar of the 13 count.

The following significant weekly swing bottom formed on week 19 rather than 17.

27-weeks resulted in the next weekly trend correction with a swing bottom (1/25/2008).

35-weeks resulted in the next major trend correction with a swing bottom (3/21/2008).

39-weeks resulted in the next minor trend correction with a minor swing bottom (4/18/2008).

52-weeks resulted in the next major trend correction with a swing bottom (7/18/2008).

 

Now, I would like to also mention that the major top of week 5/23/2008 was at the count of 44-weeks. 7/8 of the year is 45.5 weeks.

 


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Now let's use a more current example that has yet to complete one full year. We will start this count from the major bull trend top of week 4/30/2010.

14-Weeks later forms a significant weekly swing top during week 8/6/2010. If you follow my YouTube (search FDates in YouTube to find my channel) videos you would see a forecast I made for this top in advance, thus proving the value of using more than one method for forecasting market tops and bottoms.

18-weeks later formed the last major weekly bottom during week 9/3/2010. Since then, the SP500 has been extremely bullish up till the time of this writing.

This week is week ending 10/22/2010 and is the count of 25-weeks. This is one-week shy of the 26 count. So we would be on the lookout for a weekly swing to form out of either the 25, 26 or 27-week bar. This gives a nice time-frame to use with other methods in order to 'narrow' our timing down. Thus, we would obviously expect a weekly top to form no later than week ending 11/5/2010 for the 26-week interval.

So to answer the question as to whether Gann's yearly division strategy works or not for market timing, I would have to answer "yes and no". In other words, I believe it to be valuable when used in conjunction with other valuable methods.

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