Learning from WD Gann – Trend Line Indicator

Many novice traders really like to complicate their trades.

At first, they often trade on advice from friends or co-workers, or something they heard or read about in the news.

If they survive the hit they are likely to take to their capital, they may soon discover technical analysis as a better way to get a read on price action.

However, often their initial foray into technical analysis is to look at some common chart indicator like stochastics and think they have found the Holy Grail of wealth. Unfortunately that bubble will soon burst when they realize that this and every other indicator only works during certain times and with some tweaking of the parameters.

If this sounds like you and you’re still in the game (I know, this isn’t a game. It’s a figure of speech), then there’s still hope for you. Let me introduce you to WD Gann’s “Trend Line Indicator”, which today might be called a Swing Chart.

Regardless of the market you want to trade, there will be a series of lows and highs that form trends of various degrees. These swing patterns occur on any time frame and are the building blocks for determining whether a market is in an uptrend or downtrend.

The trendline or swing chart indicator comes in several varieties. You can build a 1 bar, 2 bar or 3 bar swing (I wouldn’t bother going any further than this).

The 1 bar swing chart is extremely short term and is good for setting an entry. However, for the purpose of determining the trend of any consequence, my recommendation would be the 2-bar swing. Also, it wouldn’t hurt to get a bigger picture of the trend by also constructing a 3-bar swing chart.

Building the 2-bar swing chart is quite simple. Starting from a clearly defined low or high, you would draw your swing line (trendline indicator) either up for each new high (starting with the second highest high in a row) or down for each new low (starting with the second consecutive low). bass). To demonstrate, let’s start from a clearly defined background to draw our 2-bar swing chart line.

With a 2-bar swing chart, we need at least two higher highs to advance our line to that new high on the chart. So let’s say our starting bar (with the bottom down) is bar #1. The next bar (#2) makes a higher high but not a lower low. Our high count is only one, so we haven’t moved up our swing (trend) line yet. Now bar #3 also makes a higher high and our bar #1 low is still holding. Therefore, we can move our line to the new high of bar #3.

As each new bar makes a higher high, we can continue to move our line up to that new high. If a following bar makes a low-high and a low-low, our line does not move up and our down count is one. If price resumes the move higher and makes another high higher than our current high (that would be bar #3 in this example), our line would continue to that new high and each higher high until we actually get two lower highs. -low to change the direction of the line.

So let’s say that after we’ve been moving our swing line up to each new high, we get a lower bar instead. Let’s call this bar #5. If we have been moving the line up to each new high before this new low low, our low low count starts at one. If we get a bar (#6) that makes an even lower low than the low of bar #5 before another bar makes an even higher level than bar #4 (which was the last bar with a higher high where the line rose to), our low-low count becomes two and we would move the line down from the last highest high (bar #4) to the low of bar # 6. Now, for each bar that makes a lower low than the low our line is currently at (currently bar #6), we would move the line down to that new lower low.

The bottom line here (no pun intended) is that we need to count two higher highs to start a move up or two lower lows to start a move down. Once the count has been reached, we can continue in that direction for each bar that exceeds the price the line is currently at.

There are times when a bar makes neither a higher high nor a lower low (called an Inside Bar, or “inside bar” by WD Gann). Since they don’t do a high-high or a low-low, don’t do anything. The line holds.

There are also times when a bar makes both a higher high and a lower low (remember we are comparing each price bar to the previous bar to determine if it is a higher high or a lower low). This bar is called the Outside Bar. Dealing with these bars depends on the current direction the line has been moving. If the line has been moving towards each new higher high, then you should move the line back towards the new high of this outside bar. On the other hand, if the line has been moving down for each new low low, I would move the line down to the low of the new low low of this outside bar.

The thing to note about outside bars is that although you will be advancing your line up or down (depending on the current direction of your line drawing), you should count the opposite side of the outside bar as a count of one in the opposite side. address. Therefore, if price then goes in the opposite direction and exceeds the opposite side of the outside bar, the count becomes two in the opposite direction and the line must move from the outside (where it currently is) to the bar. who made the account. fingers.

For example, let’s say we have been moving the line down to each new lower low (so the direction is currently down). An outer bar then forms that makes both a lower low (lower than where our line is currently) and a higher high (higher than the previous bar). Since our direction leading to this outer bar was down, we move our line down to the low of the outer bar (since it is, in fact, a lower low). We also want to assign the highest high of this outer bar with the count of one. Now, if the next bar makes a higher high than our outer bar, the count reaches two and the line moves from the low of the outer bar to the new higher high.

After you have done this with your price chart, you will see the peaks that represent the swing highs and lows. You will use these spikes to determine the current market trend.

For example, an uptrend is a pattern of higher lows. As long as the market forms each swing low higher than the previous one, the uptrend will be in effect. On the other hand, the downtrend pattern is made up of swing lower tops and swing lower bottoms. So no matter where these swing tops or bottoms form in relation to the previous one, you can immediately determine the current trend.

WD Gann has stated that when the high of a 2-bar swing top has been exceeded, it is an indication of higher prices. He also stated that when the low of a 2-bar swing bottom is removed, it is an indication of lower prices.

Not only should the trader focus on trading in the direction of the trend, but those changes can also help determine where to adjust stop-loss orders. For example, if you are long because the trend is up, moving your stop-loss below each higher low would protect your position in case a low is removed (as this is an indication of price). lower to come).

Of course, these days you may be leaving a lot on the table to use these 2-bar reversals for stop-loss orders. Consider this as an initial guideline. One option I can employ is to draw a trendline below two or more lows (when long) or along two or more highs (when short) and use the slope of that trendline as a guide to set my stop. – loss.

Learning to identify swing tops and bottoms is a valuable tool for any trader who wants to get a good read on the market. It’s mentioned in several WD Gann lessons because it’s really, really important. In my work, everything revolves around swings.