Basics of Gann Analysis
Gann’s one‐eighth retracements
Gann one‐eighth retracements are constructed by dividing the range between
significant historic peaks and troughs into eight equal price intervals. It is usu-
ally used to identify potential support and resistance during a retracement. Once
price penetrates the highest previous peak or lowest trough in a retracement
range, the entire retracement chart is redrawn as the previous levels are essen-
tially invalidated (although these old levels may still be somewhat predictive
over the near term). There is no requirement for using the scale or trend rate
when drawing percentage retracement charts since retracement levels represent
static overlay indicators and are not affected by the element of time, and only
readings that reside on the price axis matter. It should be noted that though
uncommon, some modern Gann practitioners reverse engineer the approach by
identifying four initial intervals of reliable price reaction and subsequently pro-
jecting or extending the remaining four intervals in the direction of the existing
trend in the hope of forecasting potential levels of support and resistance. Figure
19.6 shows the continuous chart of wheat reacting at the one‐eighth retrace-
ments levels at Points 1 to 7. The range between points A and B is divided into
eight equal price intervals. Point X depicts prior resistance turning into support
at Points 2 and 4 at the two‐eighths level, which subsequently turned into resis-
tance at Points 5 and 6.
For all subsequent charts, the area of application, that is, the area where the
retracement levels are valid for use, lies after the time line located at Point B. For
best results, use longer‐term charts such as the weekly charts and base the retrace-
ment range on a historically significant peak and trough.
Figure 19.7 depicts the Dow Jones Industrial Average reacting to various one‐
eighth retracements levels, as seen at Points 1 to 10, with many of the supports
and resistances coinciding with oversold and overbought indications on the cycle‐
tuned stochastic oscillator.fiGure 19.6 Filtering Price Action into Four Pieces of Information (OHLC).
Courtesy of Stockcharts.com