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Dynamic Principles of GANN
By
Chief Trade Analyst
William F Young II
Director
GoFXPro.org
Copyright 2/2007
Dynamic Principles of GANN
I have read many opinions regarding the use of the Octaves and the rules which can be applied to them. In fact, I
have spent many years working toward perfecting their use.
If I may, I would like to share how I have been able to use them to a large degree of success. I do this in an effort
that it may help someone else.
My background.. I am a professional money manager, mentor and Chief Market Analyst. I am the director of a
professional trading group that uses the Octaves/MM on every trade ranging from Metals, Options, Indexes,
Forex, Stocks, Bonds, ETF's. I and our group make no decisions without the use of the Octaves/MM. No moving
averages, no Stochastics, no MACD, no Volume Histograms, no Bollinger Bands, no Keltner Channels, no RSI,
and certainly no Elliot Waves. Only a line drawing tool and the Octaves / MM lines. We often provide our trade
analysis, posting publicly for free, in advance, and do so with a high degree of success. Students learning the
craft of the Octaves/MM lines are profitable in short time periods provided they follow the rules.
There are many sites which state the rules of the buy and sell zones. So I am not going to cover them here. The
practical side of the use of the Octaves is really quite simple in nature, as they deal with nature, and more
importantly in my opinion, reflect the psychological force of traders in mass. Meaning, they tend to reflect the
uninformed and emotional characteristics of the market traders and their reactions to the price action.
Let me give you an example; a typical move that is very profitable is the move from Level 8 to level 7 or Level +1
to Level 8. Lets set aside for the moment that Gann rules state that markets typically move 2/8 levels at time. I
just want to look at the move from Level 8 to Level 7.
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Remember that to get to Level 8, price must have previously passed level 6 (tough Resistance Level) and Level 7
(the beginning of the sell side zone) In that one single movement, what is taking place is the Longs are taking
profits and the sell side traders are moving in. What is also occurring is the smart traders (this includes big money
accumulating positions to offset credit risk and third party counter risk, funds, banks, FCMs, FDMs, Trade desks,
etc.) who traded long are also reversing. So there is a process by which protective stops, sell side entry stops and
market sell orders are being filled. The drive, however, is being created by those traders who were late to the
party, the uninformed traders who are jumping in on the late moving trade in an effort to not miss the train... or so
they thought. The Octaves, or MM lines represent the various support and resistance levels created by the price
action of the markets which are a result of the various psychological characteristics of those traders.
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Stops move the markets. Stops create liquidity. Stops create demand. How many times have you heard that
95%+ of traders lose money trading. They are either stopped out, or close the trade because they traded the
wrong direction. The activation of those stops create movement and ultimately the final momentum and direction.
The market will move until it encounters a large enough bundled group of stops to cause the market to slow its
direction and reverse, even if only for a short time period. Trading from Level 8 to Level 7 or +1 to Level 8 or Level
-1 to Level 0 or Level 0 to Level 1 represents that activation of a price point or range whereby an overwhelming
abundance of stops are located. The primary market makers, data providers, FCMs/FDMs who are responsible
for the bundling and eventual offsetting of the trades to counter parties to offset their credit risk know these stops
levels. As a provider of the clearing services and trading services (The House), it is their job to know where their
risk parameters are, and how their customers (The "Risk") are doing, ie: how their accounts are doing. As a result,
the back-office functions provide important information to "The House" to know where a majority of the traders are
bundled for stop management. Effectively, "The House" knows where the bundled or grouping of stops are
located. So if you do what everyone is doing, then you will get the same results that everyone else has (Million
Dollar Tip there).
The Octaves are challenging and take time to learn. However... They (the Octaves/MML), in my professional
opinion, represent the top trading application available. A connoisseur of the Octaves can read the markets and
be able to forecast potential market activity 2-3 trades in advance using a few simple tools.
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Learn the time component and your have a very formidable skill set. I know this to be true as I/we (our trade
group of trained members have been successively using the octaves for about 4 1/2 years).
I have read on one of the major Forex threads that the Octaves alone can't be used to be successful. I must
respectfully disagree with that statement.
If the rules of Time and Price are understood, then trading with the Octaves/MM lines becomes extremely
profitable. In any period they can be successfully used without any other tools or indicators and can be very
successful and over long periods of time. Lets look at the same example again that we mentioned previously.
Let’s trade from Level +1 to Level 8. This one scenario repeats itself over and over and over. 8-9 times out of 10
as Price will hit the Level +1 the first time, it will move back down to Level 8. Take a 1 hour period chart, mark that
time off on a 5 or 15 min chart, or even a 1 minute chart. See how many times it hits the level +1 and moves back
down to Level 8.
Question: What if, you only made the trade based on the first time Level +1 was hit in an hour's time period or
even during a session such as London or New York. Meaning, the first time up to bat at level +1, the odds of it
moving back to Level 8 is like 95%. The second time it attempts a move back from Level +1 to Level 8, the odds
are greatly reduced, particularly if it is occurring in the same hour period as the first reaction.
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So you take the first hit, but don't take the second hit (Million Dollar Tip There). Or if you take the second attempt,
reduce your lot size to represent the higher level of risk. You can always wait for the close of the bar/candle that
hits the Level +1 the second time and then enter the market below the closing price of that bar for a sell entry.
Your stop would be a few pips above the high of the previous or current bar. That increases your odds of success
should price move from that Level +1 to Level 8 again. It would also keep you from being on the wrong side of the
trade should price move higher. If price does move above the Level +1, wait until the octaves reset, then trade the
new confirmed support level to the upside.
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Let’s look at using EURJPY (EJ) for our trade example: During low volatile periods, the spread between the
different MM/Octave levels on a 5 min period chart can run as low as 3-5 pips. On a strong volatile market such
as New York or London Sessions, the spread can run as high as 30+ pips.
Normally, it runs about 20. Using a 1 hour chart, spreads can range 30 - 60 and a 4 hour period chart spreads can
range 80 to 120. The higher the volatility, the larger the spread. This is a great indication of volatility (Million Dollar
Tip There).
Again, Lets look at EJ 1 hour period chart. The spread at the time you do your analysis is 40 pips. The situation of
the price action is that the market has been falling for the last several hours and you missed the move down. Here
is what you do.. STOP. Don't trade. THINK. Where is the market in relation to the Buy / Sell zones or in otherwords the accumulation / distribution zones? According to the Rules for levels -1, 0, 1 you only buy. You know
these rules, they are everywhere on the web. To continue, the market has moved down from Level 4 and is
selling down hard. Your emotions see this and attempt to get you to sell. After all, you don't want to miss this
move down. You just missed a big drop and you don't want to miss any more of it.
It’s a way to make great money, the trend is down, go for it. WHOA.. STOP. If your reading this, and the market
has moved down to level 2 and is about to break going down to Level 1 and Level 0; DO Not Be A Seller. When
you are a bit more advanced, you can trade the break of Level 2 to Level 1. But until then, don't do it. The worse
thing that will happen is that the market will move lower and you miss the trade. But there is only a 5% chance of
success here. What your emotions are expecting, ie: the lower price action and what the markets actually do are
two different things. Yes occasionally it will work.
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If during this sell down this is the first time down to Level 1 or 0 or -1, particularly -1 then expect the bounce to
occur from the -1 level. If you only made this one trade 1 time a session x 1 session per day x 3 days per week at
+40 pips per trade (remember we are on a EURJPY 1 hour chart) x 2 standard lots x 50 weeks = about $120,000
usd per year not including potential slippage, commissions etc.
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Here is what we know: This occurs on all time periods, all pairs multiple times per session per day providing a
multitude of opportunities. As a general rule, when EJ is moving, so is EURUSD, USDJPY, USDCHF, GBPJPY,
AUDJPY, etc.. So multiply the potential opportunities x 4+ using the previous move.
Learning the rules is the key to the Octaves / MM Levels.
I also want to address this issue about the resetting of the octaves. I see many different opinions and comments
on the resetting from dislikes to not understanding them. It’s because you don't understand what is going on. Here
is how they work. I mentioned earlier that when using the octaves/MML lines, you must be familiar with where the
market is in relation to higher time periods at all times. This means you need to know where price is in relation to
the weekly, daily, 4 hour, 1 hour, etc. Draw a line on your chart for those various times periods. This will keep you
on track and give you a reference to both price and time. Now, the following information that I am about to
describe to you is extremely important. What occurs on the higher time periods also occurs on smaller time
periods. Look at your hand. It is comprised of cells. They are bonded together and form your hand. They control
the shape, size, elasticity, senses, touch, etc. They contain the characteristics that make your hand. As a whole,
they work together to form the larger picture, but simultaneously, have their own individual operations taking
place. Price does the same thing. Look at a 1 day chart and you see a picture. Now look at a 1 minute chart, you
will see a similar picture. If I removed the pricing off the screen and removed the time period off the chart, you
would be hard pressed to identify the period or even the trading instrument. But what you would see is similar
price action movement. You will see various support / resistance levels, various range levels being broken, long
runs up, long runs down. In-fact, you may even be hard pressed to determine the "trend". Oh and while I am on
the subject of "Trend" or "Trend Line", I prefer to use the word "Trade" in place of the word "Trend". Reason is,
that "Trend" in my 15 year professional opinion is just that... an opinion.
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There are many occasions where you can look at a daily period chart, and price will be up for a few days, down
for a few days, then back up, then back down, etc. So what is the "Trend"? I can go down to a 4 hour chart and
see significant number of upward bars which would make many traders say that the trend is up. However, when
reverting back to the Daily period chart, all which is occurring is a retracement within a longer down period. Yet, if
I look at a weekly period chart, that time period shows a larger upward move for the past 18 weeks.
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So "Trend", in my opinion, is subjective at best. Yes, I know I am bucking the industry here. Let’s consider for a
moment substituting the word "Trade" for "Trend". If you look at a chart, as previously mentioned, to denote the
price action of a specific period, we typically draw a line along a select group of lows or highs of a grouping of
bars / candles to represent the continuous price movement that has been similar enough in price action to allow
the drawing of a line which can provide for the highs or lows of a majority of the bars/candles to be contained
above or below that line. But notice this. What happens when price crosses that line we just drew? Price changes
direction and then allows for the drawing of a new line, in a different direction (generally opposite) because the
direction of the momentum has changed. It has reversed. As a result of the crossing of that line, we are aware of
potential action that may need to occur or not. Example: You are short the market, EJ, price has been dropping.
Price stops falling and bounces as it typically does. If you follow that price action, a great majority of the time you
are able to draw a line along the tops of the downward candles/bars. In doing so, you will see that eventually price
crosses that line. When it does, its like Magic. Price reverses. Whoa.. it what? Price is now bouncing? But I am
short? I am losing money. You are losing money. You need to cover. A call to action. The "Trade Line".
If you are looking to enter a market, the crossing of the "Trade Line" is a great signal or prompt for a call to action.
There are rules for its use and for trade entry, but I don't want to get into that here. So when we trade, we use
"events" to create a call to action. This does not necessarily mean we make the trade. We still have to do our
analysis, but this is a great trigger. Using this technique, we can trade in direction of the higher period "Trade
Lines" which can act as Stop levels, Support and Resistance levels. The resetting of the Octaves is simply a
fulfillment of price action of a higher time period or higher fractal period that must be completed.
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Example: Let’s say you are looking at a 4 hour chart. Price is dropping and is near Level -1. Let’s say that the
price level of -1 is 111.72 and Level 0 is 112.50. Market is currently trading at 112.10. You know what is coming.
You can feel it, and now.. after reading this article, you can see it. Price is expected to bounce from Level -1 to
Level 0 on that 4 hour chart which you just used for your analysis.
Now for the trade: You switch to a 15 min chart, or even a 5 min chart. You enter a long position at the price point
you decided on. Price moves off the support level on the 5 min chart. The price moves up and down, vibrating up
and down on all the various levels of the 5 min chart. Suddenly you see price move up to Level +1 on 5 min.. It
backs down to Level 8 as expected, maybe even back down to Level 7. Somehow price finds support and prices
rise again. We are back at +1, and rising.. wait a minute.. the rules are that +1 is a sell level. But price is still
lifting.. now at +2. Wow, price is still rising. Oh wow, the octaves just reset.. Oh NO! You are short on the Level
+1, 5 min chart as per the rules. Now you have to cover the trade at a loss. Geez.. I hate those octaves and the
resetting.
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Fast forward.. you forget something, The bigger picture. Remember the 4 hour analysis? The probability of price
moving from 111.72 to 112.50 is very high. Remember the following: "Within Price Space and Price Time the
actions of the bigger picture also occur on the smaller picture". In other words, the fact that price "must" (The word
'must' is used cautiously here as it implies a high degree of confidence in the natural laws of vibration of price
action) move from 111.72 to 112.50 impacts the actions of the smaller time periods. In other words, for price to do
what is expected of it in the larger time period, the octaves will likely reset multiple times on smaller time periods.
If you got caught in a reset, it simply means that the markets are trying to fulfill higher level requirements and that
you were not aware of this action to be done. So before you trade, know where the market is in relation to current
and higher time periods. If the market is in the middle of an octave range, either wait for a pull back on smaller
time periods, or trade a TL pullback in the direction of the higher Octave level time period to be completed.
The above is just one of the many practical applications of trading the octaves that we use.
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As I am writing this, during the Asian session, (Feb of 2007), EJ and E$ both just bounced off Level 1 for a 20+
pip move. EJ, 5 min chart, from 112.21 to 112.69 for a 48 pip move, and E$ from 1.3735 to 1.3790 for a 55 pip
move. Just taking 20, not including trade management techniques like 1/2 off, trail the balance using octaves on
smaller time period for stops, and other techniques, but just taking 20, that was a 40 pip combined move, and if
trading only 2 standard lots, was a $800.00 move in less than 2 hours. Interested in learning to do this?
I am sure some will not understand, others will criticize and even knock this down. For those who really want to
get it and understand, this will be a blessing to them. I am not going to give away all our trade secrets or the
whole picture of what we teach, but suffice to say, once you travel through the above information and apply it, you
will begin to understand the value of the above information. If you have any plans to provide negative criticism,
please hold it. We are Masters of our craft and experts / Professionals at what we do. We will gladly accept
positive criticism any time. The above is not the almighty Holy Grail. It is however, an application of processes
and thoughts and skill sets that can provide you a lifetime of opportunity.
Many blessings to you in your trading.
MiamiBill
Copyright 2/2007 MiamiBill [email protected]
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