Learning from WD Gann – Trend Line Indicator

Many novice traders really like to complicate their trading.

At first, they usually trade on tips from friends or co-workers, or on something they hear or read on the news.

If they survive the blow they are likely to take to their capital, they may soon come to discover technical analysis as a better way to get a reading about price action.

However, often the beginning of their entry into technical analysis is to install some popular chart indicators such as the Stochastic and believe that they have found the Holy Grail of wealth. Unfortunately, this bubble will soon burst when they realize that this and any other indicator only works during certain times and with some parameter modification.

If this just happened to sound like you, and you’re still in the game (I know, this isn’t a game. It’s a speech character), then there’s hope for you yet. Let me introduce you to WD Gann’s “Trend Line Indicator”, which today may be referred to as a swing chart.

No matter what market you want to trade, there will be a series of swing bottoms and swing tops that form trends of varying degrees. These swing patterns occur on any time frame, and are the key components in determining whether a market is in an uptrend or downtrend.

A trend line indicator or swing chart comes in several types. You can create a 1 bar, 2 bar, or 3 bar swing (I wouldn’t bother going beyond this).

This single bar swing chart is very short term and good for setting entry. However, for the purpose of determining the direction of any outcome, a 2 bar swing would be my recommendation. Additionally, it wouldn’t hurt to get a bigger trend picture by creating a three-column swing chart as well.

Creating a two-bar swing diagram is very simple. Starting at a clearly defined bottom or top, you can draw your swing line (trend line indicator) either up for each new high (starting at the second high in a row) or down for each new low (starting at the second in a row – few). To illustrate, let’s start from a clearly defined bottom to plot the line of the two-column swing chart.

With a two-bar swing chart, we need at least two higher highs in order to push our line to a new high on the chart. Let’s say the starting bar (with a lower bottom) is bar #1. The next bar (#2) makes a higher high but not a lower low. Our higher high is only one, so we haven’t moved yet on our swing (trend) line. Now, bar #3 is also making a higher high and the low of bar #1 is still holding. Therefore, we can move our line up to the new top of bar No. 3.

As each new column makes a higher peak, we can continue to move our streak up to that new height. If the next bar makes a lower high and a lower high, our streak does not move up and our countdown is one. If the price resumes the upward movement and makes another top higher than the current high (it would be bar #3 in this example), our line would continue up to that new high, and each top higher until we actually get two lower-lows to change the direction of the line.

Let’s say that after we move our swing line to each new high we get a low-low bar instead. Let’s call this bar number 5. If we move the line up to every new high before this new low, the low count starts at one. If we get bar (#6) that makes the lowest low of bar #5 before it makes another bar and higher of bar #4 (which was the last high bar high where the line moved up to), then our minimum low count becomes two and we’ll move The line is down from the last higher high (bar #4) to the low of bar #6. Now for each bar making the lowest trough where our line is currently sitting (bar #6 currently), we will move the line down to that new lower low.

The bottom line here (no pun intended) is that we need to count two highs to start moving up or two lows to start moving down. Once the number is met, we can then continue in that direction for every bar above the price where the line is currently located.

There are times when the bar isn’t higher-high or lower-low (called the inside bar, or “inside the bar” by W.D. Gann). Since they don’t make any of the high – high or low – do nothing. The line remains.

There are also times when the bar is higher – high – low – low (remember that we compare each price bar to the previous bar to determine if it is higher – high or lower – low). This bar is called an external bar. To deal with these columns depends on the current direction in which the line is moving. If the line is moving to each new higher peak, then you can push the line back to the new top of that outer bar. On the other hand, if the line is moving down with each new lower low, you can move the line down to a new lower lower for that outer bar.

The thing to note about the outer bars is that although you will be presenting your line up or down (depending on the current direction of your line drawing), you must count the other side of the outer bar as a single number in the corresponding direction. Thus, if the price then goes in the opposite direction and crosses the other side of the outer bar, the counting becomes two in the opposite direction and the line must then move from the outside (where it is currently sitting) to the bar that counted. of two.

For example, let’s say we move the line down to each new lower low (so the trend is currently down). Then the outer bar forms making both a lower-low (lower where our line is currently sitting) and higher-high (higher than the previous bar). Since our trend to this outer bar was down, we are moving our line down to the lowest level of the outer bar (since it is actually a lower low). We also want to set the highest height of this outer bar to a single number. Now if the next bar is higher than our outer bar, the count goes to two and the line moves from the lowest level of the outer bar to the new higher high.

After doing this with your price chart, you will see tops representing swing tops and bottoms. You will use these tops to determine the current direction of the market.

For example, an uptrend is a pattern of higher swing lows. As long as the market forms each swing high/lower than the previous one, the uptrend is in effect. On the other hand, a bearish trend pattern consists of lower swing highs and lower swing lows. So by not having anything where these swing lows or tops are forming compared to previous lows, you can identify the current trend right away.

WD Gann stated that when the top of the two-bar swing is crossed, it is an indication of higher prices. He also mentioned that when the two-column swing low is removed, it is an indication of lower prices.

Not only should the trader focus on trading in the direction of the trend, but these fluctuations can also help determine where to set stop loss orders. For example, if you are in a long position due to an uptrend, moving your stop loss below each higher swing low will protect your position in the event of a swing low being taken out (as this is an indication of lower prices in the future).

Of course these days it can leave a lot on the table to use these two-column swings for stop loss orders. Consider this a guideline for a start. One option I might use is to draw a trendline below two or more swing lows (when they are long) or across two or more swing tops (when they are short) and use the slope of this trendline as a guide to set my stop loss.

Learning how to spot 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 many tutorials by WD Gann because it’s really important. In my business, it’s all about the ups and downs.