Smithson Rediscovering WDGanns Method of Forecasting The Financial Markets

ISSUE 80 FEBRUARY 2016
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MARKET TECHNICIAN
THE JOURNAL OF THE STA
IN THIS ISSUE
C. Wicken
Release from the private investor trap........................................................................... 1
D. Watts
Bytes and pieces................................................................................................................. 6
J. Smithson
Rediscovering W.D. Ganns method of forecasting the financial markets................ 7
J. du Plessis Point and Figure charts: From the 19th to the 21st centuries................................ 13
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FOR YOUR DIARY

Tuesday 1st March
New and exciting market timing indicators..................................... Speaker: TOM DEMARK

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Tuesday 12th April...................................................................... Speaker: To be confirmed
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Journal of the Society of Technical Analysts
Release from the private

investor trap
There could be no better way to illustrate

what is meant by the private investor
trap than to recount an experience of
Sir Isaac Newton. During April of 1720
Isaac Newton, the then Master of the
Mint no less, sold his shares in the South
By Clifford S. Wicken
Sea Company for 7,000 having doubled

his money, reportedly commenting that
The Trap
I can calculate the motions of heavenly
Markets rise and markets fall. The private investor sees share prices rising and
people making money and wants some of the action himself so he(1) buys shares.
He knows that the market does not go up in a smooth uninterrupted rise but
is punctuated by minor retracements and that he will have to ride out these
setbacks if he is to manage his portfolio successfully.
bodies but not the madness of people.

Later that summer he was gripped by
the mania and re-entered the market
just when the bubble was about to
burst. This time he lost 20,000 and for
the rest of his life any allusion to the
South Sea Company was painful(4). Any
He has no means of judging when the
come, but it was not yet in sight(2).
market is at a long term maximum and
During an ensuing rally he will probably
when a major downturn is in the offing.
mistakenly think that the main trend is
He might read the financial pages of
still alive and will regain his composure.
newspapers
magazines
Sooner or later on the way down he
but finds that every article forecasting
and
investor
tumbles to the fact that all is not well
a downturn is balanced by another
and sells out at a most disadvantageous
giving the contrary view. The time will
time. The trap has snapped shut. Well
come when a downturn arrives that is
into the next bull market, with the hurt
not just a temporary interruption in the
of his unsettling experience wearing
main upward trend but the beginning
off, and seeing everybody else making
of a major move downward. Insiders
money he tries his luck once again.
are beginning to take their gains but
He thinks that he will not be caught
the private investor, not being privy to
out twice but he is. There are many
what is happening, will hang on in the
graphic descriptions of the scenario
hope and expectation that prices will
from which this article gets its title, e.g.
turn upward once again, as they have
Charles Kindlebergers book, Manias,
done several times before. The end had

Figure 1 FTSE 250
Panics and
Crashes(3).
reader who has already become a victim

of the private investor trap should take
heart from the fact that he is in very
good company indeed.
The challenge
Major rises in price occur for different
reasons and by no means all of them
are bubbles, but their classification
is
not
material
to
us
here.
The
overwhelming majority of professional

investment
advisors
and
columnists
think of the above scenario as one of

timing purchases and sales. They say
that successful timing is not possible
and instead strongly advise buy-andhold and pound cost averaging policies.
Typical of this school of thought is
John Baron, a regular feature writer in
the Investors Chronicle and author of
Investment Trusts (a Financial Times
Guide).
In his book he writes Time
in the Market is more important than

Market timing. Market timing is a mugs
game....
In the Investors Chronicle
of 10th to 16th July 2015, in an article

entitled Staying Invested, he reasserts
this view adding Stay loyal and the
market will reward; stray and it will
punish. Simple really!.
One thing stands out from Figure 1,
which shows the passage of the FTSE250 over the past 20 years, it is that
a portfolio would perform better by
being held in a bank deposit or building
society for at least part of the two major
setbacks.
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Despite widespread scepticism it was

decided to look at this matter anew. The
Figure 2 EoP and Moving Average Compred
objective set was the determination,

by calculation, of the time to purchase
soon after the commencement of a
major rise and the time to sell soon
after the beginning of a major fall.
For the purposes of evaluation of the
system no judgement would be allowed
whatsoever. If the system signalled buy,
or sell, there could be no more waiting
just one more day to see how things
developed. If the system signalled buy,
or sell, by even a penny then it must be
acted upon and the consequence must
be allowed to have its effect. (For the
purposes of this paper the FTSE-250
is thought of as an index or a share
according to the context.)
The way forward

The graph of the FTSE-250 is made up
of the long term trend on which are
superimposed short term ripples of
lesser amplitude. It was reasoned that
by comparing a smoothed out version of
the FTSE-250 with the raw FTSE-250 it
might be possible to detect changes in
the long term trend. The quest was on
to find a way of producing a smoothed
out FTSE-250.
At this point something must be said
about moving averages as they are
frequently taken to be an indication of
the long term trend and used in the
attempt to achieve the same objective
as this research. A study of methods
based on moving averages led to the
solution does not exist, because any
(EoP) for the current day. In Figure 2
conclusion that they are not sufficiently
calculation would have to use past
the moving EoP can be seen to track
reliable to give confidence and peace of
data.
to
the FTSE-250 more closely than does
mind to the rudderless private investor.
this problem attempts were made to
the moving average. Notice that the
They do not fit the above requirements
produce a graph that at least tried to
moving EoP is less delayed than the
as they do not even try to follow the long
follow the long term trend of the FTSE-
moving average, the EoP maximum
term trend - because they are averages.
250 and was not too delayed. The
occurring an amazing 100 days before
For example a moving average does not
quest for a way of achieving this led to
that of the moving average. Notice also
rise to the maximum of a long term trend
the adoption of the regression maths
that there is a good match with the
or fall to the minimum simply because it
topic. (There might be a better way of
amplitude of the raw FTSE-250.
is an average. Even more importantly,
achieving the objective but none has
moving averages suffer too long a delay
been found so far.) In this application
The pointer to the EoP
to be useful for use in real time.
the linear regression formulae are not
The pointer is the best fit straight line
being used to find a best fit straight
through all the daily prices included
Having ruled out the use of moving
line for the share price, as share prices
in the calculation and points to the
averages it must be said that a perfect
move in anything but straight lines, but
estimated price for the current day. Two
as a pointer to the Estimate of Price
of these pointers are shown in Figure 3.
As
practical
resolution
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As with all straight lines the formula
c = S price m S session
simple spread sheet like Microsoft Excel.
for the EoP pointer is y = m x + c,
which in the EoP context is price = m
Thus, for the current session the EoP =
EoP graph in use
session + c
m current session + c
Having generated the EoP graph shown

in Figure 3 one has to decide how to use
Where:

m = gradient of the pointer
c = price at the origin of the

graph
n =
number of data points used
in the calculation
session =
the number of the trading
session counting from an
arbitrary date in the distant
past
The linear regression formulae are used
to obtain m and c:
Consideration of the second pointer in
it. There are two considerations:
Figure 3 gives an insight into the reason
1. The share price falling below the EoP
why the EoP is less delayed than the
by a predetermined amount for just
moving average. When the long term
a day or two would not amount to
trend has turned down, not only will the
sustained selling, which is what one
leading end of the pointer be pulled down
is on the look out for.
but the trailing end will be pushed up. This

push-pull effect is why the EoP responds
faster than the moving average.
the
calculation
of
reduces the gradient of the moving

EoP. If this continues for long enough
The vast amount of arithmetic involved

makes
2. The share price being below the EoP
the
EoP
m =
impracticable without a computer.
Use
n S (session price) S session S price
of a bespoke computer program is best
n S session2 ( S session)2
but the EoP can be obtained using a
the moving EoP graph will level out.

But even this should not cause alarm
unless the price also falls below the
predetermined amount it might be
just an inflection.
These two considerations are combined
Figure 3 Construction of an EoP Graph
to form a simple way of determining

when a long term rising trend is likely to
have come to an end.
A sell signal is given if the gradient of
the EoP graph has fallen to zero and the
price has fallen by a hurdle amount.
Similar reasoning to the above applies
when a falling market bottoms out. The
hurdle amount used throughout this
paper is nominally 15%.
The principal chart kept is one which is
plotted every fifth day. This gives an all
important overview of the share price
direction but with some loss of detail.
At critical times snatches of a daily chart
are plotted to fine tune purchases and
sales.
Figure 4 is one such stretch of chart from
which the simple construction needed
to identify a sell signal can be seen. A
horizontal line was drawn when the EoP
gradient had fallen to zero and another
15% below. A sell signal was given when
the price crossed the lower line.
By now it will have been observed that,
after falling behind at a major trend
change, the EoP graph has to race
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MARKET TECHNICIAN
to catch up with the actual price or

index. Fortunately this has no untoward
Figure 4 Anatomy of a Sell Signal
consequences.
The EoP method generalises the moving
average method, the moving average
being m x (current session n/2) + c.
Evaluation
Returning to Figure 1, on which all
the FTSE-250 buy-and-sell signals are
shown for the 20 year period covered,
the gain over this period for a buy-andhold investor was 342% compared with
693% for an EoP investor. Details of this
calculation are given in Table 1.
The result for Edinburgh Investment
(Figure 5) over the 20 year period was
a gain of 95% for the buy-and-hold
Table 1: FTSE-250 Work Sheet
Number of data points: 250 Hurdle: 15%

% gain = (10 [log sold log bought] 1) x 100
Buy
4174
04-08-95 3.528 + 0.060 = 3.588
3.588
using the EoP method.
Sell
4946
24-08-98 3.765 0.070 = 3.695
3.690
Buy
5082
09-02-99 3.670 + 0.060 = 3.730
3.731
Sell
5597
22-03-01 3.840 0.070 = 3.770
3.768
Buy
6112
07-04-03 3.559 + 0.060 = 3.619
3.619
Sell
7214
16-08-07 4.093 0.070 = 4.023
4.020
Buy
7627
02-04-09 3.720 + 0.060 = 3.780
3.833
Sell
8217
05-08-11 4.089 0.070 = 4.019
4.013
Buy
8347
09-02-12 3.994 + 0.060 = 4.054
4.054
9140
31-03-15
4.233
Impressive though these results may

be, they are highly unfair to the EoP
approach
because
the
buy-and-hold
investor just happened to be lucky by

investing at a very low point and selling
out at a very high point. Really Mr Baron,
is market timing really such a mugs
0.401
0.180
8.89%
151.77%
51.36%
0.179
51.01%
John
Buy & hold result
0.645
341.6%
Barons view is correct for the shares
EoP method result
0.899
692.5%
investment
trusts?
Of
course
Trial ends
0.037
26.47 %
game when managing a portfolio of
0.102
% gain
Log gain
Log price
obtainable
Calculation
(logs)
for the buy-and-hold method and 506%
J P Morgan Claverhouse (Figure 6) over
Date
the same period saw a gain of 172%
Action
Session
investor and 328% for the EoP investor.
of individual companies but it is out of

place in a book on investment trusts.
Figure 5 Edinburgh INV
Transaction costs
Transaction costs should be taken into
consideration
when
comparing
the
EoP and buy-and-hold methods. But

there is a difficulty in that they are
dependent on the amount of the initial
investment, the brokers commission
and stamp duty. Rather than bringing
assumed transaction costs into every
evaluation an attempt is made to find
out whether an evaluation would be
rendered invalid without them. Table 2
tries to answer this question by working
an example assuming an initial purchase
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Limitations
Figure 6 J P Morgan Claverhouse
The EoP method will work only if the

amplitude of the long term wave is
large compared with that of the short
term waves. In the parlance of radio
engineers, a large signal to noise ratio is
required. If this condition is not met, the
noise cannot be separated from the long
term trend and the EoP method will fail
too often - with disastrous results.
In practice the only large group of
shares suitable for direct EoP treatment
is investment trusts as in general they
have a sufficiently large signal to noise
ratio. This is because, like indices, they
are composites, so that a large move in
the price of any one of their constituent
companies has only a small effect on
the price of the trust as a whole. Even
so investment trusts need vetting for
Table 2: FTSE 250 Transaction Costs To be read in conjunction with table 1
Total
Transaction
cost
12.50
37.50
Sell
a quick look at share price graphs on

the internet before investing time in the
construction of EoP charts. By the use
Value to
date
Brokerage
25.00
% Gain (from
Table 1)
Stamp
Duty
4147
Brockerage per deal: 12.50
Transaction
Amount
Buy
Stamp Duty: 0.5%
5000.00
Session
Action
Initial investment: 5000.00
suitability, which can be done by taking
of investment trusts, stock selection

can be left to fund managers, who have
the necessary expertise and facilities.
Relieved of this burden the private
12.50
12.50
Buy
5082
12.50
41.12
Sell
5597
12.50 12.50 8.89 6885.66
Buy
6112
12.50
46.93
Sell
7214
12.50
12.50
Buy
7627
17336.03
86.68 12.50 99.18
but this does not mean that it is of no
Sell
8217
12.50 12.50 51.36

26239.82
use to those who prefer to hold shares
Buy
8347
12.50
143.70
Sell
9140
12.50
12.50
6323.50
6885.66
26239.82
31.62
34.43
131.20
26.47
151.77
51.01
6323.50
investor can, by the use of EoP charts,
4946
= 430.93
Transaction costs for the buy-and-hold method
= 50.00
Added cost of the EoP method
= 380.93
of his portfolio.
The EoP method provides an enhanced
17336.03
39624.75
Total
430.93
Transaction costs for the EoP method
considerably enhance the performance
way of saving with investment trusts
in individual companies. A decline in an

index only comes about through the
decline of its constituents, so a sell signal
on the EoP chart of an index should put
private stock pickers on high alert.
Problems
In common with all charting methods
5000/100 x 692.5 = 34625
EoP charts can give false signals. In
Total gain for buy-and-hold method 5000/100 x 341.6 = 17080
setting the height of the hurdle a balance
Added gain of the EoP method
has to be struck between losses due to
Total gain for EoP method
= 17545
delay in identifying a change in the long

term trend and losses due to responding
of 5000.00, stamp duty at 0.5% and a
Costs for the EoP method turn out to be
too soon. This is illustrated in Figure
brokers commission of 12.50 per deal
381 more than for the buy-and-hold
6 where, in mid 2011, Claverhouse
(irrespective of size). The calculation
method, which is small compared with
suffered a setback in the long term
assumes that the transaction costs are
the added gain of 17,545 achieved by
trend. Only in retrospect could it have
funded from elsewhere.
the EoP method.
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Bytes and
pieces
been identified as a setback rather than
background and company news, EoP
a major trend reversal. This meant that
charts provide an enhanced way of
an investor in the index would have
investing in investment trusts and a
forgone just over 10% of the long term
good basis for investing generally.
By David Watts
rise. A similar event had taken place
A major benefit of EoP charts is that
Andrews course republished
during 1998.
they enable the private investor to
Roger Babson (1875 1967) used

Newtons laws of motion to develop and
apply a theory of action and reaction
which he observed in the markets.
These action-and-reaction rules are
equal and opposite, which is just an
application of Newtons Third Law.
Using swing analysis and geometry, he
is reputed to have made a fortune of
over $50,000,000. Babson taught his
techniques to Dr Alan H Andrews who
went on to develop the Andrews
pitchfork. Hidden away in most charting
packages as median lines or, more
commonly known as Pitchforks, this
technique is often overlooked. Andrews
original course has now been republished by Tim Morge online at:
http://www.trading-naked.com/alan_
andrews_course_1.htm
See also the Tim Morge site and blog:
http://www.medianline.com/
http://marketgeometry.com/blog
What is interesting is that Babsons
techniques can be used to predict the
end of swings, using Pitchforks, thus
forming a leading indicator. For those
wanting to investigate further, Dr
Andrews original course is free online
(http://www.andrewscourse.com/) and
an advanced course also offered.
The Tower of Babel
There must be a dozen software
packages that allow you to programme
indicators and systems, the trouble is
there is no universal standard language.
Many years ago there was a data
converter programme called Quote
Butler that was able to convert
between the then various data formats,
which raises the question is there a
code equivalent? Well no, for the most
part you need to know both languages,
but here are a list of sites that allow
conversion of codes.
Code Converter Sites
http://converter.telerik.com/ - C# to
VB and VB to C#
http://2calgo.com/Home/Index#converted_indicator - MQ4 to C#
http://mqlconvert.cyberfx.org/ - MQ4
to MQ5 - donation requested.
shrug off day-to-day price movements
Using EoP charts
with confidence and put investment
In order to demonstrate the value of
decisions in the context of the main
EoP charts, shares were evaluated over
trend, thus releasing him from the
very long periods, the same share being
private investor trap.
repurchased
after
each
downtrend.
In practice a sale would be taken as
Taking a final look at Figures 1, 5 and 6,
an opportunity to switch from a share
one cannot help thinking that it should
that had become dull into a more
be possible to benefit by absenting
encouraging prospect. A good time to
oneself from at least part of major
be invested is when the share price is
down trends. Of course the EoP investor
tracking above the moving EoP.
cannot outperform the insiders but,

once rescued from the private investor
Investment decisions that are emotive
trap, he can calmly listen to what the
and poorly timed are a recipe for
market is saying about itself and expect
disaster. With EoP charts impulsive
to outperform run-of-the-mill financial
decision
advisors.
making
is
replaced
by
more reasoned approach, resulting

in
greater
confidence
and
better
In this connexion the career of the
performance. In combination with an
shipping magnate William Burrell comes
interest taken in the general economic
to mind:
William Burrells Slate Stones5

His scheme is really the nimblest Ive ever struck. He sells his fleet when there is
a periodic boom and then puts his money into 3 percent stock and lies back until
things are absolutely in the gutter soup kitchen times everyone starving for
a job. He then goes like a roaring lion. Orders a dozen large steamers in a week,
gets them built at rock bottom prices, less than half what theyd cost him last
year.
Then by the time theyre delivered to him things have begun to improve
a little bit and there he is with a top fleet of brand new steamers and owing to
the cheap rate hes had them built at, ready to carry cheaper than anybody.
Sounds like a game that anyone could play at but none of them have the pluck
to do it. They simply sit and look at him making money like slate stones, as he
expresses it.
Robert Lorimer
Notes:
1 He
2
is used for convenience and no gender bias is intended.
Galbraith, J.K. (2009) The Great Crash 1929. 3rd Ed. London: Penguin Group.
3 Kindleberger,
C.P. (2001) Manias, Panics and Crashes: A History of Financial Crises.
4th Ed. Wiley Investment Classics

4 Carswell,
5 Marks,
J. (1960) The South Sea Bubble. London: Cresset Press
R. (1988) Burrell: Portrait of a Collector. Glasgow: R. Drew Pub.
Clifford Wicken.
Clifford Wicken is a private investor.
E-mail: cliffordwicken@btinternet.com
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MARKET TECHNICIAN
Rediscovering W. D. Ganns
method of forecasting the
financial markets
business (initially in Texarkana and then

in Oklahoma City), Gann spent nine
months collecting and analysing stock
prices in public libraries both in the US
and UK. The resultant data set of stock
prices started in 1820 and went through
to 1909 (Wyckoff op. cit. p. 52).
Gann eventually discovered the natural
By James Smithson
law, or the set of immutable principles,

governing stock and commodity prices.
1. Introduction
Gann called this natural law the Law Of
William Delbert Gann (1878 -1955) was a successful stocks and commodities
trader. He also wrote seven books and numerous short courses on how to trade
successfully. However, Ganns unique skill was the way in which he accurately
forecast the financial markets.
After
Vibration:
exhaustive
researches
and
investigations of the known sciences,

I discovered that the Law Of Vibration
enabled me to accurately determine
the exact points to which stocks or
commodities should rise and fall within a
given time (Wyckoff op. cit. p. 52).
This paper examines Ganns method of
measurement, and experiment, and the
forecasting the financial markets. More
formulation, testing, and modification of
specifically, it examines the genesis of his
hypotheses.
The evidence shows that by late 1909
by him, the potential problems with its
Thus Gann discovered his method of
his method of forecasting the financial
practical application and their resolution.
forecasting the financial markets from
It goes on to look at the evolution
his research based on the scientific
over time of Ganns methodology in
method.
application. For example, in December
the problems arising from the greater
Gann stated that in August 1902 he
published
complexity of annual forecasts and his
started researching the financial markets
solution to this complexity.
and in August 1908, shortly after he
forecasting method, its early application
the construction of annual forecasts,
moved to New York City, he made one
2. Ganns discovery
forecasting method
of
his
of his greatest mathematical discoveries

for predicting the trend of stocks and
Gann summarised the way in which he
commodities (Gann, 1954, p. 1).
discovered his forecasting method as

Gann initially observed that the prices of
follows:
A man may evolve a beautiful theory for
making money in the stock market, and
he may try it out on paper and find that
it works. It is apparently successful, but
when he applies it to actual trading and
begins to buy and sell, he then finds the
weak point and the theory fails in actual
practice. I know whereof I speak, for I
stocks and commodities appear to move

in cycles. Through inductive reasoning,
he then hypothesised that there is a set
of immutable principles, which he called
natural law, underlying the complexity
of stock and commodity prices. Gann
then set out to discover these principles
governing market prices:
Gann had fully discovered and tested

markets, found it to be sound and
was highly proficient in its practical
1909, an interview with Gann was
(Wyckoff
op.
cit.
pp.
54-
55) which showed at that time Gann

was skilled in forecasting and trading
individual stocks, in forecasting the Dow
Jones Industrials Average (which then
comprised 12 stocks) and in forecasting
and trading the two leading commodities
(viz. wheat and cotton).
3. The principles of
forecasting method
Ganns
financial
method
of
markets
Ganns
forecasting
consisted
of
the
two
elements: (1) cycles of time and (2) the

rate of vibration.
3.1 Cycles of Time
Cycles, and their possible influence on
have tried dozens of different theories,
I soon began to note the periodical
human activities, have been a source
put my money down and lost; exploded
recurrence of the rise and fall in stocks
of speculation since time immemorial.
the theory, discarded it and started all
and commodities. This led me to conclude
However, it appears that it was not until
over again. The fact that my method
that natural law was the basis of market
Gann carried out his research between
of forecasting has stood the test of time
movements. I then decided to devote ten
1902 and 1908 that the cause and effect
is sufficient proof that I have solved the
years of my life to the study of natural
of cycles on financial markets was fully
problem (Gann, 1923, appendix, p. 1).
law as applicable to the speculative
understood for the first time. Gann
markets and to devote my best energies
subsequently referred to time cycles
The Oxford English Dictionary defines
toward making speculation a profitable
throughout his writings, including:
scientific
profession (Wyckoff, 1909, p. 52).
procedure
method
that
as
has
method
of
characterised
natural science since the 17th century,
In addition to his early research carried
consisting in systematic observation,
out while an employee in a brokerage
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Time is the most important factor in

determining market movements because
MARKET TECHNICIAN
the future is a repetition of the past and

each market movement is working out
time in relation to some previous time
cycle (Gann, 1946, p. 4).
Figure 1: Chicago wheat September 1909 futures contract daily price chart
My experience has taught me that

nothing can stop the trend as long as the
time cycle shows up-trend. Nothing can
stop its decline as long as the time cycle
shows down. Stocks can and do go up on
bad news and go down on good news
(Gann, 1949, p. 3).
3.2 The Rate of Vibration
In addition to cycles of time, the socalled rate of vibration was a key element
in Ganns method of forecasting the
financial markets. Gann established the
rate of vibration by measuring the slope
of the trend line in prices for a particular
financial instrument. Importantly, in his
research between 1902 and 1908, Gann
discovered similar principles operating
in the financial markets to those being
discovered contemporaneously in quantum
physics.
For example, Gann discovered that the
rate of vibration (as measured by the
slope of the trend line) of stocks and
commodities conforms to a series of
principal energy levels and subshells.
More specifically, the principal energy
levels equate to a doubling and halving
of the rate of vibration and the subshells
equate to a fourfold division of a principal
energy level. Moreover, Gann discovered
that these principal energy levels and
subshells constitute important support
and resistance points. Thus in 1909
Gann stated:
Stocks, like atoms, are really centers of
energies, therefore they are controlled
mathematically (Wyckoff op. cit. p. 53)
and By knowing the exact vibration
of each individual stock I am able to
determine at what point each will receive
support and at what point the greatest
resistance is to be met (Wyckoff op. cit.
p. 52).
In
summary,
Ganns
method
of
forecasting the financial markets was
based on correctly identifying the
underlying cycles that are driving a
particular stock or commodity and then
analysing the resultant rate of vibration
(as measured by the slope of the trend
line) to precisely forecast prices at a
specified time. Importantly, if one has
Please refer to Figure 1 as we examine
correctly identified the underlying cycles
this forecast.
driving a particular stock or commodity,

one can precisely forecast when those
Firstly, Gann identified the start of the
cycles will come to an end. Consequently,
uptrend in the September 1909 Chicago
by knowing the date when the underlying
wheat futures contract as a price of
cycles will end and by observing the rate
94 cents per bushel on January 26th
of vibration (i.e. the slope of the trend
1909. More specifically, Gann examined
line in prices), one can make a precise
the set of positive (or constructive)
forecast as to when and at what price
cycles driving the uptrend in wheat and
the current uptrend (or downtrend) of
observed that these cycles started on
the stock or commodity will end.
January 26th 1909.
4. Illustration of Ganns early

application of his forecasting
method
Gann then calculated the long-term
Here is an example of a forecast that

Gann made in 1909:
One of the most astonishing calculations
made by Mr. Gann was during last
summer (1909) when he predicted that
September wheat would sell at $1.20.
This meant that it must touch that
figure before the end of the month of
September. At twelve oclock, Chicago
time, on September 30th (the last day)
the option was selling below $1.08,
rate of vibration for this uptrend, which

is 0.1053 cents per day (or 1 cent per
9.5 days). In completing this task, Gann
had to correctly identify the position
of the trend line (from the origin of 94
cents on January 26th 1909) and then
to measure the slope of the line. Gann
would have received corroboration that
he had identified the correct position of
the trend line from two observations:
1.
wheat prices received support on
March 22nd 1909, when the rate of
vibration had exactly halved, and
and it looked as though his prediction
2.
wheat prices met resistance on April
would not be fulfilled. Mr. Gann said If
13th 1909, when the rate of vibration
it does not touch $1.20 by the close of
had exactly doubled.
the market it will prove that there is

something wrong with my whole method
Gann then forecast that the set of
of calculation. I do not care what the
positive cycles driving this uptrend would
price is now, it must go there. It is
remain in force until at least the end of
common history that September wheat
this futures contract (i.e. until at least
surprised the whole country by selling at
September 30th 1909). Consequently,
$1.20 and no higher in the very last hour
based on the starting point of 94 cents
of the trading, closing at that figure
per bushel on January 26th 1909 and
(Wyckoff op. cit. p. 54).
a long-term rate of vibration of 0.1053
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MARKET TECHNICIAN
cents per day, he was able to forecast
future predictions based on exact

mathematical law is only restricted
by lack of knowledge of correct data
on past history to work from (Gann,
1927, pp. 76-77).
that on September 30th 1909 the price

would be $1.20.
In monitoring his forecast, Gann would
have observed that between July 21st
and August 26th 1909 strong short-term
negative (or destructive) cycles drove
prices well below the long-term trend
line (or rate of vibration). Moreover,
from examining the underlying positive
and negative cycles, he would have
established that the short-term negative
cycles
operated
simultaneously
with
the longer-term (but weaker) positive

cycles driving the uptrend; and that the
short-term negative cycles would start
to expire from August 26th 1909. Gann
would have received corroboration that
this analysis was correct from observing
that on August 26th 1909 the price (96)
showed that the rate of vibration had
fallen to precisely one eighth of its longterm rate (i.e. it had halved precisely
three times) and the rate of vibration
then started to increase. Thus, from
August 26th 1909 Gann forecast and
observed the simultaneous expiration
of the short-term negative cycles and
the doubling three times of the rate of
vibration, so that the long-term rate of
vibration was regained on September
30th 1909 (at a price of $1.20).
Clearly, this problem is much less

onerous today because of the availability
of governmental, commercial and
academic databases containing large
amounts of electronic price data.
(ii)
Complexity of underlying cycles.
However, another potential problem
in the practical application of Ganns
method is the complexity of the
underlying cycles. More specifically,
from the above examination of Ganns
September 1909 wheat forecast, we
can conclude that an individual stock
or commodity is typically governed by
a number of positive (or constructive)
cycles and negative (or destructive)
cycles; and these multiple cycles
act simultaneously and sequentially.
Consequently there are likely to be
periods of time when it is difficult to
identify which particular set of cycles
is governing a stock or commodity.
The solution to this problem, as Gann
recommended, is always to trade in
active stocks and commodities:

In summary, this example clearly shows

the two elements that constituted Ganns
forecasting method: the cycles driving a
particular stock or commodity and the
resultant rate of vibration, as measured
by the slope of the trend line.
5. Potential problems in the

practical application of Ganns
forecasting method
(i)
Obtaining a detailed price history.
sufficiently
long
and
detailed
price history of a particular financial

instrument, in order to identify the
underlying cycles:

In
making
my
calculations
on
the stock market, or any future

event, I get the past history and
find out what cycle we are in and
then
predict
www.sta-uk.org
the
curve
for
the
which refers to a stock or commodity

ceasing to act in harmony with its
underlying cycles. Gann stated that
cross-currents are typically more
of a problem for stocks than for
commodities:
When you have a forecast made up
for cotton or grain, if you are right,
you are sure to make money because
all options follow the same trend.
There are no cross-currents, as in
stocks, with some stocks declining
to new low levels and others making
new highs (Gann, 1951, foreword).
One cause of cross-currents in stocks,
which Gann gives as an example, is
dividends. More specifically, dividends
can suddenly be declared or cancelled
and the resultant stock prices may cease
moving in harmony with the underlying
cycles. In fact any major and sudden
action by a companys management (e.g.
a sizeable acquisition or divestment, or
the issue of a material amount of new
shares) may for a time produce crosscurrents in the stock price.
always queer-acting stocks and some
these periods of inactivity.
of Ganns method is cross-currents,
You should always trade in stocks

that cross former highs and make
higher tops and higher bottoms, as
they are the best to buy, and leave
the dead, inactive ones alone (Gann,
1936, p. 60).
market movements. The limit of
of his forecasting method is obtaining
potential
Ganns solution, once more, is to avoid
future, which is a repetition of past
problem in the practical application
Another
problem in the practical application

Always confine your trading to
standard, active stocks listed on the
New York Stock Exchange. Outside
stocks have spurts, but the active
leaders yield more profits in the long
run (Gann, 1923, p. 34).
There are two key advantages to trading

in active stocks or commodities. Firstly,
if they are active then they are probably
being governed by a set of stronglypositive cycles and, therefore, the
underlying cycles are likely to be more
easily identified. Secondly, these active
stocks or commodities are likely to offer
significant profit potential. Conversely,
the cycles governing inactive stocks or
commodities are likely to be in balance
and therefore the underlying cycles may
well be difficult to identify; anyway there
is very limited profit potential during
Gann stated that the only potential
(iii)
Cross-currents.
such problematical stocks and to restrict

ones trading to active stocks:
The kind of stocks to trade in are those
that are active and those that follow the
rules and a definite trend. There are
stocks that dont follow the rules. These
stocks should be left alone (Gann, 1936,
p. 34).
6. The evolution of Ganns

forecasting method into the
construction of annual forecasts
In 1909 Gann clearly stated that he
would not disclose his actual forecasting
method: Mr. Gann has refused to
disclose
his
method
at
any
price
(Wyckoff op. cit. p. 55). Nevertheless

the evidence suggests Gann also had
a strong desire to help others in their
trading activities.
Ganns
early
attempts
to
reconcile
these two conflicting goals included
MARKET TECHNICIAN
examined above with reference to his

forecast of the September 1909 Chicago
wheat futures contract (see Figure 1).
Ganns forecasting and trading in stocks
in 1908 and 1909 followed a similar
structure (see Wyckoff op. cit. p. 54).
Figure 2: The chart that Gann included in his annual forcast for grain for 1922
Thus Ganns initial application of his

forecasting method was to forecast
when and at what price an existing and
established trend in a particular stock
or commodity would end. However, the
key problem that Gann encountered
some ten years later when he started
producing annual forecasts was that they
were significantly more complex than
his initial application of his forecasting
method.
the publication of a daily letter which
should follow it very closely. This chart
advised on when to buy and sell stocks,
is reproduced in Figure 2.
cotton and wheat (advertised in The

New York Herald between April and
Gann
November 1909). In 1910 he published
commodities to his service and he
a booklet entitled Speculation - A
continued producing annual forecasts for
Profitable Profession and in 1911 Gann

sold a mechanical method, based on
fixed rules, for trading in stocks and
commodities (see The (New York) Sun,
subsequently
added
further
the rest of his life. In 1923 Gann wrote

the first of seven books, entitled Truth
of the Stock Tape and he continued
producing courses on trading the stock
1911, December 19, p.10).
and commodity markets. Overall, the
In 1918 Gann published his first annual
his death in 1955 Gann pursued in his
evidence suggests that from 1909 until
forecast, which was his latest means

of helping his clients in their trading
activities, but without disclosing his
actual forecasting method. He published
a
forecast
of
the
stock
markets
performance in 1919, on December

16th 1918. It comprised a short textual
commentary. However Ganns annual
stock market forecast for 1922 included
for the first time a chart which forecast
the trend of industrial stocks and a
separate chart which forecast the trend
of railroad stocks. Also for 1922, he
produced (apparently again for the first
time) an annual forecast for cotton and
also for grain; both of which comprised
a commentary and a chart. Gann stated
that his grain forecast was Made up
principally for wheat, although corn
professional activities two conflicting

goals; which were to seek to help others
in their trading activities, but without
disclosing his actual forecasting method.
7.
Potential
problems
in
constructing an annual forecast
and Ganns solutions
As examined above, Ganns method
of forecasting the financial markets
was based on correctly identifying the
underlying cycles that are driving a
particular stock or commodity and then
analysing the resultant rate of vibration
(as measured by the slope of the trend
line) to precisely forecast prices at a
future point in time.
Ganns
practical
application
of
his
forecasting method shortly after he

completed its discovery (in 1908) was
10
Annual forecasts are more complex

because one is not only required to
forecast when (and at what price) the
current trend will end, but when (and
at what price) all subsequent trends
over the next calendar year will end.
Thus the construction of an annual
forecast requires one to make a series
of forecasts for a particular period of
time and, for each of these periods, to
accurately identify the cycles that will
drive a particular stock or commodity as
well as make a forecast for the resultant
rate of vibration (i.e. the slope of the
trend line). I will now examine how Gann
sought to resolve these problems in
constructing his annual forecasts.
7.1 Ganns solutions to the problem
of accurately forecasting cycles.
(i)
Delay publication of the annual
forecast. Figure 2 reproduces Ganns
annual forecast for 1922 for grain.
Although this forecast starts on
December 27th 1921, Gann did not
publish it until January 31st 1922. It
appears that the reason for this delay
was because he was unsure whether
in January 1922 strongly-positive
cycles would start a strong uptrend
or whether strongly-negative cycles
would start a strong downtrend.
Therefore, Gann delayed publication
until January 31st, at which time he
observed that wheat had made a
significant low on January 16th and
then established a stable uptrend.
Similarly, Gann delayed until April
25th 1922 the publication of his
annual forecast for 1922 for cotton;
which was thereby reduced to an
eight-month forecast.
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MARKET TECHNICIAN
(ii) M
ake a contingent forecast. In
Ganns commentary included in
his annual forecast for grain for
1922 he stated, Remember This
Point: If May wheat sells at 1.08
after January 25th it will indicate
much lower prices and probably a
decline to around 95 to 92 cents
per bushel (Forecast On Grains For
1922, reproduced in the appendix to
Gann 1923). In this statement Gann
was warning that, if the price of the
May 1922 Chicago wheat futures
contract fell back to its January 1922
low point (of $1.08 per bushel),
strongly-negative cycles would be in
force and consequently the strong
downtrend would continue.
(iii)
Forecast a change in trend over
several days. From Figure 2 it can
be seen that Gann typically forecast
that a change in trend would occur
over several days. For example, he
forecast that between May 7th - 10th
1922 wheat would make its high
prices for the year and then start
a downtrend. This technique that
Gann employed reflects the multiple
nature of the underlying cycles.
More specifically, in this instance
Gann was forecasting that on May
7th negative cycles would start to
exert an influence but they might
be insufficiently strong to overpower
the previous positive cycles until
May 10th 1922; by which date - at
the latest - the downtrend would
begin.
(iv) Publish regular updates to the
annual forecast. At the end of his
annual forecast for grain for 1922
Gann stated A supplement will
be mailed you each month, giving
any changes that are indicated, if
the market is not following closely
the trend as outlined (Forecast
On Grains For 1922, op. cit.). Gann
in fact published regular updates
to all of his annual forecasts. This
technique is highly significant
because although he marketed,
produced and sold annual forecasts
(which are inherently complex), by
producing regular updates Gann
was converting his annual forecasts
into the more simple, accurate and
reliable type of forecasts that he had
previously produced between 1908
www.sta-uk.org
and 1918; which focused on when

(and at what price) an existing and
established trend in a particular
stock or commodity will end.
ii)
For that period of time (i.e. for that
section
of
his
annual
forecast),
Gann then drew a trend line which

best
represented
the
underlying
cycles driving the particular stock or

7.2 Ganns solution to the problem
of accurately forecasting the rate of
vibration.
In summary, the construction of an
annual forecast requires one to make a
series of forecasts for a particular period
of time and for each of these periods to
drive a particular stock or commodity
and also to forecast the resultant rate of
vibration (i.e. the slope of the trend line).
commodity. Clearly, if Gann forecast
In order to solve the problem of

forecasting the rate of vibration when
constructing his annual forecasts, Gann
produced a template or chart overlay
similar to that illustrated in Figure 3. It
is likely that this was originally drawn up
on tracing paper and later on transparent
plastic.
iii) Gann then made use of the template
Figure 3: Template or chart overlay of

the sort Gann would have employed in
the construction of his annual forecasts
that positive cycles would be in

force, then the trend line would slope
upwards. Importantly, the greater the
strength of the underlying cycles that
Gann forecast, the steeper the slope
of the resultant trend line that he
drew in his annual forecast. The slope
of this initial trend line was the initial
rate of vibration that Gann forecast
for that particular period of time.
depicted in Figure 3, if and when he
needed to forecast changes in the
initial
rate
of
vibration.
More
specifically, Gann placed the origin

of the template over the start of the
initial trend line and rotated it until the
1 x 1 line was over the initial trend line.
From the 2 x 1 line on the template,
Gann could then see when the rate of
vibration of the initial trend line had
halved (or from the 1 x 2 line when
the rate of vibration had doubled). As
discussed above (and as illustrated in
Figure 1), Gann had discovered that
when the rate of vibration halves it
constitutes significant price support
and,
conversely,
when
the
rate
of vibration doubles it constitutes

significant
price
resistance.
Thus,
by means of his template, in the

construction of an annual forecast
Gann was able to integrate his forecast
on the underlying cycles (particularly
their quality and strength) with his
forecast on the resultant rate of
I will now examine how Gann solved the
problem of forecasting the rate of vibration
when constructing his annual forecasts:
i)
Firstly and most importantly, when
constructing an annual forecast
Gann would have had to identify the
cycles that would drive the stock or
commodity for a particular period of
time in the next calendar year. Thus,
the necessary analysis is to forecast
for that particular period of time
whether the stock or commodity will
be governed by positive cycles or
by negative cycles. Moreover, it is
also necessary to forecast the likely
strength of those cycles.
vibration (or slope of the trend line)

and changes in that rate of vibration.
Figure 4 (on the next page) illustrates this
process. This is Ganns annual forecast
for 1922 for grain (which was reproduced
in Figure 2), but with the addition of the
trend lines that he would have drawn
in its construction with the aid of his
template. For example, Gann forecast
strongly-positive underlying cycles and
therefore a strong upward trend (i.e. a
steep initial trend line) between January
16th and February 20th 1922. However,
he then forecast negative cycles between
February 20th and February 22nd - 25th,
11
MARKET TECHNICIAN
Figure 4: Ganns annual forecast for grain for 1922 with the addition of the trend lines
Gann would have used in its construction
With regard to its effectiveness, Gann

(1923, appendix p.1) suggested that his
forecasting method had performed well
over the 15 years since its discovery:
The fact that my method of forecasting
has stood the test of time is sufficient
proof that I have solved the problem. An
initial assessment by the author suggests
that Ganns forecasting method performs
well when applied to a number of current
markets (especially if they are very active;
in that they are exhibiting large price
changes and hence are probably governed
by strong underlying cycles). Therefore
the prima facie evidence suggests that
Ganns forecasting method is still effective.
Overall, Ganns forecasting method is
likely to be of considerable interest to
investment practitioners; particularly
those looking for a scientifically-based
forecasting system applicable to the most
active markets and financial instruments.
the effect of which would be to precisely

halve the previous rate of vibration. Gann
forecast that this halving in the rate of
vibration would provide strong support
and prices would then rally until March
10th - 12th. At this point, negative cycles
would again come into force which, he
forecast, would cause prices to fall until
April 3rd - 6th; when positive cycles
would once more come into force.
Thus, from Figure 4, we can see that in
constructing his annual forecast for grain
for 1922, Gann in fact made a series of
forecasts. More specifically, he forecast
positive cycles (producing an up-trend)
from January 16th, negative cycles
(producing a down-trend) from February
20th, positive cycles from April 3rd-6th,
negative cycles from May 7th-10th,
positive cycles from August 15th-17th and
finally negative cycles from October 16th19th to December 31st 1922. Therefore
this annual forecast comprised three
periods of positive cycles (or up-trends)
and three periods of negative cycles (or
down-trends). This annual forecast was
therefore significantly more complex
and prone to error than Ganns initial
application of his forecasting method
(which was illustrated in Figure 1).
In summary, Gann used a number
of techniques to solve the inherent
complexity
of
constructing
annual
forecasts. This complexity arises because
annual forecasts require one to make a

series of forecasts for a particular period
of time, and for each of these periods to
drive a particular stock or commodity
and also to forecast the resultant rate of
vibration (i.e. the slope of the trend line).
However, by publishing regular updates
to his annual forecasts, Gann was able
to substantially revert to the earlier and
simpler application of his forecasting
method, which focused on when (and at
what price) an existing and established
trend in a particular stock or commodity
would end.
8. Conclusion
This paper has examined Ganns method
of forecasting the financial markets,
including
its
scientific
discovery
application to the financial markets and

its evolution into the construction of
annual forecasts.
Now that Ganns forecasting method
has been rediscovered, the next goal
is its effective and efficient application
to the financial markets of the twentyfirst century. Consequently the author is
currently involved in a project to determine
how best to apply Ganns forecasting
method
to
all
the
major
financial
markets (for example, paradoxically, the

construction of annual forecasts may in
fact be a highly inefficient application of
Ganns forecasting method).
12
in
the early twentieth century, its initial
Ganns forecasting method is also

likely to be of interest to academics;
for example those seeking a scientific
paradigm to succeed the Efficient
Markets Hypothesis, which according to
the analytical framework of Kuhn (1962)
would appear to be in a crisis state.
References
Gann, W. D. 1923. Truth of the Stock
Tape. Lambert-Gann Publishing Co.
Gann, W. D. 1927. The Tunnel Thru the
Air or Looking Back from 1940. LambertGann Publishing Co.
Gann, W. D. 1936. New Stock Trend
Detector. Lambert-Gann Publishing Co.
Gann, W. D. 1946. Forecasting Grains
by Time Cycles (included in W. D. Gann
Commodities Course)
Gann, W. D. 1949. 45 Years in Wall
Street. Lambert-Gann Publishing Co.
Gann, W. D. 1951. How to Make Profits in
Commodities. W. D. Gann Holdings, Inc.
Gann, W. D. 1954. Why Money is Lost
on Commodities and Stocks and How to
Make Profits. Promotional booklet.
Kuhn, T. S. 1962. The Structure of
Scientific Revolutions. 3rd ed. Chicago,
IL: University of Chicago Press.
Wyckoff, R. D. 1909. William D. Gann; An
operator whose science and ability place
him in the front rank his remarkable
predictions and trading record. The
Ticker and Investment Digest, vol. 5, no.
2 (December).
James
Smithson
(smithsonjames@
hotmail.com) is an investor and trader
based in London.
www.sta-uk.org
MARKET TECHNICIAN
Point and Figure charts:

From the 19th to the
21st centuries
was becoming difficult, so charts using

the end-of-day summary was the only
way forward. The drawing convention
changed for 3-box reversal charts to
Xs for up columns and Os for down
columns. The use of 3-box charts also
gave rise to 45 trend lines and targets
based on vertical thrusts.
By Jeremy du Plessis
Finally, a
market breadth indicator based on

Point and Figure signals, called Bullish
1. Introduction
Percent, was developed.
The Point and Figure method of charting has been around for 150 years and
during that time it has evolved without losing any of its unique character.
Through the power of the computer and some lateral thinking, more can be
done with Point and Figure now than anyone thought possible 20 years ago.
Before discussing where Point and Figure is in the 21st century, it would help
to see how it has evolved over 150 years.
The 1960s and 70s was the golden age of

Point and Figure charts. Every technical
analyst and everyone who traded,
used them.
It was also a time when
technical indicators started to appear,

but Point and Figure was overlooked in
that development, because it had no
The layout of this article is as follows.
their data so what started off as a price
Section 2 examines the roots of Point
record, became a Figure chart, the first
and Figure charting together with its
method of charting used in the West.
development against a background of
However, as writing down numbers
increasing computer power and other
became tedious, traders started to use
technical analysis techniques. Section
Xs with a vertical price scale and called
3 covers
it a Point chart.
sizes.
the determination of box
and Figure charts is that they do not
In early 20th century, the method
allow for the incorporation of moving
became formalised and books started
averages or other calculated lines, such
to appear. Trend lines were added to
as Bollinger bands and Parabolic SAR.
the charts and some patterns were
The absence of a time scale has also
identified and named; even a way
meant that technical indicators, such
to project targets from the width of
as RSI, MACD, could not be applied
patterns was developed. Traders who
and there has been no indication of
needed a longer-term view of price
volume levels. Sections 4, 5 and 6
action started using 3-box and 5-box
explain how all these have techniques
reversal charts in conjunction with
have gradually been integrated
their 1-box charts.
They kept both
Point and Figure charting in recent
Point charts and Figure charts, thinking
years while Section 7
that they showed different things, and
looks at how
risk:reward ratios can be applied to
referred
Point and Figure charts. Section 8
Figure charts, the name we use today.
concludes
By the late 1930s, Figure charts fell
that modern technology
has allowed Point and Figure charts
to them as their Point and
out of use.
to become a stand-alone discipline in

technical analysis.
By the middle of the 20th century,

more books had appeared; one by
2. Historical development
Wheelan (1990), who only covered
In the late 19th century, traders on
1-box charts constructed with tick
the exchange floors and bucket shops
data, and another by Cohen (1980).
needed a way to record what prices
He
were doing, so they simply wrote
but also used end-of-day high or low
down the numbers (usually without
data, much to the dismay of Point and
decimals) in rising and falling columns.
Figure aficionados. But obtaining tick
After a while they noticed patterns in
data and drawing long-term charts
www.sta-uk.org
moving averages on Point and Figure

charts was proposed but not taken up,
possibly because of the difficulty in
calculating and maintaining them.
In the 1980s technical analysis changed
dramatically. Pencils and rulers gave
One of the criticisms of Point
into
time scale. In the 1960s the concept of
not only ignored 1-box charts,
way to keyboards and screens and

suddenly
charts.
everyone
had
access
to
Unfortunately this led to the
demise of Point and Figure because

early software either didnt have Point
and Figure or if it did, it was unusable,
so bar and line charts took centre
stage.
The PC allowed many more
new indicators to be developed. When

software eventually came to terms with
Point and Figure, construction became
easier allowing box size and reversal
parameters to be changed quickly and
charts redrawn. One big improvement
was the ability to draw true log scale
Point and Figure charts by making
the box size a percentage rather a
number of points. That changed the
way long-term Point and Figure charts
were drawn and provided much more
accurate
analysis.
Computers
also
allowed the automation of 45 trend

lines and targets. By the end of the
1980s, Point and Figure was starting to
become popular again.
1991 saw the launch of Steve Nisons
13
MARKET TECHNICIAN
(1991) book introducing candle charts

from Japan to the West and suddenly
Chart 1: Daily S&P 500 0.926% x 3
everyone started using candles, to

the demise of bar charts. The use of
Point and Figure remained strong for a
number of reasons (Du Plessis 2005).
The
wide
availability
of
real-time
intraday data allowed traders to use

Point and Figure charts for short-term
trading again, something which had
been denied for a number of years due
to the difficulty in obtaining tick data.
Computer
recognition
of
patterns
allowed scanning of large universes for

Point and Figure double-tops, doublebottoms and trend breaks. Point and
Figure however continued to suffer
from perceived restrictions due to
lack of time scale and volume, until
21st century when all that changed
(Du Plessis, 2015).
Everything once
thought impossible, is now possible.

Box sizes can now be mathematically
determined,
rather
than
guessed,
making the drawing of Point and Figure
Chart 2: Daily FTSE 100 1.14% x 3
charts more objective. Because of the

objectivity of Point and Figure targets
and stops, the automatic calculation
of
risk:reward
ratios
is
possible.
Perhaps the most important innovation

is that a way has been found to use
moving
averages,
Bollinger
bands
and technical indicators such as RSI

and MACD on Point and Figure charts
even though these have been the
reserve of time-based charts. A way
has been found to incorporate volume
in the form of column volume and onbalance volume, thereby bringing a
new component to Point and Figure
analysis.
One way to measure typical
would normally be guessed, but ATR
price movements is to calculate the
calculates it as 0.926% for the S&P
Deciding what box size to use has
volatility. There are many volatility
500 and 1.14% for the FTSE 100, as
caused many to avoid Point and Figure
measures, but one of the best is
shown in Charts 1 and 2.
charts. Until the 21st century, it had
Wilders Average True Range (ATR).
been a guess based on experience, but
Once the ATR has been calculated, it
The advantage of using ATR, is that it
that is no longer the case, as box sizes
can be used as the box size for short-
changes when the time frame of the
can be determined mathematically and
term charts, but for the longer-term, it
data changes so a 1 minute chart of
in a systematic manner. The purpose
should be converted into a percentage
FTSE 100 (see Chart 3) calculates a
of the box size is to isolate typical
box size by dividing by an average of
box size of 0.03%.
price movements.
the price over the ATR period.
3. Point and Figure box sizes
The size affects
chart.
the sensitivity of the chart; the larger

the box size, the less sensitive the
14
Although
ATR
To obtain a medium to long-term view
measures
of
works
of a market, a log scale box size of 1%
standard deviation can be used, but
volatility,
well,
other
such
as
www.sta-uk.org
MARKET TECHNICIAN
the 21st century. It is acknowledged
Chart 3: 1 minute FTSE 100 0.03% x 3
that Point and Figure charts dont have

a time scale, but they do have an
x-axis, which is measured in columns.
So the moving average period is not
measured in days or hours, but in
columns.
The centre of each column
is taken as a proxy for the column and

the moving average calculated on that
figure, giving Point and Figure analysts
another
way
of
assessing
trend,
besides traditional trend lines. Moving

averages however cant be used in
exactly the same way as they are with
time-based charts, because columns of
Xs and Os pass through the average
too often to generate signals. Instead,
the break of the moving average is
combined with Point and Figure signals.
When a column of Xs crosses above
the moving average, the next Point
and Figure double-top signal is taken
as the buy signal. When a column of Os
Chart 4: Dax 1% x 3 with 20 column moving average
crosses below the moving average, the

next Point and Figure double-bottom
signal is taken as the sell signal. These
are shown by the red and blue arrows
in Chart 4 of the Dax index with a 20
column moving average.
4.1 Parabolic SAR and Bollinger
bands on Point and Figure charts
The use of moving averages on Point
and Figure charts has led to the use of
other calculated lines, such as Bollinger
bands and Parabolic SAR being used.
Chart 5 on the next page shows a 1%
x 3 of Gold with standard Parabolic
SAR lines. When a bullish Parabolic is
penetrated by a column of Os, it swaps
sides and becomes a bearish Parabolic
until it is penetrated by a column of
Xs and swaps sides again. Similar to
the strategy employed with moving
averages, the first Point and Figure
signal after the Parabolic is penetrated
is taken as the signal to buy or sell as
shown by the arrows in Chart 5. If the
Parabolic is penetrated, but no Point and
It is also possible to
4. Moving averages on Point

and Figure charts
use other formulas such as the square
Although the use of moving averages on
root of the price.
the formula does not necessarily have

to be volatility.
The main point is
Point and Figure charts was proposed
that box sizes can now be calculated
in the 1960s, the idea was not taken
using the formula of your choice.
up then, but it has been revived in
www.sta-uk.org
Figure signal occurs, the penetration

is effectively ignored as shown by the
penetration marked X in Chart 5.
Bollinger bands are a popular tool,
15
MARKET TECHNICIAN
but were always excluded from Point

and Figure analysis prior to the 21st
century.
Chart 5: Gold 1% x 3 with 0.02 Parabolic SAR
Now that moving averages
can be drawn, so can Bollinger bands.

Chart 6 shows a 1% x 3 of WTI oil with
10 column Bollinger bands.
One of
the main uses of Bollinger bands is to

expose areas of low volatility, called the
squeeze, which usually precedes sharp
moves. These are shown circled on the
chart and tend to show up much more
clearly on Point and Figure charts.
Bollinger bands may also be used to
generate objective buy and sell signals.
These are shown in Chart 7 of the S&P
500 with 10 column Bollinger bands.
When a column of Xs breaks above the
upper band, a marker is placed. A buy
signal is generated when the marker
is exceeded by a new column of Xs,
marked B on the chart. When a column
of Os breaks below the lower band, a
sell marker is placed. A sell signal is
generated when a new column of Os
falls below the marker, marked S on the
chart. Using the bands in this way acts
Chart 6: WTI Oil 1% x 3 with 10 column Bollinger bands
as a filter and prevents false signals.

Points X and Y show penetrations of
the lower band but sell signals were
not generated because the marker was
not breached.
The current position
at point Z, indicates that a column of

Os has crossed below the lower band
and a marker drawn, but the marker
has not yet been breached so there is
currently no sell signal.
Although not shown, Donchian channels
may also be drawn on Point and Figure
charts and used in a similar way to
Bollinger bands to generate buy and
sell signals.
5. Indicators of Point and Figure

charts
One of the main criticisms that has been
levelled at Point and Figure charts over
the years is that technical indicators,
such as RSI, MACD and others, cant
be used with them because they dont
have a time scale. That is no longer the
case. The same logic that has allowed
the use of moving averages on Point
and Figure charts can be applied to
off the raw price data, so if the Point
any time-based indicator allowing it to
and Figure parameters change, the
be drawn and used. It is important to
indicator will change.
note that the indicators are calculated

off the Point and Figure chart and not
16
The use of indicators has brought a
www.sta-uk.org
MARKET TECHNICIAN
Chart 7: S&P 500 index 1% x 3 with 10 column Bollinger bands showing buy and sell
signals
FTSE 100 with a 7 column RSI. Notice

how the divergences marked show
non-confirmation of the new highs and
new lows, something that would have
been impossible to see from looking at
the Point and Figure chart alone.
Any oscillator may now be used with a
Point and Figure chart, such as MACD,
Momentum, Overbought/oversold and
Stochastic.
But the use of indicators
is not limited to momentum type

oscillators; essentially any time-based
indicator can be used, for example,
Directional Movement, which generates
buy and sell signals when the blue +DI
crosses above or below the red DI.
In addition, the strength of the trend
is measured with the green ADX line
giving more information about the
state of the chart.
Chart 9 on the next page shows
Chart 8: FTSE 100 1.14% x 3 with a 7 column RSI
a 1.14% x 3 of FTSE 100 with a 14

column Directional Movement index.
Even
without
the
traditional
Point
and Figure trend lines, the Directional

Movement
gives
more
information
about the Point and Figure chart. The

Blue +DI came close to crossing below
the red DI indicating the that FTSE
100 trend was close to changing but
remains in an uptrend. The green ADX
however shows that the strength of the
uptrend has peaked and is starting to
slow.
The analysis of 1-box reversal charts is
more subjective than 3-box charts and
therefore often ignored. The problem
is that patterns are not as discrete
and the drawing of trend lines is not
objective. However the use of 21st
century Point and Figure tools, such as
moving averages and indicators, now
makes the analysis of 1-box charts
much easier.
Chart 10 on the next
page is a 0.025 x 1 chart of the US

new dimension to Point and Figure
or oversold. It was also previously
analysis. In the past Point and Figure
impossible to see divergence and non-
analysis consisted of trend, patterns
confirmation in a Point and Figure
and targets, but now it is possible to
chart, but that is now possible when
see rising and falling momentum as
technical indicators are used.
well as whether the price, displayed in

Point and Figure format, is overbought
www.sta-uk.org
10 year yield with a 10 and 20 column

moving average which help to describe
the trend. The MACD oscillator below
shows when trend is slowing down and
starting to change direction giving a
much better idea of what is happening.
Chart 8 shows a 1.14% x 3 chart of the

17
MARKET TECHNICIAN
Chart 9: FTSE 100 1.14% x 3 with 14 column Directional Movement index
the case.
The ability to assess the
volume in Point and Figure columns

has allowed volume histograms, as
well as indicators such as On-Balance
Volume (Granville 1976), to be used.
Chart 11 is a 1% x 3 of the Brent Oil
ETF.
The volume histogram below
shows the volume in each column;

blue bars for X columns and red bars
for the O columns.
Although the
volume histogram shows the volume

in individual columns, it can be difficult
to assess an overall picture, which is
where the Point and Figure on-balance
volume chart comes in. It simply adds
X-column volume and subtracts the
O-column volume.
Notice that the
price rise to point A is accompanied

by an increase in X-column volume
shown by the histogram as well as
the on-balance volume chart.
After
a small correction the price rose to

Chart 10: US 10 Yield 0.025 x 1 with 10 & 20 Column moving averages and MACD
a new peak at point B, but that was

not accompanied by any significant
X-column volume and consequently
the on-balance volume peaked at a
lower level, warning of a price fall.
Being able to see the volume in
columns also helps with the analysis of
congestion patterns. Chart 12 is a 1%
x 3 of DCC plc with on-balance volume
and column volume histogram. Notice
that, during the sideways congestion,
the volume in a short column of three
Xs, marked with arrows, exceeded that
of other columns, giving a clue as to
the direction of the breakout from the
congestion.
6. 21st Century Point and Figure

indicators
The 21st century has also given rise
to an oscillator based on the unique
Point and Figure 45 trend lines, which
Notice that the peak in rates in
moving averages and MACD show the
measures the deviation of the X and O
January 2014 is not confirmed by the
current trend as down. The clue to any
columns from those lines. This provides
MACD, thereby reinforcing the moving
change in trend will come when the
a way of assessing overbought and
average crossover that occurs two
MACD itself starts to turn.
oversold, as well as divergence, purely
months later. Early in 2015, the MACD
on Point and Figure criteria rather than
started to rise from an oversold level
5.1 Volume
adapting time-based indicators. Chart
indicating that the year long downtrend
Lack of volume was probably the
13 shows a 1% x 3 of the S&P 500 with
was coming to an end. Currently the
criticism most often levelled at Point
the P&F Trend Oscillator below, 45
and Figure charts but that is no longer
trend lines have been added to show
18
www.sta-uk.org
MARKET TECHNICIAN
Chart 11: Oil ETF 1% x 3 with volume histogram and on-balance

volume
Chart 12: DCC plc 1% x 3 with volume histogram and on-balance

volume
Chart 13: S&P 500 index 1% x 3 with 45 trend lines and P&F Trend Oscillator
the relationship between them and the

oscillator.
It is not possible to draw straight 45
lines on any time based chart, but it
is possible to translate the 45 trend
lines from a Point and Figure chart
onto line and candle charts and add
the P&F trend oscillator. Chart 14 on
the next page shows Point and Figure
45 lines translated onto a line chart
with the P&F Trend Oscillator below.
6.1 21st Century market breadth
Two
new
Point
and
Figure
based
market breadth indicators have been

introduced in the 21st century, one
based on the percentage of stocks
which are on an X column, and the
other based on the percentage of stocks
which are above the 45 trend line.
Combined with the traditional Bullish
Percent market breadth indicator, they
www.sta-uk.org
19
MARKET TECHNICIAN
Chart 14: Line chart of S&P 500 index P&F trend lines and P&F Trend Oscillator
with a risk:reward ratio of 304 may be

favoured instead. Chart 16 shows the
progress after the double-top buy and
the target achieved.
8. Conclusion
Point and Figure has a long history,
and far from being old-fashioned, it
has
embraced
modern
technology
and adapted without losing any of

its unique character to make it one
of the most powerful techniques in
technical analysis.
The addition of
moving averages and indicators has

meant that Point and Figure chartists
no longer have to rely on other chart
types
in
order
to
complete
their
analysis. Recent advances include the

calculation of moving averages and
price bounds on point and figure charts,
more advanced technical indicators
on point and figure charts such as
RSI and MACD alongside genuinely
21st Century techniques such as the
Chart 15
calculation of trend oscillators and
Chart 16
risk-return ratios on point and figure

charts.
References
Cohen, A.W. (1980) The Three Point
Reversal Method of Point & Figure Stock
Market Trading. (7th ed). Larchmont,
NY, Chartcraft.
Du Plessis, J. (2015) 21st Century
Point and Figure. New and advanced
techniques for using point and figure
charts. Petersfield, Hampshire, Harriman
House,.
Du Plessis, J (2005) The Definitive
Guide to Point and Figure. Petersfield,
Hampshire, Harriman House,
Granville, J.E. (1976) Granvilles New
Strategy of Daily Stock Market Timing
give three different time horizons, the
price from the double-top or bottom,
X column being the shortest and the
and the risk is entry price less the
Trend Percent being the longest.
stop, which is a signal in the opposite

direction. There can be two or more
7. Risk:Reward ratios
possible stops for any target, which
Because targets can be determined
is shown in Chart 15. The two stops
automatically and Point and Figure
provide two risk:reward ratios which
stops are so unambiguous, the 21st
help you to decide, firstly, whether to
century has also seen the use of
take the trade, and secondly, where
risk:reward ratios on the charts. The
to place your stop.
reward is the target less the entry
yields a risk:reward ratio of only 1.5
A stop at 55.7
for
Maximum
Profit.
New
Jersey,
Prentice-Hall Inc.
Nison, S. (2001) Japanese Candlestick
Charting Technique. (2nd ed). New
York Institute of Finance.
Wheelan, A.H. (1990) Study Helps in
Point and Figure Technique. (2nd ed).
Greenville, USA,, Traders Press.
Jeremy du Plessis FSTA is a Fellow of
the STA.
which means that the stop at 56.3
20
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Smithson Rediscovering WDGanns Method of Forecasting The Financial Markets

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ISSUE 80 FEBRUARY 2016

THE SOCIETY OF TECHNICAL ANALYSTS

Release from the private investor trap........................................................................... 1

Bytes and pieces................................................................................................................. 6

Rediscovering W.D. Ganns method of forecasting the financial markets................ 7

requisite for the CISIs level 6 Diploma in Investment

In addition to the benefits outlined for those who

Both the Introduction to Investment and IOC are

CWM is the highest award conferred by the CISI.

FOR YOUR DIARY

New and exciting market timing indicators..................................... Speaker: TOM DEMARK

THE SOCIETY OF TECHNICAL ANALYSTS

Journal of the Society of Technical Analysts

Release from the private

There could be no better way to illustrate

Sea Company for 7,000 having doubled

I can calculate the motions of heavenly

bodies but not the madness of people.

He has no means of judging when the

come, but it was not yet in sight(2).

market is at a long term maximum and

During an ensuing rally he will probably

when a major downturn is in the offing.

mistakenly think that the main trend is

He might read the financial pages of

still alive and will regain his composure.

Sooner or later on the way down he

but finds that every article forecasting

tumbles to the fact that all is not well

a downturn is balanced by another

and sells out at a most disadvantageous

giving the contrary view. The time will

time. The trap has snapped shut. Well

come when a downturn arrives that is

into the next bull market, with the hurt

not just a temporary interruption in the

of his unsettling experience wearing

main upward trend but the beginning

off, and seeing everybody else making

of a major move downward. Insiders

money he tries his luck once again.

are beginning to take their gains but

He thinks that he will not be caught

the private investor, not being privy to

out twice but he is. There are many

what is happening, will hang on in the

graphic descriptions of the scenario

hope and expectation that prices will

from which this article gets its title, e.g.

turn upward once again, as they have

Charles Kindlebergers book, Manias,

done several times before. The end had

reader who has already become a victim

overwhelming majority of professional

think of the above scenario as one of

In his book he writes Time

in the Market is more important than

In the Investors Chronicle

of 10th to 16th July 2015, in an article

ISSUE 80 FEBRUARY 2016

Journal of the Society of Technical Analysts

Despite widespread scepticism it was

Figure 2 EoP and Moving Average Compred

c = price at the origin of the