Gann's Law of Vibration

William Delbert Gann (1878 -1955) claimed he had discovered a repeating pattern of time and price that allowed him to predict market tops and bottoms. Collective behavior creates cycles through time, and that is what Mr. Gann called the “Law of Vibration”.

Vibration’s Theory in Financial Trading

If group behavior creates a repeating pattern, by calculating where the pattern appears next, you can make precise predictions regarding where the general market is heading. However, no one has ever precisely explained how Mr. Gann's law of vibration actually works. In this article, we are going to investigate the Vibration theory and its implications in financial trading.

 

From Pythagoras to Gann -The Ancient Origins of the Vibration’s theory

Vibration theory’s origins go back to the fifth century BC. The school of Pythagoras (570 BC –490 BC) thoroughly examined the natural frequencies of several fundamental systems (strings, vessels, etc.) and concluded that the natural vibration of a system is a pure property. A key feature that appears independently from any excitation. According to Pythagoreanism, everything in nature is connected. The movement of one thing generates harmonic associations (vibrations) to all other things in the system. The key to revealing the truth behind these natural associations is observation and mathematics.

Later, the legendary analyst William Delbert Gann developed the “Law of Vibration” and use it to predict the broad movements of equity and commodity markets. WD Gann was a very successful trader that used mathematics and astrology to investigate key patterns and time cycles due to certain market events.

Natural associations create patterns: “The pattern is said to emerge as a result of discontinuities in the perpetual processes of expansion and contraction within the cosmos. According to Mr. Gurdjieff, the discontinuities are a function of the Law of Seven, and the forces of expansion and contraction are a function of the Law of Three.” {Tony Plummer (2013)}

 

Gann’s Methods and Analytics

Gann argued he had discovered a law of vibration that exists everywhere in the natural world, including the financial markets.

Collective Behavior Creates Repeating Patterns

According to this theory, human behavior isn’t random and creates predictable vibrations in the whole market. Gann traded financial markets based on the idea that collective human behavior forms a specific repeating pattern that unfolds through time. Group behavior creates a distinct trading pattern, and by calculating where the pattern appears next, you can make precise predictions regarding where the general market is heading. As Gann wrote himself in an article: “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”.

We don’t exactly know the source of his analytic tools, but we do know that he used geometry and astrology in his trading decisions. Gann traveled around the world in search of ancient knowledge and studied the Bible by using Gematria. Gematria is a Jewish form of numerology in which letters are substituted with corresponding numbers. He also discovered an ancient method called the ‘Square of Nine’.

Square of Nine or Gann Square

Gann used circles, triangles, and squares in his work. The square of nine is a trading method that squares price and time. The first square is completed by using the number 9. Each cell in Gann’s square of nine is a point of vibration.

The Law of Three

Gann said, “In every law of nature there is a major and a minor; a positive, a negative, and a neutral.” Moreover, P.D. Ouspenslcy stated, “Every action, every phenomenon in all worlds without exception, is the result of the simultaneous action of three forces - the positive, the negative, and the neutralizing."

We can use the Law of Three in every financial market, where:

• Positive creates a bullish market
• Negative creates a bearish market
• Neutral creates a ranging market

Gann's Basic Tools

Gann’s analytic tools extend in the future, and this is why they have predictive ability. You can find the following tools in every modern trading platform:

• Gann Angles which create a Gann Fan
• Gann Square
• Gann Box

Gann angles divide time and price and can predict areas of strong support and resistance. The logic is that the market moves from angle to angle. When the market crosses an angle, moves to the next angle. The combination of all angles makes up a Gann Fan.

It is wise to combine Gann’s tools with other indicators (TA, or not) in order to better identify market tops and bottoms and make your overall analysis more applicable to your trading strategy. For example, you can combine Gann’s angles with the Fibonacci retracement or with volume analysis.

 

 

How to Successfully Trade with the Gann’s Law of Vibration -A Modern Approach

This is a practical example of how to trade with the law of vibration by combining it with proven analytic tools.

(1) Choose a financial asset and study it on higher timeframes (monthly, weekly, daily). We only use higher timeframes because the impact of market noise is limited there, and price action is more telling.

(2) Examine historical market data (time + price) by using the Gann Fan tool. Focus on periodic highs and lows to understand the cycles of uptrends and downtrends. A key periodic high/low is the effect caused by a high vibration:

(a) If there is a distinct and repeating pattern through time, it is easy to calculate the degree of vibration. For example, it is easy to calculate the degree of vibration in a long-term-ranging market. Commodity assets usually range between historical support and resistance, based on high seasonality.

(b) If there is not a distinct pattern, that means the degree of vibration is considerably larger and you need to zoom out to be able to identify it.

(3) Once you have ensured the existence of a repeating pattern, you can try to calculate the degree of vibration by measuring previous uptrends/downtrends from top to bottom, and vice versa. Calculate not only the returns of each movement but also the time it needed to unfold (price+time). You can use Gann angles for that job.

(4) Study volume on weekly and monthly timeframes. Gann argued that we should solely trade active markets. Trading volume tends to peak near key periodic highs and lows. However, there are also additional categories of more complex market data that can confirm tops/bottoms. For example, the level of Open Interest in the futures market. History has shown that Open Interest peaks/bottoms before a key market top/bottom.

Next, focus on recent price action, and identify the initiation of a strong trend (bullish/bearish). Support your views by using trading volume, open interest, and market sentiment indicators.

(5) Confirm your views using technical analysis on higher timeframes. These are some proven signals for confirming a strong trend reversal:

• The price retraces near a key Fibonacci retracement level.
• There are divergences on the daily/weekly timeframe between the slope of the price chart and the slope of the corresponding RSI or MACD.
• There is a distinct reversal candlestick formation on the weekly/monthly timeframe, such as a bearish gravestone dogi or a bullish hammer.
• Focus on the break of a key trendline or a major historical support/resistance price level. Remember, we are only interested in the closing prices, not the wicks.

(6) Apply the degree of vibrations of previous trends in today’s price action and forecast when (time) and where (price) the next high/low will occur.

• Again, use the Gann angles.
• If a financial asset is found at price discovery, you can also use the Fibonacci Extensions tool.

If the historical degree of vibrations varies, focus on the similarities between past and recent patterns. In addition, you can create different scenarios based on different degrees of vibrations. Don’t forget that the absence of a distinct pattern means you have to zoom out.

 

 

 

Gann’s Trading Tips

Finally, these are some useful trading tips by William Gann:

1. Only trade active markets, and assets

An active market means a liquid market where the trading spreads are tight and entry/exit is easy. In addition, it is more difficult to manipulate an active market and that means forecasting becomes more reliable.

2. Trade along with trend

Trade in line with the master trend, not against it. If you are not absolutely sure about what is the market trend, don’t trade at all.

3. Avoid getting in and out of the market too often

There is no reason to alter your positions if there is no fundamental change. Never get out of the market because you have lost patience or get in because you are anxious from waiting. Besides, a great number of trades increases transaction costs.

4. Don’t overtrade your positions

Don’t allocate more than 10% of your trading capital in a single position.

5. Don’t let a profit run into a loss

You can use a mental stop-loss or a trail-stop to protect your profits.

6. Don’t average losses

Don’t increase a losing bet, instead, cut your losses short and run your profitable trades. Reduce trading after the first loss.

 

Sources:

• Forex-investors.com (William Delbert Gann)
• “The Law of Vibration: The Revelation of William D. Gann” (Tony Plummer, 2013)
• “Pattern, Price and Time: Using Gann Theory in Technical Analysis” (James A. Hyerczyk, 1998)
• Bloomberg Market Essentials, Fibonacci Analysis (2008)
• The origins of vibration theory -A.D. Dimarogonas (2003)
• The Practical Application of Gann’s Law of Vibration (https://sacredtraders.com/the-practical-application-of-ganns-law-of-vibration)
• Financial Astrology and The Law of Vibrations (https://www.tradersnest.com/blog/financial-astrology-and-the-law-of-vibrations)

 

■ A Modern Trading Approach to the Law of Vibration (W.D. Gann)

Giorgos Protonotarios, Financial Analyst

for TradingCenter.org (c)

3rd of January 2022