Traders Toolbox: Traders Toolbox: Divisions of eight

Studying the writings of traders who were active in the first three or four decades of this century has often inspired me to do additional research. This has allowed me to develop additional tools and theories. In reality, what I present in this segment will not "pure" Gann. Instead, I will present applications and approaches which I have found to be useful and successful. Hopefully, this will provide a foundation for anyone who wants to study further on his/her own.

Many of the successful traders from the first half of this century have a reputation of being almost mystical. To many, this is especially true of W.D. Gann. Trader after trader has searched for Gann's "secret" to unlock the mysteries of the market. Many of his tools, and mine as well, are relatively simple and are not secrets. However, after delving into his writings, I have come to the conclusion that his biggest "secret" consisted of two things: HARD WORK and COMMON SENSE. Unfortunately, many would-be traders seem unwilling to do the first and lack the ability to use the latter.

Probably the easiest place to start explaining analytical tools is with a simple method to determine support and resistance levels. To locate what should be among the most important areas of support and resistance in a market, divide the move from one extreme to the other by eight.

As an example, oats posted a high in the summer of 1988 which may hold for some time to come. The monthly oats chart shows the range from the all-time low near 14 posted in 1932 to 393, the 1988 high, divided by eight. These eight points should prove to be important areas of support and resistance for years to come. One way to check this range is to examine whether the eight points have proven significant in previous action. In the oats, it is fairly clear the eighth points have been effective in previous years, which should give one a high degree of confidence these levels will be important in the future.

Gann indicated that the 1/3 and 2/3 divisions of a range (broken lines on monthly oats chart) were important as well. I have found the 1/3 and 2/3 points to be significant, but they will generally take a secondary role to the eighth points.

The divisions of price, primarily the eighth points, can be placed on not only the long-term monthly and weekly charts but on the daily charts as well. As the daily perpetual chart of December oats reveals, the long-term levels of support and resistance are significant to daily action. It was no surprise to see December oats find support at the 250 level as manifested during July and August, 1988. Since the point of the all-time range at 250 had been clearly broken, one would have expected to see this market fall to the level near 202 (which it later did).

The divisions of a range are not limited to the move from all- time low to all-time high. Any sizable range of movement can be divided by eight to determine lesser-degree levels of support and resistance. Note the upmove in 1991 in December silver from February to early June. Following the June high, the eighth points provided reasonable areas of support and resistance on the ensuing decline. The boxed area on the weekly December silver chart represents the action shown on the daily chart. The weekly chart didn't indicate this range was very significant, essentially a corrective rally; yet, the eight divisions still provided valuable reference points.

The power of this tool is obvious.The large-degree eighth points are invaluable as reference tools for support and resistance. Yet, the same principle we'll work on daily charts, smaller ranges and, yes, even intraday charts.

Credit to Glen Ring for this work