Gann Fan

Lines of Gann Fan are built at different angles from an important base or peak at the price chart. The trend line of 1х1 was considered by Gann the most important. If the price curve is located above this line, it is the indication of the bull market, if it is below this line it is that of the bear market. Gann thought that the ray of 1x1 is a powerful support line when the trend is ascending, and he considered the breaking this line as an important turn signal. Gann emphasized the following nine basic angles, the angle of 1x1 being the most important of all:

• 1х8 — 82.5 degree
• 1х4 — 75 degree
• 1х3 — 71.25 degree
• 1х2 — 63.75 degree
• 1х1 — 45 degree
• 2х1 — 26.25 degree
• 3х1 — 18.75 degree
• 4х1 — 15 degree
• 8х1 — 7.5 degree

The considered ratios of price and time increments to have corresponding angles of slope in degrees, X and Y axes must have the same scales. It means that a unit interval on X axis (i.e., hour, day, week, month) must correspond with the unit interval on Y axis. The simplest method of chart calibration consists in checking the angle of slope of the ray of 1х1: it must make 45 degrees.

Gann noted that each of the above-listed rays can serve as support or resistance depending on the price trend direction. For example, ray of 1x1 is usually the most important support line when the trend is ascending. If prices fall below 1х1 line, it means the trend turns. According to Gann, prices should then sink down to the next trend line (in this case, it is the ray of 2х1). In other words, if one of rays is broken, the price consolidation should be expected to occur near the next ray.

When does Support become Resistance and Resistance become Support?

Once you can identify your support and resistance points with relative accuracy, the next step is to understand that although trends do happen with forex trading, trends are made to be broken. It is important for you to watch for this. Roll with trends until they look to be reversing. But the million dollar question is "when can you decide when a support or resistance level has been broken in the forex market?"

A lot of traders are going to be quick to pull the trigger when a support line or resistance line has been broken. If you look at the image below, you will notice that the resistance level was broken only to quickly fall back. These pullbacks happen when forex traders are testing the market. This happens and is easily identifiable by looking at the candlesticks.

Did the chart break the line of support or resistance only to retreat back to within its trend? It is easy to mistake the market breaking these points for new established lines of support and resistance. However, when you are determining your resistance and support lines, you need to understand that you want to create them in relation to the way the market is moving ON THE WHOLE, not simply the reflexes that happen from day to day. You want to analyze the trend, not the knee jerks of the market.

So, if the forex market is constantly ebbing and flowing and breaking support and resistance barriers,how do forex traders determine when a support or resistance line is really broken?

There is no real answer to this. Some forex traders consider where the market closes at the end of any given day as a good way to determine if the price has hit a new support or resistance line.

However, this is not always the case. If you used this strategy as a definitive place to determine support and resistance lines, you will get burned more than once. A better way to use support and resistance lines in forex trading is to think of them not as concrete numbers but as zones of opportunity.

So, judging from the forex chart above and supposing that we didn't see it in its entirety but had reached "point A" on the chart where the line began edging its way upwards, breaking the resistance level", would you automatically assume that that should be the new support line? Would you immediately start mapping out new support and resistance lines?

If you were smart, you would hold the phone and wait it out. Why? Because, normally when a support and resistance line is broken, it takes a second for forex traders to decide whether the broken barrier was justified. And this is one of the cruxes that forex trading are forged on and more importantly, it separates the forex traders who make money from the forex traders that don't.