Price Units, Factors, and Harmonics for Gann Tools
To get the most out of the Gann tools and to make them a meaningful part of your analysis it's important to understand how they work. Many of the tools, such as Gann Fan Angles, use a property called Price Unit in their calculation. The Gann Square Top/Bottom tool also uses time and price factors, whilst the Gann Square Range uses time and price harmonics. This article will explain the difference between them and how each can be used.
The Price Unit is the foundation of all Gann tools. Whenever we need to relate price and time together, it is easy to define time as it is usually one bar, or one week etc, but to define price we need to set a base Price Unit. Typically the price unit is set to the smallest tick movement of a security, but depending on the particular chart's value and time frame (i.e. 5 minute bars, weekly, etc) in Optuma we allow you to change that so that you can experiment with different price units and see what effect that has on the analysis. Gann often talked about each market having its own "periodic weight" like atoms, the Price Unit is the way that you can experiment with different values.
For example, a security trading at $2.60 that moves $0.01 in price is different from a currency trading at $0.8652 moving $0.0001 in price, which is in turn different from an index at 1,300 moving at 1.
You can also change the price unit to your own value eg 1 point per day or 10 points per week, etc. When the tool's Price Unit is the same as the chart's Time/Price ratio then the 1x1 in the Gann Fan or Gann Square will be a geometric 45 degrees.
Another way of adjusting the calculations on several Gann tools is by changing the Factor. This scales the interval accordingly, so on a Gann Square set to 90 bars, adjusting the Time Factor to 0.5 will draw the edge of the square at 45 bars. Similarly, if the Price Factor is changed to 2 then the top of the box will be drawn $1.80 away (if the Price Unit is set to 0.01).
The Factor in the Dynamic Square of 9 tool multiplies the difference between the levels. For example, starting at 1 with a Price Unit of 1 and a Factor of 1 the first 360 degree line will be drawn at 9; increasing the Factor to 2 will draw the first 360 degree line at 17. This is calculated by the difference between the lines when the Factor is 1 (i.e. 9 - 1 = 8) and multiplying it by 2 (16) which when added to the start price (1) gives 17. Similarly, using a Factor of 3 will draw the first 360 degree line at 25.
The idea of harmonics originate from wave theory. Where factors scale intervals, harmonics divide them, so when there are two harmonics, the wave - or interval - is split in half, three harmonics splits it in thirds etc. Often in Gann-based tools the harmonics are just as significant.
For example, while the ending date of a Gann Square Range is valid and very important, it can often be too far in the future to be useful in day-to-day trading. Harmonics is used to divide the square both in time and price, independently, into smaller more appropriate squares. If a time harmonic setting of 4 is entered, 4 squares are displayed with the same price size as the original square, however the time value is broken up into quarters based on the original square size for time. If a harmonic of 4 is entered in both price and time, 16 squares are drawn inside the original Gann Square, as in this example: