Scaling Gann? – Understand the basics of financial charts

1. The Ticker Tape: Hello and welcome. My name is Stephen Hollander. And in this series of videos I will talk about a popular subject: "how to scale a chart." First, I will look at the early history of trading. Then we'll need to see what scale actually is. And finally, we will put it together on paper and on screen. Very shortly, this is how they traded back in those days: stock prices were telegraphed to a ticker-machine, and they were written onto a board at a brokerage. If a trader was rich, he would rent an office and have his own ticker tapes. Charting stock prices was a later invention - for a very simple reason: They had to be drawn by hand using a graph paper. If you have found this series of videos, you must be somebody who is interested in Gann's studies. Here, I will only talk about the means and purpose of his techniques. We will not investigate why these techniques work or if they work or don't work. Before you start anything, please use the resources section for help to follow along. 2. The Chart: Charts were a very complicated or expensive way to trade. But don't take my word. There is a famous book from those days: "The Reminiscences of a Stock Operator." It gives us a very detailed description about the whole atmosphere of trading back then. I don't want you to get me wrong. This book has very little practical use, its literature. It was written for entertainment, not as a trading handbook. But it gives us an overview why people preferred looking at the numbers as they came out of the ticker. Trading charts were considered impractical for the very reason that they were too time-consuming to create – as compared to watching the numbers and acting on them. So let's not go further than this statement: "A chart helps those who can read it, or rather, who can assimilate what they read." 3. The Scale: Let's face it: the world is globalised. Most of us speak some kind of international English as a 2nd or 3rd language these days. Some of us only use it to communicate on the internet. But what does this have to do with our topic? If you are like me, when it comes to any special subject, I am always ready to overanalyse it. And I noticed that most of us, who study Gann, do the same. People approach Gann like a puzzle. And they have to solve it. The situation is the same when it comes to scaling. "Scale" is one of those buzzwords around Gann. Have you ever noticed how many different things it means in English? Even if you are a native English speaker, you might not realise this. For our purposes, this definition is the best; we don't need to go further: "A system of ordered marks at "fixed intervals used as "a reference standard in measurement." It sounds very-very complicated because linguists and other scientists like to over-complicate things. So let's break it down, because as I promised, we need to keep things simple. It really goes on about the same thing. Measurement: which for our purposes are the numbers. What are numbers? Ordered marks, and they are in order with fixed intervals between each. And most importantly, we use numbers as a reference. Simply put, we make a connection between things by using numbers. Nothing complicated. So, for instance, on a time and price chart, we define the price scale from 1 to 10. 4. Scale on Paper: So far, we have agreed what a scale is, and now we can get to the point To understand how to make a chart on paper, first we will need a piece of paper like this. Let's just say we want to look at last month's closing prices day-by-day and make a chart. Which means we have one number for every single trading day. So we define the scale to start somewhere. We define a scale from 1 to 10. Then we start putting the prices onto the paper: from 2 to 6, 4, 8, 6, 8, back to 2, up to 4... And as we start getting bored, we notice something. We made a mistake! We should have looked at the whole set of prices! They go up all the way to 20! But our scale only goes from 1 to 10! What is a normal reaction? Here's our chart and I will just stick another paper on top of it! Going like this, you will soon need a bigger desk! ...Or a brand new wallpaper. It's obvious that we cannot keep on going like this. So we have to ask a question now: What did Gann do? It's just as easy, but we need to do the work from the beginning again. Get another piece of paper, redefine the scale going up to 20 and redo the chart once again: from 2 to 6, 4, 8, 6, 8, 2, 4... And so on. This way, you are safe until the price goes above 20 and you will have to do it all over again. Now you see the reason why it was so time-consuming to construct a chart manually. It wasn't just one extra step. It had to be planned, it involved many extra steps, which we don't see today as charts are automatically created by computers. 5. Gann and the Scale: Onto the next part! I'll think you could easily follow the line of thought so far. Here, I want to focus on something that seems to be the core of the problem and seems to confuse most people. This is where we are now: we have the exact same charts on two different scales. What did Gann do? He had other calculations on his charts. I don't say drawings for a reason because everything he did was based on numbers and calculations. Unfortunately, the so-called "Gann Tools" are part of the drawing tools of any trading software. I would not mind calling them "drawings" as long as we remember what this means in our context. This means that when he changed the scale of a chart, he couldn't just do this: he couldn't just copy all the so-called "drawings" because the calculations would have been completely wrong, incorrect. You cannot skip doing the recalculations when it comes to the "drawings". This is the correct scale. 6. Scale on Screen: Let's carry on from this statement: Anything we put on a chart must be referenced by numbers. When you make a chart by hand, you will know the price went from 2 to 6, 4, 8 and so on. However, when you see the same thing on screen, there will be a great disadvantage. You don't need to focus on the numbers anymore. To make it more convenient, the change in scale has become automatic. This is how it works on the screen. No need to redraw anything because the work surface is now endless. The chart is flexible. Let me again remind you of this quote: "A chart helps those who can assimilate what they read." Working on a computer instead of paper doesn't mean that we don't have challenges. We just face different ones. What did Gann do on paper? He tried to use a fixed scale to save efforts and time. He also used so-called overlays, which were independent layers to move his analysis from one chart to another chart. To do this, both of the charts and the overlay had to be the same scale as I have shown you. This is the reason he placed so much emphasis on the scale! What would Gann do on screen? It is almost the opposite: because charts have become flexible, we need to make sure that whatever we do on charts, our analysis moves hand-in-hand. The analysis cannot move independently when we scroll through a chart on screen. 7. Graph Papers: Now I need to ask you to do something. If you have only been *watching* these lessons without actually following along by using a paper and pencil, please go back and do so now. You'll need to practice this and the reason is you will answer most of your own questions along the way. These are just a few numbers to start off with. You'll need to understand how to transform them into a chart. As I have explained, all you need is a pencil and the simple grid on paper, I could not make it any more simple. A real chart would be much more complicated to create. One more thing about the grid on the paper. Back in those days of Gann, prices were quoted in full points and quarters of points. And Gann used an inch-by-inch charting paper. Today, prices are quoted in full points and decimals. It's better suited to use a metric charting paper. Which means we have a paper where 1 square is not 1 inch divided into quarters and eighths, but 1 square is 1 cm divided into 10. This does not affect our method or any of our techniques in any way. Let me show you. We can assign any number of points to any of the spacing. It is not the grid or the measure of 1 inch or 1 cm that dictates anything. It is also us who utilise the spacing of the grid and define what scale we want to use. Earlier, I made the explanations and lessons very simple by using the most basic grid possible. Depending on the price movement that we want to transform into a chart, we can have many options. 8. What Did Gann Do?: I used this question throughout these lessons - obviously, the main reason is to give you some consistency all the way, to be able to connect the lessons. But the other reason is plain and simple. If you notice, I tried not to use any of the buzzwords around Gann other than the "scale". As I've said, it's not a puzzle, do not try to analyse words. Try to understand what he did. Most of the Gann literature and internet content is nothing but stuff that is trying to explain what he meant by this word or that word. And people go into lengthy arguments about them in comments. So instead of talking or giving you a lecture, I tried to show you how it had been done. I encourage you to experiment. We can argue about the words later. So for instance, instead of "scale", it would be more appropriate to talk about the "spacing" of a paper-based grid chart. It solves the problems, because we don't have to use any grid on a screen-based chart. It does not apply there because it works in a different way. *We* work on it in a different way. And the issues we face are also completely different - as I have pointed out. Gann never did anything special in the construction of his charts, because you can only do it one way, really. He just never lost track of the fact that the chart is not a goal, not the purpose, it is just the most important tool to reach the goal. 9. What Would Gann Do?: In the introduction, I said I will talk about the means and the purpose of Gann's techniques. I talked about the "means" a lot, which is - in a nutshell: don't forget that first and foremost, he worked on paper. Plenty of the problems that he ran into simply don't exist today. So I have talked about the means, the tools of his analysis, but I haven't talked about the purpose. It's for an obvious reason. If you have found these lessons, it means we already have the same goal: we want to put our analysis onto a chart before the price movement reaches the future areas. If we miss this goal, it doesn't matter how brilliant our analysis looks. So the real value to take away from these lessons is simple: it's not the tools which are important, it is the concept. What is the "concept" we have agreed on in these lessons? Gann's techniques are based on numbers and their regularities. Never forget that the chart itself is also just a tool which helps us to identify these "regularities" - which is just a word for something that is not a rule but occurs often enough. It makes no difference whether this tool, the chart, is based on paper or screen. A chart helps us visualise those regularities. So, to wrap it up on a personal note: depending on the reactions or encouragement I'll get after I publish these short lessons, I have other things planned for the future. But I had to start with the very basics to make sure we are all on the same page regarding what a chart is. Because, in my experience, most people take it for granted and that is where they get mixed up, not understanding the technical difficulties of a paper-based chart; and they end up creating issues on the screen which should not even be there in the first place. The whole discussion about "scaling" is nothing but such an issue. Don't get me wrong. I don't expect anybody to agree with me. If you take away one thing from these lessons, it should be: focus on the purpose and use your tools as they are intended. Whatever the case is, I thank you for your time and I'll speak to you in another string of lessons in the future.