W.D Gann is considered a master trader. Many of his techniques are esoteric but a number of gems are to be found in his courses and books. Here we will look at a number of Gann's rules for determining a trend change, and market entry rules that Gann derives from these rules.
ll charts created with HotTrader Software.
We are going to start with Gann's bear market "Short" entries first. These principles work with many markets including stocks and commodities, but we will use stocks in these illustrations.
"Going from a Bull to Bear market" - Gann says ...
In "How to Make Profits in Commodities", W.D Gann says ...
"SECONDARY RALLY OR LOWER TOP. After a prolonged advance when wheat or any commodity reached final high and the Bull campaign is over, there is usually a short severe decline, lasting anywhere from 1 to 2 and possibly 3 weeks or months. After the first sharp decline, the market may remain in a narrow trading range for 10 days or 2 or 3 weeks, in some cases even longer."
"After that, there is a SECONDARY RALLY, sometimes getting up near the OLD TOP and sometimes not reaching it by many points. Going over past records you will find that a market seldom fails to have this SECONDARY RALLY. When this SECONDARY RALLY comes, especially after the TREND has TURNED DOWN, it is the safest rally on which to SELL SHORT, because the decline is faster from that time on and rallies smaller."
Below is an example of this on ANZ Weekly chart. Note that this picture exactly fits Gann's description - a break of the uptrend, then a large secondary rally followed by a reasonably fast bear market decline with smaller rallies. (In order to effectively sell short ANZ, you would have to have bought put options.)
A further point that Gann raises is this ... "Sell after the first decline exceeds the greatest reaction in the preceding Bull Campaign or the last reaction before the final top" (W.D.Gann Stock Market Course).
For an explanation of this,
refer to the chart and commentary below ...
The size of reactions 1, 2, 3, 4 and 5 are marked with white lines. Reactions 1 to 4 occurred during the bull market phase. Reaction 5 is the first decline that exceeds the greatest reaction in the preceding bull campaign AND Reaction 5 exceeds the last big reaction before the final top (reaction 4) AND Reaction 5 breaks the long term uptrend. (We've used a normal trend line to mark this, not the break of a swing point. This is not what Gann taught but it is an alternative method that can be used when you become skilled at recognising the trend channel.)
Places to Sell ...
Gann says that the safest place to sell is near, that is, just after, the top of the secondary rally - assuming you can pick this- In the W.D.Gann Stock Market Course, Gann Writes ... ".SAFEST SELLING POINT
Sell on a secondary rally after a stock has broken the previous bottoms of several weeks (Sell Point 2 just after "Top of Secondary Rally" in the picture above) or has broken the bottom of the last reaction, turning trend down. (Sell Point 1) This secondary rally nearly always comes after the first sharp decline in the first section of a Bear Campaign."
and ...
"Sell after the first decline exceeds the greatest reaction in the preceding Bull Campaign or the last reaction before the final top." (Sell Point 1).
Important Points ...
(1) If you are initiating new positions, that is, you are selling short or buying put options, you must first determine your risk before entering the trade. Sell Point 1 may require a stop above swing point 5. This stop is a fair distance away in this example and may be too big for your account size or may cause a severe reduction in value of a put option if the market went this far against it. If this is the case you do not take that trade.
(2) Sell Point 1 in this case could be used for exiting a long position, but not initiating a new short position if the risk was too great, considering where you would put your stop - above point 5 top. In other examples Sell Point 1 can be good for initiating a short position.
(3) Gann considers Sell Point 2 to be the safest, with a stop above the top of the secondary rally, although this sell point can be difficult to define and is actually not used in his standard swing trading method. There are methods which can be used to define it some of the time, which we will look at in the screen movies.
(4) Sell point 3 is used in Gann's swing chart trading method and can be used subject to you being able to define a point where you would exit the trade with a stop if the trade goes against you. Gann says put a stop above the secondary rally.
Further example ...Study this carefully ..Acacia Resources Weekly with 2 Bar Hotswing..
Explanation ...The market falls, going lower than swing bottom 3, and the fall from swing top 4 to swing bottom 5 is larger than the range from swing top 2 to swing bottom 3, which is the last and largest reaction of the preceding bull campaign. The fall below swing bottom 3 "officially" turns the trend down based on Gann's rules so we are now looking for the "seconadary rally". Market does a "Secondary Rally" making swing top 6. which is quite a bit lower than swing top 4. Gann says that the secondary rally sometimes gets up near the old top (4) and sometimes does not reach it by many points. In this case it didn't reach it by many points indicating potential weakness, which was bourne out by the subsequent bear market. Gann's rules ...
Entry Point 1 - Sell if long and sell short as market goes under swing bottom 3 subject to the risk being acceptable if you put you stop above swing top 4.
Entry Point 2 - Sell Short as top of secondary rally turns down (swing top 6). Swing top 6 is a bit above swing bottom 3 (remember "Support and Resistance in Trends").
Entry Point 3 - Sell short as the market goes below swing bottom 5, subject to you being able to define a suitable stop point - a tick or two above swing top 6.
Here is what it looks like on a swing chart ...Carefully go through the preceding explanation and relate it to the swing chart.
Places to Buy ...
On page 35 of the W.D.Gann Stock Market Course, Gann says ...
"SAFEST BUYING POINT Buy on a secondary reaction after a stock has crossed (above) previous weekly tops and the advance exceeded the greatest rally on the way down from the top."
Example.
Explanation ...
Swing tops 4, 6 and 8 are bear market tops because they are lower than previous swing tops. Market then goes above swing top 8, falls back making swing top 10, rises to make swing bottom 11. Swing top 10 is the "Rally" and swing bottom 11 is the secondary reaction.
The advance from bottom 9 to top 10 exceeded the size of rallies 3 to 4, 5 to 6, and 7 to 8. (I haven't counted 1 to 2).
Entry Point 1 - Buy as market goes above swing top 8, stop under swing bottom 9.
Entry Point 2 - Buy near the bottom of the secondary reaction (11) if you could pick it - it's around the price of top 8 in this example - (remember "Support and Resistance in Trends"). Entry Point 3 - Buy as the market goes above swing top 10 with a stop under swing bottom 11. That is, you buy on stop a tick or two above swing top 10 with a sell stop a tick or two below swing bottom 11. This would actually have been a good buy because a buy just above the top of swing top 10 with a sell stop under swing bottom 11 would have presented little risk because swing bottom 11 is close to swing top 10.
Here is what it looks like on a swing chart .Entry Point 3 with its stop, is marked.
Terry Ashman
HotTrader, Australia
source : http://www.afsd.com.au/
No comments:
Post a Comment