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Stocks & Commodities V16:3 (127-129): Combining Gann’s 50% Rule With VIDYA by Gerald Marisch

INDICATORS

Combining Gann’s
50% Rule With VIDYA
Sometimes, the most puzzling of trading questions can be can make profits following it. You will always make the most
answered with the simplest of technical methods. Here, two money following the main trend of the market — by waiting for
such methods are combined for trading: Tushar Chande’s a definite indication of the trend before buying and selling.
variable indexed dynamic average (VIDYA), a moving aver- • The next most important point for tops or bottoms is three-
age that automatically adjusts to the current market’s vola- fourths, or 75%. Doubling the 50%, or 100%, is the next most
tility, is used as a trend indicator, and a classic rule of thumb important point.
from early-day trader W.D. Gann known as the 50% rule is
added. VIDYA 21,5
The concept of using the variable indexed dynamic average
by Gerald Marisch (VIDYA) 21,5 concept for intraday trading, originally devel-
oped by STOCKS & COMMODITIES Contributing Editor and
ff-floor, intraday traders are analyst Tushar Chande, was introduced in the January 1998
faced with decisions through- issue. The VIDYA 21,5 is an exponential moving average but
out the trading day. Two of the mathematically structured to be sensitive to a bull or bear
simpler yet most perplexing trend and compared with a nontrending horizontal channel.

O questions are, first: Which way


are prices trending? And sec-
ond: Is the reaction occurring
during a trend, part of the trend,
or the end of the trend? For the
When combined with Gann’s 50% rule, VIDYA 21,5 results in a
greater interpretation of the market’s language. Definitions and
rules are paramount to trading successfully. Here, then, are my
first set of rules for using the 50% rule and VIDYA 21,5:

answers to these questions and 1 In a bear market, closes will always be below the
many more, consider W.D. VIDYA 21,5.
Gann’s 50% rule, and a previously introduced trend monitor In a bull market, closes will always be above the
called the VIDYA 21,5. VIDYA 21,5.
In a nontrending (sideways) market, the VIDYA 21,5
WILLIAM D. GANN will be horizontal.
Numerous books and articles written have been written about When the trend is changing direction, the VIDYA 21,5
legendary technician William D. Gann. Conflicts about his will turn at a sharp angle.
analytical abilities to project market prices range from retro- 2 In a bear market (the main, or impulse, trend is
spective interpretation of price trends to his use of complex down), a price retracement will occur at the 50%
proprietary numbers and their relationship, astrology and level of the prior bear trend.
psychology to generate profits. The reported amount of Retracements will find resistance at the 50% level.
Gann’s profits range from a moderate income from selling his Retracements finding resistance at a level less than
systems to a net lifetime gain exceeding $50 million from 50% of the prior bear impulse trend is a sign of a
trading the markets. continuing strong bear trend.
Whatever the case, Gann’s 50% rule is irrefutable and has Retracements finding resistance at a level more than
withstood the test of time. The strictures of the rule, according to 50% of the prior bear impulse trend is a sign of a
W.D. Gann’s How to Make Profits in Commodities, are: slowing bear trend.
• Always remember that the 50% reaction or halfway point of 3 In a bull market (the main or impulse trend is up), a
the range fluctuation of the extreme highest point is a point for price retracement will occur at the 50% level of the prior
support on the downside or for meeting selling and resistance bull trend.
on the way up. This is the balancing point, because it divides Retracements will find support at the 50% level.
the range of fluctuation into two equal parts. Retracements finding support at a level less than 50% of
• You can make a fortune by following this one rule alone. A the prior bull impulse trend is a sign of a continuing strong
careful study and review of past movements in any commodity bull trend.
will prove to you beyond doubt that this rule works and that you Retracements finding support at a level more than 50%

Copyright (c) Technical Analysis Inc. 1


Stocks & Commodities V16:3 (127-129): Combining Gann’s 50% Rule With VIDYA by Gerald Marisch

of the prior bull impulse trend is a


sign of a weakening bull trend.

These concepts are illustrated in Figures 1


and 2. Both are five-tick charts of the De-
cember 1997 Standard & Poor’s futures
contract for December 2, 1997, between
2:08 p.m. and 3:04 p.m. (CST). The highest
highs and lowest lows are connected with
trendlines. The beginning of impulse trends
are indicated with “B” and the point num-
ber. The ends of the impulse trends are
indicated with “E” and the point number.
The 50% retracements are designated
as “R” for resistance in bear trends or “S”
for support in bull trends and the point
number. Figure 1 illustrates eight impulse
trends — four bear and four bull — with
associated retracement trends, totaling 16
points. The impulse trends are identified by
support/resistance lines, alternating in style
for easier viewing. Only closing prices are
used and appear as dots.

MARKET BEHAVIOR AND


TWO TECHNIQUES
Let’s walk through the market’s price
behavior and see how the two techniques
work together. First, in Figure 1 from
point 1 to point 2, a bear impulse trend
occurs. Then at point 3, prices retrace a
distance of 50% of the previous bear im-
pulse trend. Next, from point 3 to point 4,
a second bear impulse trend occurs.
Point 5 occurs as prices retrace a dis-
tance of 50% of the previous bear impulse
trend. Then, from point 5 to point 6, a third
bear impulse trend occurs. Point 7 is an-
other example of prices retracing a dis-
tance of 50% of the previous bear impulse
trend. Point 7 to point 8 is a fourth bear
impulse trend. At point 9, something dif-
ferent occurs — prices, rather than retrac-
ing 50%, retrace approximately 75% of
the previous bear impulse trend.
Remember the rule that prices exceeding
a 50% retracement in a bear trend is a sign of
a slowing trend, and maybe the start of a bull
PATRICK KELLY

trend? Let’s take a look.


In retrospect, it can be seen that point 8 is pivotal. Retracement now find support.
points prior to point 8 (points 3, 5 and 7) find resistance at the From point 10 to point 11, a second bull impulse trend
50% level. After point 8, retracement points (points 10, 12, 14 occurs. At point 12, prices retrace a little past 50% of the
and 16) find support at 50% levels. previous bull impulse trend. This is a sign of a weak bull trend.
At point 10, prices retrace 50% of the previous impulse trend, From point 12 to point 13, a third bull impulse trend occurs,
but point 8 to point 9 is a bull trend. Rather than finding resistance although small. At point 14, prices retrace almost to 100% of
at the 50% level, as at previous 50% points of 3, 5 and 7, prices the prior bull impulse trend, but not to the lowest close at point

Copyright (c) Technical Analysis Inc. 2


Stocks & Commodities V16:3 (127-129): Combining Gann’s 50% Rule With VIDYA by Gerald Marisch

TRADESTATION (OMEGA RESEARCH)

FIGURE 1: S&P 500 FIVE-TICK CLOSING PRICES. Four bull and four bear trends FIGURE 2: S&P 500 FIVE-TICK BARS. The same data is shown with the high, low
are overlaid on the chart. Note how the retracements in the bear trend (R-B) line up and closing prices filled in.
with 50% retracement levels. The support levels (S-B) also occur near 50%
retracement points.

12. This is important, indicating that prices may be in a small of the prior impulse trend.
consolidation from point 11 to point 14. From point 14 to B If retracements are less than 50%, it may be a sign of
point 15, a fourth bull impulse trend occurs. Point 16 again a strengthening bear trend.
illustrates how prices retrace a distance of 50% of the prior C If retracement are more than 50%, it may be a sign of
bull impulse trend. a slowing bear trend.
Figure 2 is the same contract price range and time range as 3 If the overall trend is a bull trend, retracements should find
Figure 1. Dots for closing prices have been replaced by tick support at the 50% level of the prior impulse trend:
bars. VIDYA 21,5 (the smooth line) has been added. A Retracement should find support at the 50% level of
Now, let’s combine Gann’s 50% rules previously listed, the prior impulse trend.
and the VIDYA 21,5 for trading signals. B If retracements are less than 50%, it may be a sign of
The first trade was a sell at point 1 at 976.25 when prices a strengthening bull trend.
touched the declining VIDYA 21,5. The retracement rules and C If retracements are more than 50%, it may be a sign of
declining trend indicator indicated the market participant a weakening bull trend.
should stay short. Then the shorts were covered shortly after
4 If 50% retracements are now finding support at 50%
point 8, at 973.00, and at the same time, the market bought at
retracements instead of resistance, the trend has changed
973.00 as the price crossed the flat VIDYA 21,5. Finally, a
from bear to bull.
market on close (MOC) order was placed at 3:04 p.m. and
thereby letting the trade go at 975.10. Allowing for slippage, 5 If 50% retracements are now finding resistance at 50%
15% deducted for expenses and the new half rate for the retracements instead of support, the trend has changed
Standard & Poor’s 500 index, this simple strategy netted from bull to bear.
approximately $1,140 per contract. Of course — and unfor- 6 Look for 50% retracements — bull or bear — to find
tunately — not all days or fills will be this straightforward. support or resistance at the VIDYA 21,5 trend line.

CONCLUSIONS Gerald Marisch is a private trader.


Could more profits have been made with more confidence if
RELATED READING
more trading rules had been used? Sure. There are additional
Chande, Tushar [1995]. “Identifying powerful breakouts early,”
indicators that can enhance a trader’s proficiency, but this is just
Technical Analysis of STOCKS & COMMODITIES, Volume 13:
an example of combining two well-known, conservative and
October.
proven studies to generate profits. Sometimes, the simplest
Gann, W.D. [1942]. How to Make Profits in Commodities,
methods can work the best, and following this set of guidelines
Lambert-Gann Publishing Co., Pomeroy, WA.
will help you in your intraday trading:
Krausz, Robert [1998]. “The new Gann swing chartist,” Technical
Analysis of STOCKS & COMMODITIES, Volume 16: February.
1 When in an overall price trend, anticipate 50% retracement
Marisch, Gerald [1998]. “Breaking out of channels,” Technical
trends to occur after impulse trends.
Analysis of STOCKS & COMMODITIES, Volume 16: January.
2 In an overall bear trend:
A Retracements should find resistance at the 50% level †See Traders’ Glossary for definition S&C

Copyright (c) Technical Analysis Inc. 3