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William Delbert Gann, also called WD Gann, was a finance trader who developed a

technical trading tool known as Gann angles. Just as impressive as the trading tool he
developed are the rules he traded by.

Those rules range from basic money management principles to the all-important
mental game. However what’s truly amazing about these rules is that while they were
written one hundred years ago, they are just as true today as they were then.

This article will expose some of WD Gann’s most ambitious rules by providing
commentary on each one. My hope is that by the end of this article you will have a
strong understanding of the idea that, although the markets may change over time,
there are many trading rules that remain timeless.

The Rules Exposed

1. Always use stop-loss orders


This one goes without much explanation. Using a stop loss is mandatory if you want to
become a successful Forex trader. By not using one, you open yourself up to the
potential of trading on emotion, which never goes well.
Trading without using a stop loss is like trying to drive a car without brakes. So always
be sure to use one every time you enter the market.

2. Never overtrade
I’ve written about the importance of not overtrading before, stating that the potential for
profits increases exponentially as soon as you reduce your trading frequency.
What does this mean, exactly?

It means that when it comes to trading, less is more. The more patient you become, the
less you trade. The less you trade, the more you can focus on only trading confluent
setups.
3. Don ‘t enter a trade if you are unsure of the trend. Never buck the trend
This rule is important for two reasons:

1. Only trade active markets. If a market isn’t trending, or you aren’t sure about the
direction of the trend, stay away.

2. Don’t trade counter-trend movements. It may be tempting to try to catch a top or bottom
in a market. But swimming against the current is much harder than swimming with it –
so be sure to always trade with the momentum of a market and never against it.

4. When in doubt, get out, and don’t get in when in doubt


If you’re ever unsure of a position, the best thing to do is get out, especially if the
position is losing money. As a trader, there’s nothing worse than not having a plan for
the current situation.

Over the years, I’ve found the number one reason a trader stays in a losing position is
due to the fear of taking the loss, only to see the market move in the intended direction
once the position is off the table.

The problem is, when you find yourself in unknown territory, there’s a 50/50 chance of
making money or losing it. In essence, you’ve lost your trading edge and you should
therefore remove yourself from the market.

5. Only trade active markets


This one is extremely important but is often overlooked by many traders. You can’t
make money in a market that isn’t moving. This goes without saying, yet I see many
traders attempting to trade sideways markets.

There’s nothing wrong with trading breakouts from sideways price action – I do it quite
often. But to try and trade a sideways market is one of the fastest ways to lose money
in the Forex market.
Your most profitable trades will always come from trending markets. This is because
not only can you capitalize on the initial position, but a strong trend gives you the
opportunity to multiply your profits through pyramiding.
6. Don’t close trades without a good reason
Have you ever exited a trade due to a fear of giving back unrealized profits, only to see
the market continue in the intended direction? I’m sure you have. And if you haven’t
yet, you will.

This is something every trader has to master – the ability to control emotions in a way
that allows you to trade based on pure technical analysis. One way to keep your
emotions in check if you feel the urge to close a position early is to simply ask yourself,
“why am I closing this position?”. If your answer is anything other than a technical one,
you are likely making a decision based on emotions.
7. Never average a loss
This one is as old as trading. You should never, ever add to a losing position.
There are several reasons why this is true, but most important is the fact that a losing
position is a sign that your analysis may not have been correct. By adding to your
position in this situation, you are increasing your risk without first having confirmation
from the market that you are in a favorable position.

It is possible to add to an existing position through pyramiding, but only once the
market has moved in the intended direction and broken a key level of support or
resistance.
8. Never get out of the market because you have lost patience or get in because
you are anxious from waiting
I often talk about patience and its importance to your trading success. But patience isn’t
just about waiting for the perfect trade setup. It also plays a critical role when managing
open positions.

The market isn’t on a schedule. It ebbs and flows according to the news and sentiments
that impact it. This is why we, as traders, set profit targets but we don’t set time limits. A
market needs time to see an open position through to the end just as it needs time to
form the perfect setup; both of which require patience.

9. Avoid taking small profits and large losses


I read an article a while back (I won’t mention who wrote it to avoid embarrassing the
writer) that claimed making money in the Forex market is hard work. While I agree with
the overall sentiment that becoming profitable is hard work, I don’t agree with what was
said next. The writer went on to say that it’s all about finding quick wins. In other words,
making small profits each day.

This is completely backwards in my opinion. Becoming consistently profitable is all


about letting your winners run. In essence, you have to make enough money on your
winners to pay for your losers.

WD Gann had the right approach. He knew that becoming a consistently profitable
trader means taking large profits and small losses.

10. Never cancel a stop loss after you have placed the trade
Why? Because once you enter the market, your judgment becomes skewed. You now
have something to lose, which triggers the emotional side of your brain when making
decisions.

On the other hand, when you determine your stop loss before entering the market,
you’re able to make an unbiased decision about its placement. This allows you to stay
disciplined by trading what the market is doing versus what you want it to do.
11. Avoid getting in and out of the market too often
Do you find yourself jumping in a position only to close it within the first thirty minutes
only to go chase a “better” setup? This is a common theme among many Forex traders
– the idea that there is always another setup out there that will make them more money
in a shorter period of time.

The most common reason for this type of behavior is risking too much capital on a
single trade. In order to let your winners run, you have to give the market room to
breathe. If you are risking too much capital on a single trade, you’re going to be
tempted to close the position too quickly, thus missing out on potential profits.
The weeks where I make the most money are the ones where I do absolutely nothing
except for adding to winning positions at strategic levels.
12. Be willing to make money from both sides of the market
For us Forex traders, this one is easy. That said, I still see some traders preferring to
only take long positions or only take short position.
While this may seem harmless at first, it does present a problem.

As price action traders, our job is to remain patient and wait for the market to show its
hand before pulling the trigger. But if you are only interested in trading long or short but
not both, you may miss out on opportunities. You may even try to convince yourself that
a market is producing a valid short signal (because you only trade the short side) when
in fact it’s producing a long setup, thus leaving you on the losing side of the market.

Always remain flexible in your approach to the markets. Try not to favor one side over
the other as both can produce favorable trade opportunities.

13. Never buy or sell just because the price is low or high
The terms “low” and “high” are extremely relative when it comes to the markets. What’s
low to one person may be high to another and vice versa. This is why I don’t
advocate the use of the terms “overbought” or “oversold” in my price action community.
Instead of looking to buy a low market or sell a high market, it’s far more effective to
make use of technical levels in combination with price action signals. This will give you
a much better chance of catching a favorable entry.
14. Pyramiding should be accomplished once it has crossed resistance levels
and broken zones of distribution
Pyramiding is something I use in my own trading and something I teach inside the DPA
member community.
The key to a proper pyramiding strategy is to only add to a position once the market
has broken a key level of support or resistance. This allows you to have a high degree
of confidence that the market is likely to continue in the intended direction upon adding
to your position.
15. Never change your position without a good reason
What is a “good” reason? Simply put, a good reason is a valid reason, and a valid
reason must be based on the technicals.

Getting in or out of a market because you heard someone else mention it as a buy or
sell is not a good reason. Similarly, getting in or out of a market because it has moved
“too high” or “too low” is not a good reason.
On the other hand, if you are in a short position and the market reaches support and
forms a bullish pin bar against your position, that is a good reason to at least consider
closing the open position.
16. Avoid trading after long periods of success or failure
One reason why becoming a consistently profitable trader is arguably the
hardest challenge you will ever face in life hinges on one word, “consistently”. Putting
on a profitable trade or even a series of profitable trades isn’t all that hard to do, dare I
say it can be easy given the right market conditions.

But to consistently grow a trading account over the course of many months and years
takes much more than a few good trades. It takes a strong mental game, among other
things.

Part of that mental game has to include the ability to remove yourself from the market
after a series of profitable trades as well as a series of losing trades. Both scenarios
can easily trigger emotional decision-making, which can be detrimental to your trading
account.

By removing yourself from the market for a period of time following a winning streak or
losing streak, you effectively reset your mind, thus allowing you to trade what the
market is doing versus what you want it to do.

17. Don’t try to guess tops or bottoms


Guessing tops or bottoms in a market is pure gambling. As traders, our ability to make
money consistently greatly depends on our edge, which is a combination of factors that
help to put the odds in our favor. By trying to guess tops or bottoms, you nullify any
edge you may otherwise have and thus leave your potential for profits to blind luck.

Many argue that a top or bottom in a market is not made clear until after the opposing
move has already begun.

I disagree. While we can never know for sure whether a market has found a top or a
bottom until after the opposing move has begun, we can determine the probability of
such a move through the use of technical patterns and signals. This is why I always say
that learning to use price action is essential to your success as a trader, regardless of
the trading strategy you end up using.
18. Don’t follow a blind man’s advice
Ever visited some of the Forex forums out there? If you have, I’m sure you can relate to
this next rule.

The arrival of the internet was an amazing advent. It not only gives us the ability to
trade the Forex market from the comfort of our own homes, but it also gives us a
plethora of information on the subject of trading.

But therein lies a problem…

With more information comes confusion, especially when the majority of that
information is born from trading forums where everyone is an “expert”. These traders
like to share their own convictions, which on the surface is harmless, but when other
traders trade based on those convictions it can be disastrous.

The information from all Forex-related sites, even this one, should be used to generate
trade ideas. Nothing more, nothing less. No site should ever be used to blindly enter
trades.

In order to succeed as a Forex trader you must learn to perform your own technical
analysis. Getting ideas from websites is fine, but make sure you always follow it up with
your own analysis before putting your capital at risk.

19. Reduce trading after the first loss; never increase


Revenge trading is one of the most deadly sins a trader can make. It begins with a loss
and ends with further losses.

One way to avoid revenge trading is to either scale back your trading immediately
following a loss or simply remove yourself from the market altogether. I tend to opt for
the latter.

In fact when I experience a loss, I will typically remove myself from the markets for at
least 24 hours. This allows me to clear my head and regain my composure so that I
know the next trade I take will be based on strong technicals rather than an emotional
need to get back at the market.
20. Avoid getting in wrong and out wrong; or getting in right and out wrong. This
is making a double mistake
Becoming a successful trader is all about timing. It isn’t enough to only get the entry
right or to only get the exit right. You have to be right on both fronts to become
consistently profitable.
By using a combination of entry strategies, a proper stop loss strategy and key levels to
determine profit targets, you can learn to get in right and get out right.

 Never risk more than 10% of your trading capital in a single trade.
 Always use stop-loss orders.
 Never overtrade.
 Never let a profit run into a loss.
 Don 't enter a trade if you are unsure of the trend. Never buck the trend.
 When in doubt, get out, and don't get in when in doubt.
 Only trade active markets.
 Distribute your risk equally among different markets.
 Never limit your orders. Trade at the market.
 Don't close trades without a good reason.
 Extra monies from successful trades should be placed in a separate account.
 Never trade to scalp a profit.
 Never average a loss.
 Never get out of the market because you have lost patience or get in because you are anxious
from waiting.
 Avoid taking small profits and large losses.
 Never cancel a stop loss after you have placed the trade.
 Avoid getting in and out of the market too often.
 Be willing to make money from both sides of the market.
 Never buy or sell just because the price is low or high.
 Pyramiding should be accomplished once it has crossed resistance levels and broken zones of
distribution.
 Pyramid issues that have a strong trend.
 Never hedge a losing position.
 Never change your position without a good reason.
 Avoid trading after long periods of success or failure.
 Don't try to guess tops or bottoms.
 Don't follow a blind man's advice.
 Reduce trading after the first loss; never increase.
 Avoid getting in wrong and out wrong; or getting in right and out wrong. This is making a
double mistake.

W.D. Gann's 12 Tradinng Rules


W.D.Gann published several books in his lifetime. Among which I find “45 Years in Wall Street” most valuable to any
trader. He wrote this book at the age of 74 based on his 45 years of trading experience in the stocks and commodities
markets. He has his unique ways of analyzing the markets, and he had developed many trading strategies as well. In
this blog, I would like to share with the readers his 12 rules about the stock market that he had emphasized throughout
his book.

W.D. Gann’s 12 Rules Trading in Stocks


Rule 1. Determining the Trend
“For traders, trend is your friend. Besides drawing trendlines for the individual chart you are trading, it is important to
determine the trend of the market index and the industry index that you intend to trade. This is to confirm if the trend of
the individual stock is in line with the industry trend as well as the overall market trend.”

The following charts 1a, 1b and 1c shows that the market (KLCI index), the sector index (Finance index) and the
individual (Maybank) all exhibited bearish trend during the given period.

Fig 1a

Fig 1b

Fig 1c
Rule 2. Buy at Single, Double and Triple Bottoms

“Buy at single, double or triple bottoms. The fact that prices rebound from the previous low is an indication that this
bottom is a support zone. After you have made a trade, do not forget to place a stop to protect your position. Do not
overlook the fact that the 4th time the stock reaches the same level, it is not as safe to buy, because it nearly always
goes through. Reverse this rule at the top.”

Rule 3. Buy and Sell on Percentages

“Buy or sell on a 50% decline from any high level or a 50% advance from any low level so long as these reactions or
rallies are with the main trend. You can use the percentage of the individual stocks as well as the percentage of the
market index to determine the resistance levels. The resistance levels are: 3-5%, 10-12%, 20-25%, 33-37%, 45-50%,
62-67%, 72-78%, 85-87%. The most important resistance levels are 50% and 100%.”

See the following examples:

Figure 2 shows that the KLCI achieved a top at 1860, the first low is 3.33% reaction point from the top. Subsequently,
the next low is 9.1% from the peak, which is close to the 10% reaction point.

Fig 2

Figure 3 shows the monthly chart for the S&P 500 achieved a peak prior to the 2008 financial crisis. During the peak
of the mortgage subprime crisis, the S&P 500 fell 53% which is close to the 50% important resistance level that Gann
discovered. These are important discoveries by Gann as this insight gives us a direction of when is the peak or
bottom.

Fig 3
Rule 4. Buy and Sell on 3 Weeks’ Advance or Decline
“Buy on a 3 weeks’ reaction or decline in a bull market when the main trend is up, as this is the average reaction in a
strong bull market. In a healthy bull market, it is perfectly normal for the price to undergo correction. If the correction
lasts for 3 weeks, that’s a buying opportunity if you want to “buy in dip” in a bull market.

After the market advances or decline 30 days or more, the next time period to watch for tops and bottoms is around 6
to 7 weeks, which will be a buying or selling level, protected, of course, with a stop loss order according to resistance
levels.

After a market rallies or declines more than 45 to 49 days, the next time period is around 60 to 65 days (12 to 13
weeks) which is about the greatest average time that a bear market or bull market reacts.”

Figure 4 depicts the weekly chart for KLCI. We can see that during the bull run, the index follows a healthy correction
of not more than 6 weeks each time within the given period. However, in 2014 July onwards, the KLCI experienced 23
weeks of downtrend, this is greater than “the 12 to 13 weeks, the greatest average time a bull market reacts,” as
stated by Gann.

Fig 4

Rule 5. Markets Move in Sections


“Stock market campaigns move in 3 to 4 sections or waves. Never consider that the market has reached the final top
when it makes the first section in a move up, because if it is a real bull market, it will run at least 3 sections an
probably 4 before a final high is reached.”

Figure 5 shows the STI chart. It is quite clear that we see that the STI follows this 3-4 waves theory quite well.

Fig 5
Rule 6. Buy or Sell on 5 to 7 Point Moves
“Buy or sell individual stocks on reactions of 5 to 7 points. When a market is strong, reactions will run 5 to 7 points, but
will not decline as much as 9 or 10 points. By studying the Industrial Averages you will see how often a rally or
reaction runs less than 10 points. However, it is important to watch 10 to 12 points rallies or declines for buying or
selling levels on the average.

The next important point to watch is 18 to 21 points up or down from any important top or bottom. Reactions of this
kind in the Averages often indicate the end of a move.

When to take profits? Follow the rules and do not take profits until there is a definite indication of a change in trend.”

Figure 6 depicts the price chart of Maybank. We shall use 10 cents to represent 1 point in this example. Maybank
achieved RM10.20 as the peak and underwent a bear rally that reached a bottom of RM8.30, which represents
RM1.90 or 19 points decline and it’s the end of a move. Subsequently, Maybank rebounded to RM9.25, RM0.95 or 9.5
points, which was below the 10 point move as stated by Gann.

Figure 6

Rule 7. Volume of Sales

“Study the total volume of sales on the New York Stock Exchange in connection with the time periods. Study the
volume of sales on individual stocks, as the volume of sales will help in determining when the trend is changing.”

Volume of sales basically gives you a direction whether the current trend is strengthening or weakening. In a typical
extreme high year, the volume of sales is high for that particular year as retail investors are attracted into the stock
market. Similarly, in an extreme low year, the volume of sales is also high, this is because retail investors are selling
down the market in panic.
In a bullish trend, we shall see price rises together with volume rises. If price continues to rise but volume declines, it
is an indication that the market has lost momentum and very soon price correction is around the corner.

In a bearish trend, if we see rapid decline in price together with a surge in volume, it is an indication that the selling
pressure is gathering momentum, and the bearish trend is expected to persist. However, as prices continue to decline
with a lighter volume, we may expect a change of trend in imminent.

Gann also states that the volume of sales has to be studied together not only with the price change but also with the
time periods. We shall see in the next section.

Rule 8. Time Periods

“The time factor and time periods are most important in determining a change in trend because ‘time’ can over
balance ‘price’ and when time is up, the volume of sales will increase and force prices higher or lower.

Market over-balanced – The averages or individual stocks become over-balanced after they have advanced or
declined a considerable period of time, and the greater the time period, the greater the correction or reaction. When
the time period on a decline exceeds the time period of a previous decline it indicates a change in trend. When the
price breaks a greater number of points than the previous decline or reaction, it indicates that the market is over-
balanced and a change in trend is taking place.

Reverse this rule in a bear market. When stocks have been declining for a long period of time, the first time that a rally
exceeds the time period of a previous rally it is an indication that the trend is changing, at least temporarily. The first
time that the price rallies a greater number of points than a previous rally, it indicates that the ‘space’ or price
movement is over-balanced and a change in trend has started. The time change is more important than reversal in
price. Apply all of the rules to see if a change in trend is due at the time when these reversals take place.

When the market is nearing the end of a long swing or a long downswing and reaches the 3rd or the 4th section, the
swings upward will be smaller in price gains and the time period will be less than the precious section. This is an
indication that a change in trend is due. In a bear or declining market, when the loss in points becomes less than the
previous section and the time is less, it is an indication that the time cycle is running out.”

In layman term, it is important to record down the duration of trends in the market or the individual stocks. For
example, during the 2011 US debt ceiling crisis, the US, Malaysia and the Singapore equity markets all experience a
bearish trend that lasted for 8 weeks.

In addition, it is important to record down the reaction time period. For example, in a bear trend, record down the
duration for each bear rallies, if the current rally is longer than the previous, it indicates inherent bullishness in the
trend, especially, when the bear rally is the 3rd or the 4th in a prolong bear trend.

Rule 9. Buy on Higher Tops and Bottoms

“Buy when the market is making higher tops and higher bottoms which shows that the main trend is up. Sell when the
market is making lower tops and lower bottoms which indicates the main trend is down. Time periods are always
important. Check the time period from previous top to top and from previous bottom to bottom. Also check the time
required for the market to move up from extreme low to extreme high and the time required for prices to move down
from extreme high to extreme low.”

Rule 10. Change in Trend in Bull Market

“A change in trend often occurs just before or just after holidays.

Bull market ending: When prices on the Industrial Averages or individual stocks break the last low on a 9-point swing
chart or break the lst low on the swing on a 3-day chart, it is an indication that the trend is changing, at least
temporarily.
Bear market: In a declining market when prices cross the top of the last upswing on a 9-point chart, or cross the top of
the last upswing on a 3-day chart, it is the first signal for a change in trend. When prices are at high levels there are
usually several swings up and down; then when the market breaks the low of the last swing it indicates a reversal and
a change in trend.

At low level prices often narrow down and remain in a narrow trading range for some time, then when they cross the
top of the last upswing it is important for a change in trend.

Always check to see if the market is exactly 1,2,3,4 or 5 years from any extreme high or low price. Check back to see
if the time period is 15,22,34,42,48 or 49 months from any extreme high or low price, as these are important time
periods to watch for a change in trend.”

For the context of KLCI, I notice its a 40 points and 80 points reactions. For example, when the KLCI is advancing and
reaching a visible top, then a reaction or price drop more than 40 points per day or 80 point per week, then it is an
indication that there is a change of trend from bullish trend to bearish trend. The reverse is true for a bottom.

Rule 11. Safest Buying and Selling Points

“It is always safest to buy stocks after a definite change in trend has established. After a stock makes bottom and has
a rally, then follows the secondary reaction and it gets support at a higher bottom. When it starts to advance and
crosses the top of the first rally, it is the safest place to buy because the market has already given an indication of
uptrend. Stop loss orders can be placed under the secondary bottom.

Safest selling point: After a market has advanced for a long time and made final high and has the first sharp quick
decline, then rallies and makes the second lower top, and from this top declines and breaks the low point of the first
decline, it is then safer to sell because it has given the signal that the main trend has changed to the down side.

Remember that stocks are never too high to buy as long as the trend is up; and they are never too low to sell as long
as the trend is down. But do not overlook the fact that you must always use a stop loss order for your protection.
Always go with the trend and against it. Buy stocks in strong position and sell stocks in weak position.”

Rule 12. Price Gains in Fast Moves

“When markets are very active and advancing or declining very fast they average about 1 point per calendar day.
When the movement on averages or individual stocks is 2 points or more per day, it is far above normal and does not
last very long. Movements of this kind occur when there are short time periods and a quick corrective reaction or
decline in a bull market. When the trend is down in a bear market these quick fast rallies correct the position in a short
period of time.”

It says that big price change usually doesn't last very long. For example, KLCI, you may have 40 points increase for
one day, but you hardly see 40 points per day for consecutive days, its just not sustainable.

Note: To give you a perspective, the DJIA was trading at 80 - 380 points between 1920 to 1929.

Background

William Delbert Gann, usually referred to as W.D. Gann, attained legendary status as a market operator on Wall
Street between 1900 and 1956.

He was born in East Lufkin Texas on June 6, 1878 , which at the time was cotton-growing country. He spent his
teenage years working as a cotton warehouse clerk.

In 1902, Gann began trading the stock and commodity markets. In 1908, he moved to New York City and it wasn’t
long before he opened his own brokerage firm, W.D. Gann & Co, on 18th and Broadway.

His storied success began early. In the month of October 1909, while being observed by a representative of Ticker
Tape Magazine (the Barron’s of the day), Mr. Gann executed 286 trades in various stocks on both the long and short
side of the market. He profited on all but 22 of these trades. By the end of this 25-day period, his starting capital had
increased by 1000%.