Looking @ W.D. Gann – Introduction

Some of you will know that I am a very big fan of W.D. Gann & R.N. Elliott, these guys noticed things about the market that the masses ignored and to be fair most of the writings on the market pre-computers are some of the best written work available (albeit rare).

This series of posts looks at W.D. Gann – in my opinion he was the greatest investor ever, far superior to Warren Buffett.

I came across Gann a few years back, long after I started trading and from sheer luck it transpires that I follow some of Gann’s rules – I think this is because I view the markets from a mathematical, fractal view point.

Gann’s basic rules for trading the market are still viable in today’s markets, some with a little tweaking, but overall if you followed his basic methods you should still make a success in the markets.  There’s a lot of material in Gann’s published works and still relevant to use today, so I plan to produce a series of posts looking at aspects of Gann’s work in between my regular other posts.

W.D. Gann is renowned for being mysterious – basically he died without fully revealing his true methods for predicting markets, he gave many clues, but never directly said this is exactly how I do it.  So it has led to many people speculating his methods and none of them [those with published work on Gann] have a trading record like his!  To me that says it all about their “discoveries”.

Gann used to make hundreds of trades in a month massively compounding his original starting capital and had  a success rate of 80-95%, that is a feat in itself!  (This has been independently verified as well)

It should be known that W.D. Gann, went bust many times, prior to 1907 it was mainly down to trading mistakes such as novices make then after 1907 the times he went bust was due to Brokerages failures going bust and taking his money with them.  W.D. Gann became a broker too so he’s seen both sides of the trading/investing coin.

This series of posts on Gann will focus on the cold hard facts of his published works and will NOT contain any of the mystery, the key here is to remember that Gann wrote this material during early 1900’s, he was probably one of the first people in the world to use charts to trade from & with, but the material he published a century ago would still benefit new and experienced traders today!

I would thoroughly urge all to purchase Gann’s works, his Master courses can be bought for less than £1000 so don’t fall for the con artists offering them for tens of £1000’s – Yes they are rare but they can be obtained reasonably.

To start with Gann published 24 Rules, here they are, I’ve edited in red my personal thoughts/observations:

  1. Divide your capital into 10 equal parts and never risk more than 1/10th of your capital on any one tradeFor me 10% is way too much and I’d max out at 3%, saying that I bet vast numbers of traders flout this basic rule of Gann’s.  Risking 10% allows 9-10 trades before going bust!  But if you get it right you’ll have big profits.
  2. Use Stop Loss orders. Always protect a trade when you make it with a stop loss order 3 to 5 points away – Sound advice, its approx 3-5% in terms of price rather than points.
  3. Never Over Trade.  This would be violating the capital rule – Again another key rule to managing risk and capital and another one that I bet most [new] traders flout
  4. Never let a profit run into a loss.  After you once have a profit of 3 points or more, raise your stop loss order so that you will have NO loss of capital – this is approx a profit of 3%, Gann used to trade $100 shares, 3 pts = 3%.  anyway another rule flouted and abused by traders – they obviously think they can predict the market!
  5. Do not buck the trend.  Never buy or sell if you are not sure of the trend according to your charts – Just common sense really, but it means you have to have some method of how you define a trend
  6. When in doubt, get out, and don’t get in when in doubt – Proves you don’t always have to be in a trade/position
  7. Trade only in active stocks, keep out of slow dead ones – I do this naturally because I prefer the safety of liquid stocks, but this rule is not as relevant today as it was, however, trading in slow dead stocks will not produce a trend as per Rule 5
  8. Equal distribution of risk.  Trade in 4 or 5 stocks, if possible.  Avoid tying up all your capital in any one stock – nice approach, spreads risk.
  9. Never limit your orders or fix a buying or selling price. Trade at the market – I have trouble with this one but I can see Gann’s point, but I’ve over come this using a specific strategy once in a trade
  10. Don’t close your trades without good reason.  Follow up with a stop loss order to protect your profits – Let’s the market take you out of a position and a tactic that I employ – see THT Propulsion & Gann Pullbacks trade set-up
  11. Accumulate a surplus.  After you have made a series of successful trades, put some money into a surplus account to be used only in emergency or in times of panic – Sound advice, I would also use it to repay debts, credit cards and the mortgage and once that’s repaid use it to treat the family, holidays and general wealth building
  12. Never buy just to get a dividend – I could really go to town on this one!  The number of people I’ve met that think divi’s are the be all and end all.  Yes divi’s are good but if the share price falls 15% for you to then earn 8% from the dividend to me it does not make good financial sense.  You can earn 10 times the dividend by trading the share rather than investing – if done right!
  13. Never average a loss.  This is one of the worst mistakes a trader can make – completely agree and anyone doing it is proving to themselves they don’t know how to trade properly
  14. Never get out of the market just because you have lost patience or get into a market because you are anxious from waiting – doing so is gambling, some of the best positions you’ll ever take will be not to take a position in haste!  We have trading rules and a plan for a reason and that’s not to lose too much money against the winners, unless your gambling then losing all your cash is fair game, hence the term GAMBLER
  15. Avoid taking small profits and big losses – another trait of the new trader/investor that usually helps to wipe their accounts out, however. also thinking that markets always produce big profits is equally as wrong – they don’t.  Really what gann is saying is that often people take quick profits and let losses grow big.  To be successful in the markets you really need your wins to be at least twice as big as your losses.
  16. Never cancel a stop loss order after you have placed it at the time you make the trade – If you do this it is a classic sign that you don’t know what you’re doing in the trading arena – Professional traders KNOW exactly where their stop loss orders go BEFORE they get into a trade/position, this is not an after thought, so why would a stop loss be cancelled?  It is pure common sense to then move the stop loss in favour of the trade once an open position is in play and the trades working out as planned.
  17. Avoid getting in and out of the market too often – Over trading!  I trade a few times a week when active, sometimes I go months without placing a trade – I trade because it gives me the freedom to live my life as I wish, I don’t live to trade – there’s a big difference.
  18. Be just as willing to sell short as you are to buy.  Let your object be to keep with the trend and make money – Too many uneducated people [of the markets] think that shorting the market is bad and fuels the decline, it doesn’t – markets are quite capable of dropping vertically like a stone simply if the market runs out of BUYERS!
  19. Never buy just because the price of a stock is low or sell short just because the price is high – the market can always go higher or lower than you expect, why take the risk of guessing! Remember we don’t know for certain when or where a market will turn.
  20. Be careful about pyramiding at the wrong time.  Wait until the stock is very active and has crossed resistance levels before buying more and until it has broken out of the zone of distribution before selling more – New traders should not be considering this, yes it can leap frog your profits but managing various trades inside of one another is tricky and best avoided until experienced.  for the experienced that aren’t doing this, you are missing a trick, you can turn a normal 3 to 1 trade into a 5 to 1 and more, quite easily within the same time-frame as the 1st trade.  It is adding extra risk but with time, knowledge and experience it can easily be done.
  21. Select the stocks with small volume of shares outstanding to pyramid on the buying side and the ones with the largest volume of stock outstanding on the sell side – Think about this one – supply & demand!  I must admit I don’t consider volume in my trades, but I can see and understand the Supply/Demand issues with the quantity of shares available for sale/purchase and the price implications thereof.
  22. Never hedge.  If you are long of one stock and it starts to go down, do not sell another stock short to hedge it.  Get out at the market; take your loss and wait for another opportunity – I don’t even consider this, for me its not an option if I’m wrong in my belief of market direction I’m wrong and out of the market, hedging just adds another layer of complication that I don’t want to add to my trading.
  23. Never change your position in the market without good reason.  When you make a trade, let it be for some good reason or according to some definite plan; then do not get out without a definite indication of change of trend Flouting this rule shows a misunderstanding of how the markets works.  To put it blunt you don’t know how to trade/invest properly or understand how the market works. 
  24. Avoid increasing your trading after a long period of success or a period of profitable trades – at some stage losses will emerge, ego, confidence and “brilliant trader” syndrome will show their face and catch you out.  A holiday is often nice at these points in time.

“When you decide to make a trade, be sure that you are not violating any of these 24 rules, which are vital and important to your success.  when you close a trade with a loss, go over these rules and see which rule you have violated; then do not make the mistake a second time.”

This just shows you that Gann was on tha ball decades ago (virtually a century ago!), it also shows you the importance of having a plan and a set of trading rules – If these [ Trading plan & Rules] are not written down to suit your style and adhered to then you are gambling in the markets and guessing – a sure fire way to lose money in my books.

Gann delves deeper into each area within his books and courses, I’ll let you discover exactly what he wrote if your interested.

Obviously If you incorporate these into your work you’ll have to think about how they fit your style and might have to adjust somewhat to suit – this is your responsibility to do!  Remember what suits me, might not suit your style at all.

The Hovis Trader

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