For those of you interested in W.D. Gann I found this great article on a website taken from his book 45 years in Wall Street.
Rules 1-6
Remaining rules coming soon
Rules 1-6
William Delbert Gann made an enormous contribution to analysis and trading throughout his long lifetime. The fact that his techniques are used by so many traders and investors today, almost 50 years after his death, is evidence enough of his enormous contribution. Even his few critics flatter him by repeating his never failing rules as their own, more than half a century after Mr. Gann first devised them.
W. D. Gann’s last book, 45 Years in Wall Street, written when he was 72 years of age, was arguably his best stock market book. It was written with the immense benefit of his lifetime of experience in Wall Street. It was inspired by a desire to pass on his wisdom to others.
As Mr. Gann stated in the book’s Foreword:
I am now in my 72nd year; fame would do me no good. I have more income than I can spend for my needs, therefore, my only object in writing this new book is to give others the most valuable gift possible – KNOWLEDGE! If a few find their way to make safer investments my object will have been accomplished and satisfied readers will be my reward.
(Gann, W. D., 45 Years in Wall Street, Lambert-Gann Publishing Co., Pomeroy, WA, 1949, Forward, p. 2.)
W. D. Gann did not believe in pulling punches in his books. He understood the risks involved in trading and investing and believed in giving his students a realistic view of market reality, including knowledge which would help them to control the risk and to profit handsomely.
Early in the book Mr. Gann addresses the issue ‘Why You Have Lost Money in Stocks and How to Make It Back’. Under this heading he lists three reasons why many traders lose:
They overtrade or buy and sell too much for their capital.
They do not place stop loss orders or limit their losses.
Lack of Knowledge. This is the most important reason of all.
(Gann, W. D., 45 Years in Wall Street, Lambert-Gann Publishing Co., Pomeroy, WA, 1949, p. 4.)
Every page of 45 Years in Wall Street contains valuable knowledge, however it is W. D. Gann’s twenty-four never-failing rules that give traders and investors the benefit of his knowledge. As Mr. Gann states:
In order to make a success trading in the stock market the trader must have definite rules and follow them. The rules given below are based upon my personal experience and anyone who follows them will make a success.
(Gann, W. D., 45 Years in Wall Street, Lambert-Gann Publishing Co., Pomeroy, WA, 1949, p. 16.)
It is now more than 50 years since W. D. Gann documented his 24 rules, yet they apply today as much as they ever did. Let us examine his first six rules:
Rule 1 – Amount of capital to use: Divide your capital into equal parts and never risk more than one-tenth of your capital on any one trade.
Trading can be exciting. Money management is intrinsically boring. As a consequence, many traders ignore basic money management rules to their peril. It is no coincidence that Mr. Gann’s first rules are survival rules. As Mr. Gann stated:
Your first thought must be to protect your capital and make your trading as safe as possible. There is one safe, sure rule, and the man who will follow it and never deviate from it will always keep his money and come out ahead at the end of every year. This rule is divide your capital into 10 equal parts and never risk more than one-tenth or 10 per cent of your capital on any one trade… You can always find new opportunities to make profits, so long as you have capital to operate with. Taking heavy risks in the beginning endangers your capital and impairs your judgment. Trade in such a way that you not be disturbed mentally by a loss or two, if it comes.
(Gann, W. D., 45 Years in Wall Street, Lambert-Gann Publishing Co., Pomeroy, WA, 1949, p. 17.)
It must be stated that risking 10 per cent of capital should be considered to be the absolute maximum percentage and only for those with smaller trading accounts. Two to five per cent would be a more appropriate percentage to risk for the majority of traders.
Rule 2 – Use stop loss orders. Always protect a trade when you make it with a stop loss order 3 to 5 points away.
Stop loss orders are not 100 per cent guarantees of trading safety just as seat belts are not 100 per cent guarantees that one will not sustain injury in a road accident. This is hardly an argument against stop-loss orders or seat belts, however. The evidence supporting the use of both stop loss orders and seat belts is overwhelming!
Mr. Gann was adamant that stop-loss orders should be an integral part of a trader’s reason for taking a trade. He left no doubt about his views on this subject by saying:
I feel that I cannot repeat too many times the value of using stop loss orders because it is the only safety valve to protect the investor and trader. An investor or trader will place a stop loss order and one time out of ten the stop will be caught at the exact top or bottom. After this he always remembers this and says, "If I place a stop loss order, they will just go down and catch it, or just go up and catch it and then the market will go the other way." So he does not use the stop loss order the next time… The trader forgets the nine times out of ten the stop loss order was right and would have prevented big losses by getting him out at a time when the market was going against him.
Mr. Gann adds:
PLACE A STOP LOSS ORDER AT THE TIME YOU MAKE A TRADE AND DO NOT CANCEL IT.
(Gann, W. D., 45 Years in Wall Street, Lambert-Gann Publishing Co., Pomeroy, WA, 1949, pp. 18-19.)
It should be noted that Mr. Gann advised traders to "place" the stop-loss order, in other words to give the order to their broker. Some traders say that they do not need to do this as they use ‘mental’ stop-loss orders.
There are two real problems with the use of mental stops. The first is that it leads to a delay in the execution of the order. An order placed with a broker can be executed the moment the market has traded at the nominated price. Even if a trader is aware of a stop price being ‘hit’, he or she has to contact the broker before the order can be executed.
The second problem with the use of ‘mental’ stops is the fact that it gives the trader the opportunity to second-guess his or her trading plan. It is very tempting to rationalize that "my stop may have been hit, but it has been a good trade so I will wait just one more day". Many a trader or investor has waited "just one more day", day after day, until a profit has become a loss.
One of the most effective pieces of advice I give traders who are having trouble with discipline is to tell them to always place a stop-loss order with their broker. The temptation to override it is then out of their hands.
Rule 3 – Never overtrade. This would be violating your capital rule.
There are two forms of overtrading. The first is when Rule 1 is violated – that is, when more than 10 per cent of your trading capital is placed at risk in the market.
The second form of overtrading involves taking too many trades in a relatively short period of time. This form of overtrading can:
* Expose too much of one’s account to the market;
* Result in excessive transaction costs;
* Result in the stress associated with making numerous decisions under pressure;
* Lead to excessive work for a reduced reward.
Rule 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.
Most experienced traders or investors have suffered the disbelief involved in realizing that they have let a profit run into a loss. As Mr. Gann states:
It is just as important to protect your profits as it is to protect your capital. Once you have a profit on a trade, you should never let it run into a loss. There are exceptions to this rule, and the amount of the profits should determine where stop loss orders should be placed. The following is about the safest rule that I can give you to use under average conditions. When a stock has moved 3 points in your favor, place a stop loss order where you will be even if it is caught. In very active high-priced stocks, it will even pay you to wait until the stock shows a profit of 4 to 5 points; then move your stop loss order up to where you will have no loss should the market reverse. In this way, you will have reduced your risk to a minimum and the possibility of profits will be unlimited. As the stock moves in your favour, continue to follow up with a stop loss order, thus protecting and increasing your profits.
(Gann, W. D., 45 Years in Wall Street, Lambert-Gann Publishing Co., Pomeroy, WA, 1949, p. 19.)
Clearly, some common sense needs to be used when applying this rule. Active, higher-priced stocks need to be given more room to move than less volatile, lower-priced stocks.
Rule 5 – Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts.
One of Wall Streets most famous sayings is "the trend is your friend". The trend is certainly your friend and trading with the trend is clearly a profitable way to trade. The key is therefore to have a definition of ‘trend’ and to apply it consistently.
Mr. Gann defined an up trend as a market making higher swing tops and higher swing bottoms on a swing chart. Similarly, he defined a downtrend as a market making lower swing tops and lower swing bottoms.
Rule 6 – When in doubt, get out, and don’t get in when in doubt.
Professional traders trade when their proven system gives them a clear ‘buy’ or ‘sell’ signal. In other words, they trade when the odds are stacked in their favour.
Just as it makes sense to trade only when a clear signal has been given, it also makes sense to get out when in doubt. A trend cannot be progressing well if there is real doubt.
W. D. Gann’s last book, 45 Years in Wall Street, written when he was 72 years of age, was arguably his best stock market book. It was written with the immense benefit of his lifetime of experience in Wall Street. It was inspired by a desire to pass on his wisdom to others.
As Mr. Gann stated in the book’s Foreword:
I am now in my 72nd year; fame would do me no good. I have more income than I can spend for my needs, therefore, my only object in writing this new book is to give others the most valuable gift possible – KNOWLEDGE! If a few find their way to make safer investments my object will have been accomplished and satisfied readers will be my reward.
(Gann, W. D., 45 Years in Wall Street, Lambert-Gann Publishing Co., Pomeroy, WA, 1949, Forward, p. 2.)
W. D. Gann did not believe in pulling punches in his books. He understood the risks involved in trading and investing and believed in giving his students a realistic view of market reality, including knowledge which would help them to control the risk and to profit handsomely.
Early in the book Mr. Gann addresses the issue ‘Why You Have Lost Money in Stocks and How to Make It Back’. Under this heading he lists three reasons why many traders lose:
They overtrade or buy and sell too much for their capital.
They do not place stop loss orders or limit their losses.
Lack of Knowledge. This is the most important reason of all.
(Gann, W. D., 45 Years in Wall Street, Lambert-Gann Publishing Co., Pomeroy, WA, 1949, p. 4.)
Every page of 45 Years in Wall Street contains valuable knowledge, however it is W. D. Gann’s twenty-four never-failing rules that give traders and investors the benefit of his knowledge. As Mr. Gann states:
In order to make a success trading in the stock market the trader must have definite rules and follow them. The rules given below are based upon my personal experience and anyone who follows them will make a success.
(Gann, W. D., 45 Years in Wall Street, Lambert-Gann Publishing Co., Pomeroy, WA, 1949, p. 16.)
It is now more than 50 years since W. D. Gann documented his 24 rules, yet they apply today as much as they ever did. Let us examine his first six rules:
Rule 1 – Amount of capital to use: Divide your capital into equal parts and never risk more than one-tenth of your capital on any one trade.
Trading can be exciting. Money management is intrinsically boring. As a consequence, many traders ignore basic money management rules to their peril. It is no coincidence that Mr. Gann’s first rules are survival rules. As Mr. Gann stated:
Your first thought must be to protect your capital and make your trading as safe as possible. There is one safe, sure rule, and the man who will follow it and never deviate from it will always keep his money and come out ahead at the end of every year. This rule is divide your capital into 10 equal parts and never risk more than one-tenth or 10 per cent of your capital on any one trade… You can always find new opportunities to make profits, so long as you have capital to operate with. Taking heavy risks in the beginning endangers your capital and impairs your judgment. Trade in such a way that you not be disturbed mentally by a loss or two, if it comes.
(Gann, W. D., 45 Years in Wall Street, Lambert-Gann Publishing Co., Pomeroy, WA, 1949, p. 17.)
It must be stated that risking 10 per cent of capital should be considered to be the absolute maximum percentage and only for those with smaller trading accounts. Two to five per cent would be a more appropriate percentage to risk for the majority of traders.
Rule 2 – Use stop loss orders. Always protect a trade when you make it with a stop loss order 3 to 5 points away.
Stop loss orders are not 100 per cent guarantees of trading safety just as seat belts are not 100 per cent guarantees that one will not sustain injury in a road accident. This is hardly an argument against stop-loss orders or seat belts, however. The evidence supporting the use of both stop loss orders and seat belts is overwhelming!
Mr. Gann was adamant that stop-loss orders should be an integral part of a trader’s reason for taking a trade. He left no doubt about his views on this subject by saying:
I feel that I cannot repeat too many times the value of using stop loss orders because it is the only safety valve to protect the investor and trader. An investor or trader will place a stop loss order and one time out of ten the stop will be caught at the exact top or bottom. After this he always remembers this and says, "If I place a stop loss order, they will just go down and catch it, or just go up and catch it and then the market will go the other way." So he does not use the stop loss order the next time… The trader forgets the nine times out of ten the stop loss order was right and would have prevented big losses by getting him out at a time when the market was going against him.
Mr. Gann adds:
PLACE A STOP LOSS ORDER AT THE TIME YOU MAKE A TRADE AND DO NOT CANCEL IT.
(Gann, W. D., 45 Years in Wall Street, Lambert-Gann Publishing Co., Pomeroy, WA, 1949, pp. 18-19.)
It should be noted that Mr. Gann advised traders to "place" the stop-loss order, in other words to give the order to their broker. Some traders say that they do not need to do this as they use ‘mental’ stop-loss orders.
There are two real problems with the use of mental stops. The first is that it leads to a delay in the execution of the order. An order placed with a broker can be executed the moment the market has traded at the nominated price. Even if a trader is aware of a stop price being ‘hit’, he or she has to contact the broker before the order can be executed.
The second problem with the use of ‘mental’ stops is the fact that it gives the trader the opportunity to second-guess his or her trading plan. It is very tempting to rationalize that "my stop may have been hit, but it has been a good trade so I will wait just one more day". Many a trader or investor has waited "just one more day", day after day, until a profit has become a loss.
One of the most effective pieces of advice I give traders who are having trouble with discipline is to tell them to always place a stop-loss order with their broker. The temptation to override it is then out of their hands.
Rule 3 – Never overtrade. This would be violating your capital rule.
There are two forms of overtrading. The first is when Rule 1 is violated – that is, when more than 10 per cent of your trading capital is placed at risk in the market.
The second form of overtrading involves taking too many trades in a relatively short period of time. This form of overtrading can:
* Expose too much of one’s account to the market;
* Result in excessive transaction costs;
* Result in the stress associated with making numerous decisions under pressure;
* Lead to excessive work for a reduced reward.
Rule 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.
Most experienced traders or investors have suffered the disbelief involved in realizing that they have let a profit run into a loss. As Mr. Gann states:
It is just as important to protect your profits as it is to protect your capital. Once you have a profit on a trade, you should never let it run into a loss. There are exceptions to this rule, and the amount of the profits should determine where stop loss orders should be placed. The following is about the safest rule that I can give you to use under average conditions. When a stock has moved 3 points in your favor, place a stop loss order where you will be even if it is caught. In very active high-priced stocks, it will even pay you to wait until the stock shows a profit of 4 to 5 points; then move your stop loss order up to where you will have no loss should the market reverse. In this way, you will have reduced your risk to a minimum and the possibility of profits will be unlimited. As the stock moves in your favour, continue to follow up with a stop loss order, thus protecting and increasing your profits.
(Gann, W. D., 45 Years in Wall Street, Lambert-Gann Publishing Co., Pomeroy, WA, 1949, p. 19.)
Clearly, some common sense needs to be used when applying this rule. Active, higher-priced stocks need to be given more room to move than less volatile, lower-priced stocks.
Rule 5 – Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts.
One of Wall Streets most famous sayings is "the trend is your friend". The trend is certainly your friend and trading with the trend is clearly a profitable way to trade. The key is therefore to have a definition of ‘trend’ and to apply it consistently.
Mr. Gann defined an up trend as a market making higher swing tops and higher swing bottoms on a swing chart. Similarly, he defined a downtrend as a market making lower swing tops and lower swing bottoms.
Rule 6 – When in doubt, get out, and don’t get in when in doubt.
Professional traders trade when their proven system gives them a clear ‘buy’ or ‘sell’ signal. In other words, they trade when the odds are stacked in their favour.
Just as it makes sense to trade only when a clear signal has been given, it also makes sense to get out when in doubt. A trend cannot be progressing well if there is real doubt.
