Rule #1 : Strive for Success
To be successful the most important rule is to strive for success. This means you must exert effort and put a lot of hard work into your effort. You must have both the short term and long term charts necessary for trading the markets you trade. They must be always up-to-date and you need to watch them on a daily basis so your mind gets use to their price and time movement. You will then learn the secret of trading and see how the entire price movement continually evolves.
Rule #2: No One Owes You Anything
You must succeed on your own. It is all up to you. The markets, stockbrokers, brokerage firms, newsletters don’t owe you anything. Gann never took anyone’s newsletter. He did it all himself. The markets are there to provide you a service for buying and selling the markets you are trading. They really don’t care that you make money. The markets are there for the brokerage fees. The more you trade, the more money the brokerage firms and exchanges make. You must be knowledgeable of a reliable trading method that you can use to extract money from these markets. This method must be able to help you understand the price structure of the markets in regards to time and price movement.
Rule #3: Plan Your Way to Profit
When you enter a trade you should have a figured a game plan for both the entry and exit of the trade. The plan should be definite and not subject to changes to your psychology during market hours. Gann knew exactly what he was doing all the time. You should have a stop in the market at all times, because you never know when a time cycle might turn against you. You should also have a profit objective in the market. So many traders today lose because they are using computer oscillators to trade with and they never know where they are going. They usually end up on trading with rumors and tips and use hope and fear to try to make a success of the markets.
Rule #4: Plan your Orders
You should always use price orders to enter the market. By doing this you will limit your risk and you can have a predetermined stop loss for the trade you are making. It also eliminates slippage on the entry. When you exit the market, it can be with a limit order based on the time and price objective. However, if the price has not been met by the end of your time cycle, you should then exit at the market.
Rule #5: Profit Ratio
You should set your profit ratio at 3 times your risk factor. Go back on the previous charts of the market you are trading and determine how much the market has risen or fallen and then set the loss ratio based on that. For example, if you have found that wheat usually rallies 12 cents then you should have a stop set at 4 cents.
Rule #6: Trade in Private
Never under any circumstances reveal your trading positions to anyone. Your mind must be in complete harmony with your trading positions. When you reveal your positions to someone, they will immediately start to question the trade and start to erode your confidence and concentration in the trade. You will then be a less effective trader and eventually lose.
Rule #7: Margin
Over trading on low margins is why so many people lose in the markets. You should never put a position on that risks over 10% of your capital. Every position you have in commodities should be backed with 3 times the minimum exchange margins. That means if the minimum exchange margins on wheat is $700 then when you buy a contract of wheat, it should be backed with $2100. This backing can be done in several ways. You don’t have to have the money sitting in the brokerage account. It can be in a money market account or in Tbills.
Rule #8: Double Tops
Double tops offer you the best method of selling a market. What is happening is that a time and price high is being challenged. In most cases, the upward timing of the market has run out and it is in a downtrend. You should use the first rally to test the top as a selling point. In many cases, it ends up being a double top. Check back on the particular market you are trading on previous double tops and see what the market needed to do to get through and break the double top. It is usually 1-2 percent of the price of the current market. You should then set your stop based on that. The distance between double tops is important. The longer the distance the more important it is. Double tops on yearly charts are the most important, and then monthly and then daily are important. This is why you should always be looking at long-term charts to see these tops.
Rule #9: Double Bottoms
Just like double tops, a good double bottom offers an excellent trading opportunity. Most major bull markets are created from these bottoms. Always keep an eye on all charts for this development. Place the orders and use your protective stops to take advantage of these trades.
Rule #10: Inside Day
Watch the markets for inside days. This means that the previous day’s market high and low is inside of the previous day’s range.
Rule #11: Reversal Signals
Understand and look for reversal signals. This will tell you the trend of the market short term. When the market runs up for more than five days and then gaps up, fills that gap, and closes lower for the day, it indicates low prices. You should expect the trend has changed. This is the strongest reversal signal. Another reversal is a market that runs up for 5 days or more and opens steady goes higher and then closes lower and under the previous days close. In many cases, the market will move at least 3 days in the opposite direction after one of these reverse signals.
Rule #12: Fibonacci Sequence Numbers
Gann never talked about Fibonacci Sequence Numbers, but he did use them. This was one of his secrets he kept to himself. Everything in nature and in the markets is based on Fibonacci Ratios of .382, .500 and .618. Markets will move according to the Fibonacci Numbers of 1, 3, 5, 8, 21 and so on. Watch for turns of the market on these numbers.
Rule #13: The Right Broker
You should choose a broker who complements you and thinks like you. The broker should take your order and fill it with the utmost speed. In commodity trading today it is important that your order gets to the floor within seconds. The new electronic trading has helped increase the speed. The broker should be willing to give you all the technical and fundament research you need to succeed without question and in a timely manner. The broker should never question your orders as you have put in the many hours of research into this trade and you know the trend of the market much better than he does of the market. Their only job should be to provide you with the best execution service possible.
Rule #14: Diversification
You should diversify your money so that you are in more than one group. For example, if you are a commodity trader you should have positions in grains, metals and meats. This helps to protect you from having adverse things hitting your one sector. This also destroys your confidence. In the stock market, you could have positions in different industries for protection.
Rule #15: Stops Based on Percent
All the stops you use should be based on percent of the price of the current market. Check back and you will find that a certain percentage stop works on the market most of the time and it is based on the current price of the market. Usually a 1 percent stop will protect you. Check back and see what previous stops have held the market and you will find one secret to trading successfully.
Rule #16: Trading Positions
There are three different positions you can be in at any one time. Those being long, short and neutral and not in the market. Don’t be afraid to be out of the market. When cycles are changing, there are times when you should not be in. Changing cycle markets give you poor signals. You are also constantly being stopped out in these markets. If you are stopped out of 2 – 3 trades, you probable won’t take the next trade because of psychology and that will be the one that works.
Rule #17: Odd Price Orders
When you place limit price orders, they should be not even but odd. That means if you want to buy corn at $3.00 you should place the order at $3.01. That is a little above the price level. The price level of $3.00 is a strong psychological level and many orders are placed there. The chances are that you would not be filled at that price level and the market would then rally sharply.
Rule #18: Fundamentals
You should not dismiss fundamentals. They are what move the markets. You should always be aware of upcoming reports, weather and other fundamentals in the commodity’s markets. In stocks, you should know what’s happening with sales, earnings, new products, management and other fundamental factors. The technical charts will then give you a leading indicator as to how those fundamentals will change. For example, in commodities the market will often go up into a report. The report will come out bullish and will jump the day of the report, just to turn down again the next several days. Checking further you will find that the report was on a cycle high day in a major down trend.
Rule #19: Anniversary Dates
Anniversary dates are very important. If you check back on your long-term charts (using daily) you will find that harmonic years many times will move in the same direction. The important harmonic years are every 10 years back. Therefore, if you find that December Wheat made a high on October 20, 1978 and we are approaching October 20, 1988 watch that anniversary date, if it reverses that same day it is very important and could lead to a major reversal.
Rule #20 Gaps
Gaps are extremely important. There are three types. One is the breakaway gap, which occurs after a congestion area. It usually leads to a big move in the market. The next is a midway gap. This is a gap, which occurs after the market has moved in the same direction for some time. It usually will tell you the market will move the same amount in the same direction for another extended period. The last type of gap is the exhaustion gap. It is where the market exhausts itself. For example, in a bull market when the bear finally gives up, throws in the towel and the market gaps up, and trades a few days up there, then finally starts down the market is through. The market will start a major downtrend.
Rule: #21 Swing Charts
Swing charts are extremely important. They tell you the direction of the market. When a previous swing low is broken, the market should be sold on any rallies and when a swing top is broken the market is ready to start up and all lows should then be bought. Using a stochastic oscillator on your charts sometimes tells you the relative importance of any particular swing high or low.
Rule: #22 Pyramiding
Pyramiding can be extremely profitable. You should buy 50% of your position on the cycle low or known bottom according to your time and price cycle work. Keep your stop below this low. Then at the wave two bottom you should add 25% of your position. Yes, you need to know Elliott Wave to trade. Place your stop for that position below that low. At wave, four buy another 25% and place your stop for that position below that low. On the last wave up which is the Fifth, you should start peeling off positions and removing stops starting with the first positions taken. When you think the market has topped take off all positions, cancel all stops, and wait for the next major trend to develop.
Rule: #23 Trade with the Main Trend
Gann always said go with the main trend. It is very important. You can buy reactions against the main trend and this can be very profitable. Reactions will usually be 1, 3 or 5 days, weeks, or months. That means that if the market reacts beyond 5 days then it will react 1, 3 or 5 weeks. If the market reacts beyond 5 weeks then it will react 1, 3 or 5 months.
Rule: #24 Harmonic Cycles
Harmonic cycles are time cycles and they are very important. The major cycles are every ten years back. You should have available long-term charts going back as far as possible in daily format. Overlay these long-term harmonic charts on top of each other. If 90% of them are going up during a time period then there is a high probability that the current trend will go up.
Rule: #25 Square Time and Price
If the market bottoms at a set price then it will rally in hours, days, weeks, months or years to square that price. For example if Dec Wheat bottoms at 250 then it will rally 250 hours, days, weeks, months or years from that bottom.
Rule: #26 Timing Points
Timing lows and highs are based on time and may not necessarily be the high or low of the market. Sometimes momentum will carry the market further than the high or low.
Rule: #27 Time Overbalancing Price
Watch the rise and fall of the markets carefully. If the 2nd last reaction in an uptrend drops for example 5 cents in corn in 3 days and the last reaction drops 5 cents in 6 days, then time is changing to the downside and the market will soon decline.
Rule: #28 Watch the Timing Swings
Timing swings are important. Watch both time and price from lows to highs, highs to lows, bottoms to bottoms and tops to tops. Keep track of them; as in many cases, they are the same.
Rule: #29 Psychology and Health
Psychology is very important. Trade only when you are mentally and psychologically strong. Your mind and body must be at its top condition when making critical decisions, which risk large sums of money.
©Halliker’s Inc. Reprinted with permission of Traders World Magazine (www.tradersworld.com)