The Trading Methodologies Of W.D. Gann

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The TradingMethodologiesof W.D. Gann

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The TradingMethodologiesof W.D. GannA Guide to Building YourTechnical Analysis ToolboxHima Reddy

FT PressVice President, Publisher: Tim MooreAssociate Publisher and Director of Marketing: Amy NeidlingerExecutive Editor: Jim BoydEditorial Assistant: Pamela BolandOperations Specialist: Jodi KemperMarketing Manager: Megan GraueCover Designer: Alan ClementsManaging Editor: Kristy HartSenior Project Editor: Lori LyonsCopy Editor: Krista Hansing Editorial ServicesProofreader: Kathy RuizIndexer: Larry SweazyCompositor: Nonie RatcliffManufacturing Buyer: Dan Uhrig 2013 by Hima ReddyPearson Education, Inc.Publishing as FT PressUpper Saddle River, New Jersey 07458This book is sold with the understanding that neither the author nor the publisher isengaged in rendering legal, accounting, or other professional services or advice by publishing this book. Each individual situation is unique. Thus, if legal or financial advice orother expert assistance is required in a specific situation, the services of a competent professional should be sought to ensure that the situation has been evaluated carefully andappropriately. The author and the publisher disclaim any liability, loss, or risk resultingdirectly or indirectly, from the use or application of any of the contents of this book.FT Press offers excellent discounts on this book when ordered in quantity for bulk purchasesor special sales. For more information, please contact U.S. Corporate and Government Sales,1-800-382-3419, corpsales@pearsontechgroup.com. For sales outside the U.S., please contactInternational Sales at international@pearsoned.com.Company and product names mentioned herein are the trademarks or registered trademarks of theirrespective owners.Charts created using TradeStation. TradeStation Technologies, Inc. 2001-2012. All rights reserved.No investment or trading advice, recommendation, or opinions is being given or intended.All rights reserved. No part of this book may be reproduced, in any form or by any means, withoutpermission in writing from the publisher.Printed in the United States of AmericaFirst Printing September 2012ISBN-10: 0-13-273438-9ISBN-13: 978-0-13-273438-7Pearson Education LTD.Pearson Education Australia PTY, Limited.Pearson Education Singapore, Pte. Ltd.Pearson Education Asia, Ltd.Pearson Education Canada, Ltd.Pearson Educación de Mexico, S.A. de C.V.Pearson Education—JapanPearson Education Malaysia, Pte. Ltd.Library of Congress Cataloging-in-Publication DataReddy, Hima, 1979The trading methodologies of W.D. Gann : a guide to building your technical analysis toolbox /HimaReddy.p. cm.ISBN 978-0-13-273438-7 (hbk. : alk. paper)1. Technical analysis (Investment analysis) 2. Speculation. 3. Gann, William D., b. 1878. I. Title.HG4529.R43 2013332.63’2042--dc232012028203

For my father,Pandu R. Tadoori

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Contents at a GlanceForeword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvPreface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xviiChapter 1The Work of W.D. Gann . . . . . . . . . . . . . . . . . . . . . . . . . . . .1Chapter 2Elements of the Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Chapter 3Interpreting the Market . . . . . . . . . . . . . . . . . . . . . . . . . . . .27Chapter 4Trading the Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39Chapter 5Application of Gann’s Principles . . . . . . . . . . . . . . . . . . . . .85Chapter 6Trade and Capital Management . . . . . . . . . . . . . . . . . . . .119Chapter 7Bringing It All Together. . . . . . . . . . . . . . . . . . . . . . . . . . .139Chapter 8Beyond Trading Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . .155Appendix AGann’s 28 Trading Rules . . . . . . . . . . . . . . . . . . . . . . . . . .173Appendix BAffirmative Versions of Gann’s 28 Rules . . . . . . . . . . . . . .177Appendix CGann’s Buying and Selling Points . . . . . . . . . . . . . . . . . . .181Appendix DGann’s Soybean Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . .185Appendix EGoogle, Inc. (GOOG) Highs and Lows byCalendar Month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .187Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .189vii

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ContentsForeword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvPreface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xviiChapter 1The Work of W.D. Gann . . . . . . . . . . . . . . . . . . . . . . . . . . . .1Market Predictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Publications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Focus of This Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Trading Rules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Chapter 2Elements of the Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Basic Market Movement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Price Is King. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Patterns Repeat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11The Construct of Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Chapter 3Interpreting the Market . . . . . . . . . . . . . . . . . . . . . . . . . . . .27Gann’s View of Price Movement. . . . . . . . . . . . . . . . . . . . . . . 27Projections Based on Existing Price Movement. . . . . . . . . . . 32Chapter 4Trading the Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39Exceeding Moves in Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41Triple Bottoms/Tops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Double Bottoms/Tops . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57Exceeding Moves in Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63Buy Old Tops/Sell Old Bottoms . . . . . . . . . . . . . . . . . . . . . . . 69Rapid Moves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74Trading Ranges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80Chapter 5Application of Gann’s Principles . . . . . . . . . . . . . . . . . . . . .85Gann’s Favorite Numbers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85Gann’s Principles Applied Outside of Price . . . . . . . . . . . . . . 95The Importance of the Closing Price . . . . . . . . . . . . . . . . . . 108ix

xTHE TRADING METHODOLOGIES OF W.D. GANNChapter 6Trade and Capital Management . . . . . . . . . . . . . . . . . . . .119Risk Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120Placement of Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123Trade Initiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126Management of Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127Trade Exit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136Chapter 7Bringing It All Together. . . . . . . . . . . . . . . . . . . . . . . . . . .139Exploring Gann’s Examples. . . . . . . . . . . . . . . . . . . . . . . . . . 139Rigid Rules, Flexible Observation. . . . . . . . . . . . . . . . . . . . . 150Chapter 8Beyond Trading Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . .155Looking to the Left of the Chart . . . . . . . . . . . . . . . . . . . . . . 155Recommended Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160Obtaining Charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161Gann’s Writing Style and References . . . . . . . . . . . . . . . . . . 162A Study “Partner”—an Invaluable Tool . . . . . . . . . . . . . . . . 167The End.of the Beginning . . . . . . . . . . . . . . . . . . . . . . . . . . 170Appendix AGann’s 28 Trading Rules . . . . . . . . . . . . . . . . . . . . . . . . . .173Appendix BAffirmative Versions of Gann’s 28 Rules . . . . . . . . . . . . . .177Appendix CGann’s Buying and Selling Points . . . . . . . . . . . . . . . . . . .181Appendix DGann’s Soybean Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . .185Appendix EGoogle, Inc. (GOOG) Highs and Lowsby Calendar Month. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .187Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .189

AcknowledgmentsClare White—You introduced me to the opportunity to write thisbook. I am so thankful for your continued confidence in my skills andknowledge and your thoughtful advice through the changing phasesof my career. You are a mentor in the truest sense.Ken Gerber—You shared your extensive Gann expertise, whichadded immeasurably to the quality of this book. I greatly appreciate the time and effort you took to answer my questions, critique myideas, and make suggestions that only a remarkable teacher could.Nikki Jones—You so graciously wrote the foreword for this bookand allowed access to your company’s vast Gann resources for myresearch. I am so grateful for the words of support and encouragement that you provided along the way and for the connection that wehave maintained since our first Gann seminar together.Marnie Owen—You provided impressively detailed and thoughtful reviews of my book material as it developed from a rough draft toa complete manuscript. I am extremely thankful for you in my life, asa dear friend and as a knowledgeable colleague with whom I can sharemy fascination with technical analysis and the markets.Jim Boyd—As my publisher, you took a chance on me. I am sograteful for all the guidance and insight you provided through thewriting and production processes.Kristy Hart, Lori Lyons, Krista Hansing, and the rest of the Pearson production team—You transformed my book from a manuscriptdraft to a press-ready work! Thank you for your helpful suggestionsand painstaking efforts, which improved the layout of the book whilemaintaining its context and intent.xi

xiiTHE TRADING METHODOLOGIES OF W.D. GANNAll of my extended family, friends, and colleagues—You expressenthusiasm in my work and exude a perpetual interest in reading whatI create, whether it’s been a blog post, or this book! I am very thankfulfor you, and I am inspired by each and every one of you.Mom, Dad, Rekha, Swathi, and Abhi—Your patience, love, andsupport are invaluable. Thank you for motivating me to try and be thebest at what I do. It makes me want to be a better daughter and sisteras well.Srinu—You ground me when my head gets into the clouds, butknow when to let me fly free. I am so grateful for your encouragementand support in all of my endeavors. Beginning work on this book in2011 was the second best thing I did that year. The first was marryingyou.

About the AuthorHima Reddy, CMT, was first introduced to technical analysis,and to the works of W.D. Gann, during her high school years by herfather, who has had a passion for trading and the markets since the early1980s. However, it wasn’t until after she completed an undergraduateFinance degree at Indiana University’s Kelley School of Business, andreturned to her home state of New York in 2001, that she immersedherself in the markets. She simultaneously volunteered as a sponsorship coordinator for several Market Technicians Association conferences, traded equity and commodity futures under the tutelage andguidance of her father, and completed the Chartered Market Technician certification. In 2006, she joined Informa Global Markets, anindependent financial research firm providing live, 24-hour marketanalysis. As Senior Technical Analyst, she was responsible for producing timely and accurate short-term technical analysis and trading strategies for fixed income and FX markets. With analysis ranging throughmultiple timeframes, her team also prepared written updates covering longer-term trends. Hima’s “guru” has always been Gann—thefirst market analysis book she ever studied in-depth was How to MakeProfits in Commodities—and to this day that is her go-to guide to themarkets. Since 2011 she has returned to trading independently andcontinues to write about the financial markets. Her primary methodsof technical analysis include pattern recognition and time durationrelationships within markets based on Gann’s methodology, momentum assessment through the use of the Relative Strength Index (RSI),Fibonacci relationships, and moving average systems including theuse of channels for trade management. Hima now resides with herhusband in Baltimore, Maryland.xiii

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ForewordOver the years, many questions have been asked about W.D.Gann and his trading system. Does it work? How much time do Ihave to spend before I trade? Can I make money? Where do I begin?I believe the best question of all is, “Which one of Gann’s books canI read that will teach me how to trade?” The answer is, they all will.However, never has a more worthy book exploring Gann’s been written for beginners or intermediate traders as this one.To be a successful trader, you need to know the rules that havestood the test of time, a bit about the man who created them, andabout the author who wrote this book.Hima Reddy has provided us with the “missing link” to W.D.Gann’s trading methods. In this book, she has laid out the basic plansstep by step, along with examples, which can be easily followed by anyone with an interest in learning the potential profit areas in trading.Reddy is an extremely talented and determined person. She iswell-qualified, with

Profits in Commodities—and to this day that is her go-to guide to the markets. Since 2011 she has returned to trading independently and continues to write about the financial markets. Her primary methods of technical analysis include pattern recognition and time duration relationships within markets based on Gann’s methodology, momen-

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