Stocks & Commodities V16:3 (127-129): Combining Gann’s 50% Rule With VIDYA by Gerald Marisch INDICATORS

Combining Gann’s 50% Rule With VIDYA
Sometimes, the most puzzling of trading questions can be answered with the simplest of technical methods. Here, two such methods are combined for trading: Tushar Chande’s variable indexed dynamic average (VIDYA), a moving average that automatically adjusts to the current market’s volatility, is used as a trend indicator, and a classic rule of thumb from early-day trader W.D. Gann known as the 50% rule is added. by Gerald Marisch ff-floor, intraday traders are faced with decisions throughout the trading day. Two of the simpler yet most perplexing questions are, first: Which way are prices trending? And second: Is the reaction occurring during a trend, part of the trend, or the end of the trend? For the answers to these questions and many more, consider W.D. Gann’s 50% rule, and a previously introduced trend monitor called the VIDYA 21,5.
can make profits following it. You will always make the most money following the main trend of the market — by waiting for a definite indication of the trend before buying and selling. • The next most important point for tops or bottoms is threefourths, or 75%. Doubling the 50%, or 100%, is the next most important point.

VIDYA 21,5
The concept of using the variable indexed dynamic average (VIDYA) 21,5 concept for intraday trading, originally developed by STOCKS & COMMODITIES Contributing Editor and analyst Tushar Chande, was introduced in the January 1998 issue. The VIDYA 21,5 is an exponential moving average but mathematically structured to be sensitive to a bull or bear trend and compared with a nontrending horizontal channel. When combined with Gann’s 50% rule, VIDYA 21,5 results in a greater interpretation of the market’s language. Definitions and rules are paramount to trading successfully. Here, then, are my first set of rules for using the 50% rule and VIDYA 21,5: 1 In a bear market, closes will always be below the VIDYA 21,5. In a bull market, closes will always be above the VIDYA 21,5. In a nontrending (sideways) market, the VIDYA 21,5 will be horizontal. When the trend is changing direction, the VIDYA 21,5 will turn at a sharp angle. 2 In a bear market (the main, or impulse, trend is down), a price retracement will occur at the 50% level of the prior bear trend. Retracements will find resistance at the 50% level. Retracements finding resistance at a level less than 50% of the prior bear impulse trend is a sign of a continuing strong bear trend. Retracements finding resistance at a level more than 50% of the prior bear impulse trend is a sign of a slowing bear trend. 3 In a bull market (the main or impulse trend is up), a price retracement will occur at the 50% level of the prior bull trend. Retracements will find support at the 50% level. Retracements finding support at a level less than 50% of the prior bull impulse trend is a sign of a continuing strong bull trend. Retracements finding support at a level more than 50% 1

O

WILLIAM D. GANN
Numerous books and articles written have been written about legendary technician William D. Gann. Conflicts about his analytical abilities to project market prices range from retrospective interpretation of price trends to his use of complex proprietary numbers and their relationship, astrology and psychology to generate profits. The reported amount of Gann’s profits range from a moderate income from selling his systems to a net lifetime gain exceeding $50 million from trading the markets. Whatever the case, Gann’s 50% rule is irrefutable and has withstood the test of time. The strictures of the rule, according to W.D. Gann’s How to Make Profits in Commodities, are:
• Always remember that the 50% reaction or halfway point of the range fluctuation of the extreme highest point is a point for support on the downside or for meeting selling and resistance on the way up. This is the balancing point, because it divides the range of fluctuation into two equal parts. • You can make a fortune by following this one rule alone. A careful study and review of past movements in any commodity will prove to you beyond doubt that this rule works and that you

Copyright (c) Technical Analysis Inc.

Then at point 3. something different occurs — prices. 5 and 7. 1997. retracement points (points 10.m. At point 14. although small. it can be seen that point 8 is pivotal. and 3:04 p. From point 10 to point 11. Point 7 to point 8 is a fourth bear impulse trend. MARKET BEHAVIOR AND TWO TECHNIQUES Let’s walk through the market’s price behavior and see how the two techniques work together. but point 8 to point 9 is a bull trend. Remember the rule that prices exceeding a 50% retracement in a bear trend is a sign of a slowing trend. in Figure 1 from point 1 to point 2. This is a sign of a weak bull trend. Only closing prices are used and appear as dots. The impulse trends are identified by support/resistance lines. from point 3 to point 4. from point 5 to point 6. (CST). a third bull impulse trend occurs. At point 10. rather than retracing 50%. At point 12. prices retrace 50% of the previous impulse trend. Point 5 occurs as prices retrace a distance of 50% of the previous bear impulse trend. The highest highs and lowest lows are connected with trendlines. prices retrace a distance of 50% of the previous bear impulse trend. First. between 2:08 p. a second bear impulse trend occurs. prices retrace a little past 50% of the previous bull impulse trend. Retracement points prior to point 8 (points 3. totaling 16 points. Then. Next. 12. prices retrace almost to 100% of the prior bull impulse trend. At point 9. but not to the lowest close at point 2 Copyright (c) Technical Analysis Inc. and maybe the start of a bull trend? Let’s take a look. These concepts are illustrated in Figures 1 and 2. Figure 1 illustrates eight impulse trends — four bear and four bull — with associated retracement trends. alternating in style for easier viewing. prices PATRICK KELLY now find support. . Rather than finding resistance at the 50% level.Stocks & Commodities V16:3 (127-129): Combining Gann’s 50% Rule With VIDYA by Gerald Marisch of the prior bull impulse trend is a sign of a weakening bull trend. a third bear impulse trend occurs. The ends of the impulse trends are indicated with “E” and the point number. 14 and 16) find support at 50% levels. 5 and 7) find resistance at the 50% level. a second bull impulse trend occurs. retrace approximately 75% of the previous bear impulse trend. Both are five-tick charts of the December 1997 Standard & Poor’s futures contract for December 2.m. Point 7 is another example of prices retracing a distance of 50% of the previous bear impulse trend. From point 12 to point 13. In retrospect. a bear impulse trend occurs. The beginning of impulse trends are indicated with “B” and the point number. The 50% retracements are designated as “R” for resistance in bear trends or “S” for support in bull trends and the point number. as at previous 50% points of 3. After point 8.

at 973. Sometimes. the simplest methods can work the best. Tushar [1995]. Gerald [1998]. the market bought at 973.D. Point 16 again illustrates how prices retrace a distance of 50% of the prior bull impulse trend. it may be a sign of a strengthening bull trend.” Technical Analysis of STOCKS & COMMODITIES. indicating that prices may be in a small consolidation from point 11 to point 14. B If retracements are less than 50%. it may be a sign of a slowing bear trend.00 as the price crossed the flat VIDYA 21. this simple strategy netted approximately $1. and thereby letting the trade go at 975. Marisch. FIGURE 2: S&P 500 FIVE-TICK BARS.m. Look for 50% retracements — bull or bear — to find support or resistance at the VIDYA 21. Gann. If 50% retracements are now finding resistance at 50% retracements instead of support. Dots for closing prices have been replaced by tick bars. W. 3 . Four bull and four bear trends are overlaid on the chart. WA. The first trade was a sell at point 1 at 976. conservative and proven studies to generate profits. The same data is shown with the high. CONCLUSIONS Could more profits have been made with more confidence if more trading rules had been used? Sure. Volume 16: January. Then the shorts were covered shortly after point 8. retracements should find support at the 50% level of the prior impulse trend: A Retracement should find support at the 50% level of the prior impulse trend. Lambert-Gann Publishing Co. Pomeroy. a market on close (MOC) order was placed at 3:04 p. This is important. the trend has changed from bear to bull. 15% deducted for expenses and the new half rate for the Standard & Poor’s 500 index. Allowing for slippage. If the overall trend is a bull trend. Of course — and unfortunately — not all days or fills will be this straightforward. C If retracements are more than 50%. How to Make Profits in Commodities. [1942].” Technical Analysis of STOCKS & COMMODITIES. but this is just an example of combining two well-known. “Identifying powerful breakouts early. VIDYA 21. B If retracements are less than 50%.Stocks & Commodities V16:3 (127-129): Combining Gann’s 50% Rule With VIDYA by Gerald Marisch TRADESTATION (OMEGA RESEARCH) FIGURE 1: S&P 500 FIVE-TICK CLOSING PRICES.25 when prices touched the declining VIDYA 21. Robert [1998]. a fourth bull impulse trend occurs.” Technical Analysis of STOCKS & COMMODITIES. 2 In an overall bear trend: A Retracements should find resistance at the 50% level Gerald Marisch is a private trader. anticipate 50% retracement trends to occur after impulse trends. From point 14 to point 15.5 trend line. Finally. If 50% retracements are now finding support at 50% retracements instead of resistance.00.10. The support levels (S-B) also occur near 50% retracement points.5.140 per contract. it may be a sign of a weakening bull trend. Figure 2 is the same contract price range and time range as Figure 1. Krausz. and following this set of guidelines will help you in your intraday trading: 1 When in an overall price trend. and the VIDYA 21. let’s combine Gann’s 50% rules previously listed.5 for trading signals..5. †See Traders’ Glossary for definition S&C Copyright (c) Technical Analysis Inc. “The new Gann swing chartist. 12. There are additional indicators that can enhance a trader’s proficiency. the trend has changed from bull to bear. RELATED READING Chande. Volume 16: February.5 (the smooth line) has been added. The retracement rules and declining trend indicator indicated the market participant should stay short. Note how the retracements in the bear trend (R-B) line up with 50% retracement levels. C If retracement are more than 50%. it may be a sign of a strengthening bear trend. Volume 13: October. 3 4 5 6 of the prior impulse trend. “Breaking out of channels. Now. and at the same time. low and closing prices filled in.