Fine Tuning the 50 Rule

Refer back to Chart 16, the D-Mark chart.

You may feel that 3-1/2 months is too long to hold a position, even in anticipation of a sizeable profit. This I understand. While you're waiting for profits in November, you've sweated bullets over each and every reversal, and felt you've missed buying opportunities.

Well, maybe you have, and maybe you haven't. Gann stated that it was much better to wait for an optimum trading opportunity, ADD TO positions at reaction points and HOLD for the long term, rather than buy and sell, buy and sell, buy and sell.

Using the information you've just learned, it is evident that at least 3 different 50% reaction points occurred from August to November at which you could have followed Gann's advice.

This was an exemplary chart. There was a very clear significant high, a significant low, and a retracement point. But what about a market that has a lot of peaks and valleys? Can this be done in a bear AND bull market?

Chart 19 is the March 89 T-Bond contract from 4/4/88 to 1/20/89. This is a real roller-coaster ride, over which fortunes were probably made and lost. I have "zoomed in" to a time period of 4/4/88 to 9/1/88. This is Chart 20.

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The first significant high of Chart 20 is 8808 on 4/11, an Intermediate Gann Pivot Point day and PI. There are reactions at several support levels, but prices eventually reach a P2 significant low of8223 on 5/22. The Retracement Zone is calculated to be RZH = 8612 and RZL = 8510. From the low of 8226 on 5/31, a 75-degree stop-loss line, S5, is drawn.

On 6/6, the close is 8518 - in the Retracement Zone. On 6/7, a small reaction occurs, with prices closing below the RZL at 8504. With a stop for 6/7 at 8408 (the price at which S5 crosses 6/6), the small reaction does not stop out the position prematurely. S5 maintained the long position. In fact, if you had allowed this stop-loss line to determine where to liquidate your position, you would have netted another 55 points or so (about $1700).

Prices continue through the RZH level and make another significant high of 8802 on 6/14.

The significant high of8802 on 6/14 (a Primary Gann Pivot Point) is within only 6 points of the previous significant high on 4/11 at 8808. This is not a coincidence. Gann determined that a 50% or 100% level from any top or bottom are the two most important points to watch in determining resistance levels. Regardless of how long it would have taken, the 100% retracement level would have been a realistic target.

The actual retracement amount of this real-time example is 97-1/2%!

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Chart 21 covers the next price range we will consider. PI is 8223 on 5/22 (a Primary Gann Pivot Point). P2 is 8802 on 6/14 (another Primary Gann Pivot Point). P3 is at 8223 on 6/14. The resulting RZH is 8510 and the RZL is 8412. After confirming that 6/14 is a significant high, a 75-degree stop-loss line is drawn from 8718, the high of 6/15.

Sure enough. Prices drop into the pre-determined Retracement Zone, from 8802 on 6/14 to a low of 8418 on 6/20. Prices then react sharply to the upside. The market could have been shorted with confidence at about 8612 on 6/15, after 6/14 was confirmed as a significant high. Continue moving stops down, as prices enter the Retracement Zone.

Once prices were in the Retracement Zone, you would have had two choices of how to exit the position. The first would have been to hold the position until being stopped out at about 8500 on 6/21 (the 75-degree stop-loss line intersecting the price trend).

The second way would have been to place a market order to cover your shorts at 8427 or lower. Either way, the position would have resulted in profits that would let you take your wife or husband out to dinner, AND a Broadway show, AND pay off your VISA bill (maybe).

Notice I suggested liquidating at " . . . 8427 or lower . . . ." There is an excellent chance of prices reacting at or near the midpoint (50%) of a Retracement Zone. The Retracement Zone's midpoint of Chart 21 is 8427. In fact, on 6/ 20 prices opened at 8424 and dropped to a low of 8418, only 9 points below the midpoint.

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Look at Chart 22. The Retracement Zone from Chart 21 is drawn in. Draw in the 50% Retracement Zone of PI at 8223 on 5/22 (a Primary Gann Pivot Point) and P2 at 8723 on 7/1 (an Intermediate Gann Pivot Point). This is easily done with a protractor. Draw this second Retracement Zone in red to help you distinguish between the two Retracement Zones.

The Retracement Zone that you drew should have a RZH of8504 and a RZL of 8409. In this zone, notice that there is a lot of congestion.

Gann stated that, when two or more Retracement Zones occur near the same level (8510-8512 and 8504-8509), the midpoint of the ranges will often be the support point of a price decline or a resistance point of a price rally.

8431 is the approximate 50% midpoint level for both Retracement Zones and a very strong reaction level. Prices seem to oscillate around this 8431 level. It is not until 8/2 that prices gap to the upside by opening at 8515. There is increased confidence that prices will trend past the Retracement Zone limits when gaps occur.

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Even though prices have gapped to the upside on 8/2, you may not want to take a long position. Chart 23 is still the March 89 T-Bonds contract, but with the long-term Elliott-Wave count on the bar chart and the short-term wave count below the bar chart. If you're familiar with Elliott, this is a blessing!

On 8/2 and 8/3, prices seem to be completing a minor C wave of a major B wave to the upside. After that, prices fall dramatically.

What to do? Nothing, just wait. Wait until the minor C wave, of the major B wave, is completed, and the major C wave is evolving from the 8/4 high of 8616 into a bear move, before taking a short position (Sources for Elliott Wave information appear in Appendix D).

Up to now, we've been determining PI, P2, P3, S4, S5 and Retracement Zones solely from price activity or sophisticated analysis systems such as Gann or Elliott Waves.

Is there a simpler method a new trader can use? Some method or system that is clear and gives supporting evidence for entry and exit points would be ideal.

On to Part VIII.

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