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Swing Direction and Neutral Slope

Page 385

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The Real Story

Who was the greatest market researcher of all time?

Betoie you answer, consider this Do you know anyone who has researched in depth the lollowing price bar patterns, astronomy, multiple time frame relationships, swing chart trend definitions, support and resistance zones based on angles? Have you met any tinders that have investigated numerology, ancient and modern geometry, mathematical relationships of numbers, squaring time and price? Or Western and Hindu astrology, pyramid technology, and the possible ties to the markets? Do you know of anyone doing tins degree of research, and without a computer7

Such a trader was W D Gann

W D Gann was an enigma Much has been written about Gann's success, or lack of it. Questions still remain as to how great his techniques were, or how poor Did he make tortunes or lose them7 And more importantly, can any of his concepts stand up in today's last moving computer driven markets?

Did you know that back in ttie 1950 s he charged some $5,000 for his courses? At that time, that was the price of an average three bedroom house in the USA Today, the equivalent cost would be over $50,000. So, back then you had to be pretty serious about trading to pay that amount of money And yet, wouldn't that price be worth it if the techniques were genuine?

The answer to this question lies within each trader's perception of value. Some traders consider $39 95 too high of a price for a book describing a trading technique. To others, valid market knowledge is priceless.

The Road Ahead

I will show you what I consider to be valid market knowledge, based on W. D. Gann's original work And what do I mean by valid market knowledge? The knowledge is a set of fixed rules to trade by You will see that the rules are valid because they meet a number of requirements; conditions that my twenty years of trading have taught me are important. Before I discuss this plan, though, I want to share with you the story of how I came into possession of this technical concept of swing trading.

W D Gann has published a number of books, unfortunately, the majority of the time Gann wrote in the manner of the ancient mystics; hiding the real meaning behind the surface explanation. Having read his books many times, I found his directions to be vague and convoluted. And not just me. others, both his followers as well as his detractors have tried to explain his concepts in an understandable and usable way Nevertheless, very lew authors have succeeded And as I said, it is Gann's own fault A small example of the challenge is his overuse of the word "square": squaring time and price; the square of nine, the square of 24; and on the square. Fortunately, while his books were obscure, his actual trading courses are more direct and straight to the point

Some ten years ago, I put out the word here and in Europe that I was interested in purchasing original WD Gann material, especially his courses You cannot believe the nuts that fell to the ground, from con-men to dreamers1 All trails led to nowhere until a lew months ago when the universe rewarded my persistence, right on my doorstep

Some of you may know that Joe Rondinone was the last trader taught by Gann before he passed away to the "great trading room in the sky." You can imagine my astonishment when Rondinone asked me if I was interested in some original Gann courses that he bought from Gann back in 1955

Rondinone explained that the couises were typed on W D Gann s letteihoad, not in the usual printed format Also, they weio signed and dated by Gann in Ins purple ink All live courses were in their original binding Alter much haggling v.e settled on the price of St 00 (yes. you road that correctly, one dollar)

Mr Rondinone s motives were clear, staling I want these m.nmsr npts in the hands of a trader and researcher who appreciates their real value and will use them frankly I was amazed at my good fortune and Joe s generosity The entire treasure trove consisted of five courses and two unfinished pages, dated Apnl 18, 1955 and hearted Tune Periods on the Master 7 Day Period lor Soybeans' Obviously these were a woik in progiess, as Gann passed away soon after that date

One method though, caught my eye It was the 'Mechanical Method and Trend Indicator for Trading Grains" and it shouted to be studied lust Given my personal approach to trading, this method was given priority, and the results of that examination are what you will find in the following chapters Before we continue the story. I want you to understand the importance of having a trading plan

Trading Plans

After 20 years ol trading. I find it almost impossible to trade without a plan thai does not have fixed rules Why"5 Why not |usl keep up to date with all the news, and trade as you see fif Because, it you do not have a set of fixed rules you cannot do a back test Without a back test how do you know if your plan worked in the past7 Yes. I know that |usl because the plan produces positive results in the past, this does not guarantee success in the future. But I do guarantee that if the plan does not produce positive mathematical expectations during the back test then it will never work in the future.

Let me ask you: Would you consider building a house without an architectural plan? Of course not! No plan would lead to chaos. The same thing applies to trading. So what constitutes a good trading plan? A valid trading plan must have some minimum components to earn the right to be called valid.

At the simplest level, a plan must define:

• Market direction (the general direction of the market; for example, the overall trend.)

• Tradable trend (the trade direction, in other words; the immediate swing.)

• Support and resistance points (exact zones.) •Action points (entry-exit-pyramid rules.)

• Money management techniques. These should include at least:

A) Capital required for your plan.

B) Stop and Stop/Reversal rules

C) Profit protection rules

D) Percentage of capital per trade (This varies according to the plan.)

Willi a trading plan that lits this description, you may be ready to trade. Now, back to my story of W D s mechanical method " Slowly, I worked my way through (he well worn pages, making notes as I went along Can you imagine my surprise when I came to his pages 11 and 12 (reproduced here on pages 5 and 6) and saw that Gann had altered some of his original calculations and signed these alterations in his usual purple ink?

These alterations were fitted in between the paragraphs. Although the original course is dated June 1933. the actual alterations were handwritten in early 1955. So I can presume that Gann thought it was important enough to insert and sign it before he sent the course to Mr. Rondinone And what did Gann write? Very simply: "Use 2 day charts and rules better than 3 day. Signed W. D. Gann "

Does Mr Gann changing a three day swing definition to a two day swing definition make it into a treasure7 I could only come to a conclusion by doing a comparative back test on today's hyper markets using both daily charts and intra-day time periods, and that is exactly what I did'

Charting by hand, a back test of the T-Bond futures markets proved to me that W. D. Gann's new Two Day Swing Concept provided two pieces of vital information: First, the trend direction and second, the points of support and resistance. The manner was simple, yet brilliant

Why the T-Bond market for the back test7 The 30-year T-Bond contract was chosen lor this test because this is my main trading vehicle, and my understanding ol this market's rhythm is such that if the Two Day Swing did not work well enough, I would spot this quickly, and not waste any time on further research of this tool

Besides my own working knowledge of this market, the T-Bond futures contract traded on the CBOT is currently the second largest futures contract in the world Just yesterday, as I write this, the daily volume was over 400.000 contracts and Ihe open interest was over 500.000 contracts Not only is this a giant market, but I believe the most sophisticated traders are involved There are hedgers. bank traders, scalpers, interest rate players, all trading for their own reasons and quantities

Therefore, if a trading concept is going to work, then tins is the place where I want to test it first So. what were the results7 Not only did I find that it field up nicely on the Daily Chart, but the Intra-day results were also acceptable After satisfying myself on the Daily bars, by hand charting, I knew the acid test would be in computerizing the entire concept in "real time." on a Multiple Time Frame basis Fortunately. I already had a real time computer program, the "Fibonacci Trader*»)". that functioned in Multiple Time Frame format. Real Time or End of Day.

Much excellent programming was done in the Fibonacci TradertK) to bring the entire technique to the standard of clarity and user friendliness that I required from a trader's point of view. But the toughest part was still to come

All of W.D.'s Swing concepts had to be pulled together and integrated with my approach to formulate a mechanical trading plan that was tradable and profitable Those of you who have tried to do this will know exactly what I am talking about This is not the time or place for a detailed discussion, but three points must he mentioned

1, Any "valid" plan of this mechanical nature must have a simplp philosophy al hnsis It can be geometric, mathematical, time onented or any combination thpipnf

2. Curve fitting or over optimizing' is the Kiss of D<\llh to any mechanical ti l ling plan Unfortunately, there are programs out them that enrmiraqp s^.tr-m dnsiqners to do |USt that Robustness is the key woid

3 Must be dynamic enough to change with the market

The concepts and techniques embodied in these plans am "-.imil.ii to thosp I use in my personal trading, incorporating Multiple Time Frames Fibonacci and Gann techniques Always mechanical, always fixed rulPS. always with serious bark testing


N01E-' rules work best in Tctivo fast-moving markets and thu big profit*

mod© trading in active markets. if You follow thesn rules,, you will mU money. Mokn up your mind t" follow tho rulos before you start and • ueu> coss in assured.

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