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45 Years in Wall Street – A Life Time of Experience
(Part Five)
In this article, the final one in the series discussing W. D. Gann’s twenty-four never-failing rules, Rules 20 to 24 will be discussed. Mr. Gann’s full set of rules can be found in:
Gann, W. D., 45 Years in Wall Street, Lambert-Gann Publishing Co., Pomeroy, WA, 1949.
Rule 20 – Be careful about pyramiding at the wrong time. Wait until the stock is very active and has crossed Resistance Levels before buying more and until it has broken out of the zone of distribution before selling more.
Chart 1 - Telstra Corporation making a final strong run to it’s all-time high after crossing resistance.
As discussed in previous articles in this series, pyramiding is the process of buying more shares in a company in which a trader already own shares (or selling more shares in a company where a trader has already short sold some). It is wise to look upon pyramiding as opening a new trade and to only do it if the stock is the best stock to buy at that time.
As with any trade entry, we should ensure that the stock is active and strong. It is also wise to wait until it has crossed resistance levels, thus confirming the stock’s underlying strength and eliminating the possibility of it forming a double or triple top soon after we have entered the trade.
Rule 21 – Select the stocks with small volume of shares outstanding to pyramid on the buying side and the ones with the larger volume of stock outstanding to sell short.
Mr. Gann is reminding us that a given buying force will move the price of a stock more if that stock does not have an excessive number of shares outstanding. He is also advising us to only short sell highly liquid stocks, as liquidity will be needed to ensure we can cover our shorts with ease.
Rule 22 – Never hedge. If you are long of one stock and it starts to go down, do not sell another stock short to hedge it. Get out of the market; take your loss and wait for another opportunity.
Hedging a stock in order to avoid taking a loss is much like failing to exit the market when a stop has been hit, or averaging down. In both cases, the trader is not willing to face the fact that the trade has failed. As Mr. Gann advises, it is best to exit the market with a small loss and to prepare for the next trading opportunity.
Chart 2 – Big Kev’s Limited. If you are wrong, you are wrong. Get out. No amount of hype can make a weak stock strong.
Rule 23 – Never change your position in the market without a good reason. When you make a trade, let it be for some good reason or according to some definite plan; then do not get out without a definite indication of a change in trend.
Consistently profitable traders plan their trade and trade their plan. To deviate from a proven plan is to not have a plan.
A good trading plan incorporates strategies that allow a trader to trade with the trend and to have a positive expectation of success. It should also give the trader an exit signal when the market has negated the reason for being in the trade – usually when the trend has changed direction.
Chart 3 – Suncorp-Metway making a strong sustained move. Mr. Gann repeatedly said that the big money is made trading the big moves.
Rule 24 – Avoid increasing your trading after a long period of success or a period of profitable trades.
Mr. Gann was not only a great trader and analyst – he also had a well-above-average understanding of human nature. He understood only too well that human beings, after a particularly profitable period in the market, feel compelled to increase their trading by a large amount. They mentally project their trading profits and realise how much they would have made if they had been trading with the larger stake throughout that period.
W. D. Gann understood that above average success in the market is usually associated with a strongly trending market. He also understood that when the market stopped trending strongly, sideways or choppy market action was a possibility. Such action is more difficult to trade and would be a particularly poor time to increase the size or frequency of one’s trading.
Conclusion
Mr. Gann concluded his ‘24 Never-Failing Rules’ by stating:
When you decide to make a trade be sure that you are not violating any of these 24 rules which are vital and important to your success… Experience and investigation will convince you of the value of these rules, and observation and study will lead you to a correct and practical theory for success in Wall Street. (45 Years in Wall Street, page 17.)
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