Here’s some practical advice: One trick can cover all! The moving average secret + 'Gann's eight major rules' will help you accurately capture entry and exit points.
First, let’s learn about Gann. In addition to founding the eight major rules of Gann, he is also the founder of the moving average and the first to propose the 'volume-price theory.' On January 6, 1981, Gann warned investors that the stock market was about to crash and advised them to sell all stocks. Sure enough, the next day, the Dow Jones Index fell by 4.2%, and in the following year, the Dow fell by 14%. This accurate prediction made Gann famous in the investment circle.
The eight major rules of Gann believe that price fluctuations have certain regularities, and the moving average represents the direction of the trend. Therefore, when price fluctuations deviate from the trend, i.e., 'price deviation from the moving average', it will correct towards the trend direction in the future. Thus, when deviation occurs, it is a significant buy and sell signal.
We call the deviation of price from the moving average a Bias, i.e., Bias = Price - MA, where Price is the price; MA is the moving average. The greater the bias, the higher the possibility of price correction. However, on the other hand, if the trend is accelerating, it can also be expected that the future bias will expand. Therefore, bias is also an observation indicator.
Gann's eight major rules use the relationship between price (stock price, futures price, or exchange rate, etc.) and the moving average as the basis for buy and sell signals. The main strategies include support, resistance, breakthrough, bias, false breakout, etc. Through these signals, investors can gain references in their operations.
Gann believes that stock price fluctuations have certain laws, while the moving average represents the direction of the trend. The eight major rules of Gann summarize eight different situations as the basis for entering and exiting trades.
① Breakthrough: When the moving average gradually turns from a downward trend to horizontal consolidation or upward, and the stock price breaks through the moving average from below, it can be considered a buy signal.
② False Breakout: The stock price falls below the moving average but then rebounds above it, and the moving average is still in an upward trend, which can be considered a buy signal.
③ Support: When the stock price trend is above the moving average, although the stock price corrects downwards, it does not break below the moving average and then rebounds again, it can be considered a buy signal.
Entry signal.
④ Rebound: When the stock price falls sharply downwards, not only breaking below the moving average but also deviating far below it, and then begins to rebound upwards towards the moving average, it can be considered a buy signal.
⑤ Break: When the moving average changes from an upward trend to a horizontal line or shows a downtrend, and the stock price falls below the moving average from above, it can be considered a sell signal.
⑥ False Breakout: When the stock price rebounds and breaks through the moving average, but then immediately reverses and falls below the moving average, and the moving average is still in a downward trend, it can be considered a sell signal.
⑦ Resistance (Pressure): When the stock price trend continues to be below the moving average, even if the stock price rebounds, it cannot break through the moving average, making the moving average a resistance level for the stock price, which can be considered a sell signal.
⑧ Reversal: When the stock price rises sharply and deviates far above the moving average, and then the stock price reverses downwards towards the moving average, it can be considered a sell signal.
0 The four core spirits of Gann's eight major rules.
1. Do not short when the moving average is rising, and do not long when the moving average is falling.
2. The moving average itself has characteristics of support and resistance, aiding in bullish and bearish judgments.
3. The bullish and bearish arrangements of prices are the combined patterns of price and moving averages. Once the arrangement trend reverses, it is necessary to change strategies and conduct reverse operations.
4. The golden cross and death cross of moving averages occur at the intersection of past price costs. Once an intersection occurs, it often leads to a trend of price rising or falling, providing opportunities for trend-following operations.
0 The four application flaws of Gann's eight major rules.
1. Since Gann's rules highly depend on moving average operations, and the moving average is a historical trajectory of prices, the occurrence of signals often lags behind prices, resulting in a time lag.
2. When the price is in a consolidation phase, false signals are usually generated.
3. When choosing a shorter period moving average, such as 5 days or 10 days, the time lag of the signal will be reduced, but there will be more false signals.
4. When choosing a longer period moving average, such as 120 days or 200 days, the signals obtained will be more significant and effective, but there will be a time lag. For example, the buy and sell signals will only appear after the price has already risen or fallen for a short period.
0 Parameter settings of Gann's eight major rules.
It was mentioned earlier that using shorter cycle moving averages (such as the 10-day line) is more sensitive than longer cycle moving averages. Conversely, the movement speed of long-cycle moving averages is slower and more stable. Therefore, when the stock price simultaneously breaks through both long-cycle and short-cycle moving averages, it can be seen as a short-term reversal buy signal, and a buying action can be taken. If the price drops below the short-cycle moving average, it can be seen as a short-term reversal sell signal, and short-term traders can even consider shorting.
Therefore, the selection of the moving average cycle is quite important. Some friends may ask: What parameter is the best? This is a great question because it is also a question that every trader is seeking answers to.
Here’s a standard answer: There is no best or most accurate period parameter, only the one that is most suitable for oneself.
Some traders may be short-term traders, so the period parameters of the moving average do not need to be set too long to cope with the rapid fluctuations required for short-term trading. Alternatively, if traders are swing traders, the period parameters of the moving average do not need to be set too short, just to judge the medium-term trend of price movement.
Find the moving average periods that complement the products you are trading, align with your trading logic and habits, to ensure the reliability and stability of buy and sell signals.
Before traders truly start using the eight major rules to generate buy and sell signals, they should first have a considerable grasp of the results obtained from various currencies and periods in terms of accuracy and win rates, so that they can apply them more skillfully.
When it comes to the moving average system, it should be said that Gann's eight major rules are the foundation for all subsequent applications derived from moving averages. Next, take the four methods of entering a trade with an upward moving average as an example. It provides us with an effective trading strategy that helps traders capture entry opportunities when the market trend is upward.
A Mode: Price breaks upward through the moving average, entering a long position.
The moving average serves as both support and resistance. When the price breaks above the moving average, it indicates that the original resistance level has been breached, which is a signal to consider entering a position. However, to avoid noise interference in the market, traders can set certain conditions to filter out false breakout signals. For example, a large bullish line breaks the moving average, or the closing prices of two consecutive K-lines are both above the moving average, which can improve trading accuracy.
There are many ways to derive trading modes. For example, when the short-term moving average crosses above the long-term moving average, you can go long, or when the price breaks through the Bollinger Bands' outer track, you can go long. Additionally, when the short-term moving average crosses above the medium-term moving average and the long-term moving average is also trending upward, you can go long. These strategies are based on the combination of moving averages and price indicators to capture potential buy signals.
Type A opening mode is prone to frequent entry and exit operations when the moving average is flat and the market lacks a clear trend, resulting in a larger capital drawdown, making it less widely accepted by traders.
B Mode: Price pulls back to the vicinity of the moving average and receives support, entering a long position.
In a situation where the main trend is upward, using market pullbacks to enter trades at key positions is a typical strategy. This method is also one of the more popular trading models in the market today.
C Mode: Price pulls back and breaks below the moving average, then receives support, and the price is above the moving average, entering a long position.
Essentially the same as B mode, under the premise of an upward main trend, using pullbacks to enter trades at key positions is a typical strategy. It is also one of the currently popular trading models.
Derived trading modes include double moving average and triple moving average strategies. In these strategies, the price may drop below the short-term moving average but must not drop below the long-term moving average.
D Mode: Price quickly moves far away from the moving average, entering short.
This opening mode is a counter-trend trade and is not recommended for standalone use. We should utilize the volatility opportunities during pullbacks (such as B and C modes) rather than directly trading the pullback segments. This can reduce risk and improve the success rate of trading.
Trend Judgment
In addition to using the moving average to enter trades in B and C modes, the most core and common function of the moving average is to judge market trends. Its advantage lies in its simplicity and effectiveness, applicable to various varieties and different time periods. When the moving average is rising, it indicates an upward trend; when it is falling, it indicates a downward trend.
Derived trading modes include double moving average and triple moving average strategies. In the double moving average mode, when the short-term moving average crosses above the long-term moving average and points upwards, it indicates an upward trend; conversely, it indicates a downward trend. In the triple moving average mode, when the short-term moving average is above the medium-term moving average, and the medium-term moving average is above the long-term moving average, and all three point upwards, the trend is upward; otherwise, the trend is downward.
Use the moving average to set trailing stop losses for exits.
In Gann's eight major rules, the moving average can serve as both support and resistance, helping us find entry points, and can also be used as a basis for trailing stops. When the price breaks through the moving average, it usually means we need to exit. Especially in bullish trend trades, when the price falls below the moving average, it is a clear exit signal.
In short-selling trend trades, when the price breaks below the moving average, we exit.
In practical applications, we can combine other factors to filter false breakouts. For example, requiring that the K-line must break through the moving average with a long body, or that the closing prices of two consecutive K-lines must break above the moving average. Additionally, the K-line breaking through the moving average must be accompanied by increased trading volume (applicable to stocks and futures). We can even use multiple moving averages and set conditions to exit after the K-line breaks through multiple moving averages. These methods can effectively improve trading accuracy.
The parameters of the moving average need to be adjusted according to individual trading systems. In fact, the essence of all moving averages is the same. Long-term moving averages are not sensitive to price changes and can capture larger trends, but they may also consume many floating profits. Short-term moving averages are more sensitive and can capture more trend occurrences, but excessive trading frequency may affect the overall performance of the system. Therefore, it is crucial to set moving average parameters reasonably.
Starting from the moving average indicator, we can further explore other technical indicators, such as Bollinger Bands' outer track and parabolic SAR, which can also serve as exit points for trailing stops, helping us better manage risks and seize trading opportunities.
Three main uses of the moving average: enter with the trend, exit with profit, and bottom-fish against the trend.
An advanced use of the moving average is to use it as a condition for trailing stops. For example, when the moving average continues to move upwards, if the price does not fall below the moving average, we can continue to hold. Only when the price falls below the moving average should we consider taking profits. This method can help us lock in profits during trends.
The moving average has three main uses. First, follow Gann's eight major rules to enter, i.e., buy when the price approaches the moving average, or buy when there is a rebound after approaching the moving average. Second, the moving average can be used as a basis for trailing stops, for example, exiting when the price falls below the moving average after a bullish run. Finally, the moving average can also be a condition for counter-trend entry, for instance, buying when the price breaks above the moving average after a downtrend, or shorting when the price falls below the moving average after an uptrend. This means that the same moving average can be applied differently in varying market environments.
Summary
Trading systems designed primarily around moving averages typically have a low win rate and high drawdowns. Therefore, it is recommended that everyone primarily use moving averages to assess market trends. One can grasp entry points through B and C structure models, while using A structure models and their practical methods for entry is not recommended to avoid potential risks. At the same time, it is best to avoid using D structure models for entry. Moving averages can also be used as methods for trailing stops to help manage risks.
Gann's eight major rules define parameters of moving averages differently. Short-term can use 10MA as a parameter, while mid-to-long-term can use 22MA and 65MA. The moving average is essentially the average cost of price holders, and Gann's eight major rules represent the relationship between price and the costs held by the majority, using changes in this relationship as the basis for buying and selling.
In addition to freely setting the parameters of the moving average, one can also utilize daily, weekly, monthly, and other moving average periods from trading software to judge buying and selling opportunities. If you want to be very accurate in application, you must choose the appropriate moving average period to apply and combine it with wave theory for operation; only then can you accurately grasp price fluctuations.
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Useful Tips: - Observe high and low consolidations.
When the market is in a high or low horizontal consolidation stage, waiting is a more cautious strategy. The appearance of horizontal consolidation is often a prelude to a trend change. After digesting previous fluctuations, the market will ultimately choose a clear direction. At this time, acting hastily may lead to unnecessary losses. Waiting for the market to clarify and then acting according to the trend is the rational approach. Seniors have repeatedly reminded us, 'During consolidation, observation is more valuable than blind trading.'
Two, do not linger on hot positions; adjust positions as the market changes.
In short-term operations, popular positions are often the result of speculation. Once the heat dissipates, funds will quickly exit, leaving investors trapped in a passive situation. Therefore, seniors suggest not to linger on popular positions for long but to adjust flexibly and always maintain maneuverability. As he says, 'Short-term popular positions come quickly and go quickly; a slight mistake will lead to chasing highs and cutting losses. Successful short-term operations are not about blindly following trends but about maintaining clarity at all times and achieving 'from start to finish, only to end up empty.'
Three, in an upward trend, one should hold firmly when there is a gap up.
If a bullish line appears with a gap up during an upward trend, accompanied by increased volume, it indicates that the market has entered an accelerated rising phase. At this time, one should remain calm and hold firmly, as this situation often brings about a significant rise. Seniors refer to this period as the 'acceleration phase' and emphasize that belief must be steadfast during this phase, not to be swayed by short-term fluctuations, so that significant profits can be achieved.
Four, decisive exit when there is a large bullish line.
Regardless of whether the market is at a high or low position, the appearance of a large bullish line is a signal to exit. In this case, even if you see a price limit up, you should decisively close your position, because in most cases, a large bullish line will be followed by a pullback. Seniors tell us, 'No matter how tempting the profit is, it’s crucial to take it and decisively exit to avoid profit withdrawal.' The core of this strategy is to 'know when to advance and retreat', and to guard against risks and control profit pullbacks in any situation.
Five, buy on bearish lines above the moving average, sell on bullish lines below the moving average.
The moving average is one of the key references for short-term operations. If the stock price is above important moving averages and shows a bearish pullback, it is a suitable buy signal; conversely, a bullish line below the moving average may indicate weak upward momentum, suitable for selling. In short-term investing, generally only daily averages or attack lines are considered, and positions should not be held too long. Seniors remind us, 'No more than a week; act within three days; don’t linger on missed opportunities.' Short-term trading emphasizes speed and precision; holding for too long increases risk.
Six, do not sell when prices are high, do not buy when prices are low, and do not act during consolidation.
In the crypto space, market fluctuations are frequent; this principle is regarded as a basic survival rule. If the current price is not significantly higher than the purchase price, one should not sell easily; conversely, if there is no clear decline, do not rush to buy. When the market is in a consolidation phase, waiting is a safer approach. Seniors refer to this as 'being steady above all', as any rash trades could lead to losses. Long-term profit relies not on frequent entry and exit, but on reasonable timing for entry and exit.
Seven, better to enter less than to enter more; act according to your ability.
In the crypto space, ensuring flexibility is key. Even with great confidence, it is unwise to invest a large sum of money all at once; reasonable position sizing is particularly important. Seniors remind us, 'Better to enter less than to enter more,' because the market may experience unexpected fluctuations at any time. Diversifying funds can reduce the risks of a single investment. For each trade, a reasonable position ratio should be established to avoid being caught off guard by sudden market movements.
Eight, learn to interpret market news.
In the crypto space, the influence of news cannot be underestimated. Market news often directly triggers significant price fluctuations, which can be sharp rises or falls. Therefore, investors should learn to interpret market information, especially major events and policies. Seniors suggest that beginners should mainly observe during significant news events since excessive intervention may lead to unnecessary losses.
Nine, learn to grasp technical indicator analysis.
Technical analysis plays an important role in the crypto space. Seniors suggest that beginners should systematically learn technical indicators, develop a study plan, and master analysis tools such as moving averages, KDJ, Bollinger Bands, candlestick patterns, volume-price relationships, and capital flows. Technical analysis requires long-term accumulation and is not achieved overnight. Mastering technical analysis can help investors judge entry and exit points, reducing unnecessary losses.
Ten, create a trading plan to avoid frequent trading.
Frequent trading not only incurs high transaction fees but also disrupts trading mentality, leading to emotional trading. Seniors emphasize, 'Trading requires planning, and should not be blind or random.' In the crypto space, frequent entries and exits often mean greater uncertainty. An effective trading plan can help investors maintain rationality and clarity of thought.
Eleven, do a good job in risk control, set stop-loss and take-profit points.
For each trade, reasonable stop-loss and take-profit points should be set to control risks within an acceptable range. When the stop-loss or take-profit point is reached, one should exit decisively rather than greedily pursuing further profits. Given the volatile price movements in the market, seniors' experience tells us, 'Reasonable stop-loss and take-profit are key to trading success.' Even experienced investors cannot accurately predict the market, thus sound risk control measures are a must for every investor.
This concludes the trading experience shared by the instructor today. Many times, you have lost many profitable opportunities because of your doubts; if you do not dare to boldly try, engage, and understand, how will you know the pros and cons? You must take the first step to know how to proceed next. A warm cup of tea and a piece of advice; I am both a teacher and a friendly conversational partner.
Acquaintance is fate, and knowing each other is a bond. The instructor firmly believes that fate will lead to meeting each other across thousands of miles, while a lack of bond is destiny. The road of investment is long, and temporary gains and losses are just the tip of the iceberg. One must understand that even the wisest may overlook something while the foolish may gain something. Regardless of how emotions fluctuate, time will not stagnate for you. Pick up your frustrations, stand up again, and continue forward.
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