\ [| by WILUAMMCLAREN ~~ } vy go SSWTABLE OF CONTENTS INTROUGHION: © lc THE PSYCHOLOGY OF TRADING . Se Mastering Hope, Fear and Greed’ Discipline and’ Protective Stops Partial Positioning HOW MARKETS MOVE . bee Four Investment Strategies’ Tops, Bottoms, and Consolidations Volume of Sales Trends and Trend Following Techniques THE CYCLE OF YEARS 6 6. ee ee ee ee ee ee 8h Geometric Charts Angles . . re) Support and Resistance A-key From The 1x2 Angle Angles and Strong or Weak, Positions Fast Angles and Their Applications Zero Angles Price Squares. ee ee ee ee OB The Square of 52 The Square of 90 The Square of 144 The Square of fanee The Square of Hig The Square of Low Illustrations of Price Squares TRADING A DECADE 2 we ee ee ee ee 79 Gann’s Decade Long Pian The Road Map Applied THE SQUARE OF NINE 2 2 be APPLYING THE CONCEPTS «1 ee ee ee ee ee 108 THE PLANETS AND GEOMETRIC VIBRATION «2. 1... 1. 1 + 197 COCLUSI@N 6 ks coe “Pquburn Us: Steel: 2 | Overnight chart Be ee ee ee soe ee Forecasting: = 9 2 2 6 tb 2 oesINTRODUCTION In the years since W.D. Gann’s career ended, many people have attempted to duplicate the prediction and trading capabilities which he became known for. Gann used many techniques, some of which are simple and easy to understand, while others are more obscure. What becomes apparent from a quick overview of the man’s history is that he did a prodigious amount of work. His papers, accumulated over a lifetime of study, filled an entire moving van when they were purchased by Billy Jones. From this one fact, it can be said that there was no a technique which produced the results that Gann used in his trading. Today you can find many individuals who claim to have found one simple key that was the cornerstone of all of the predictive work which Mr. Gann accomplished. But the “secrets of Gann" are many numerous faucets of the man’s work, and no one, without the support of others, works accurately and well all of the tine. If your reason for reading this book is to find that one secret possibly the "magic square", or the Jupiter - Saturn aspect, whic! ives you a perfect trade every time, then you will be lisappointed. The purpose of this book is ‘to give you a grasp of the charting techniques and knowledge of time which Gann, and others since him, have used successfully in determining key dates and price levels’ in the future. Also, T want to give you enough knowledge to be successful in your own trading. he method presented herein, if used properly, is very accurate in predicting months, weeks, days, and even the five minute period into the future which will change the direction of the price movement in a stock or market. In fifteen years of study of the man’s work, I have discovered simple techniques that, in and of themselves, are valuable predictive tools, and have combined these tools in to a system of analysis that produces tradable results. This is a middle ground in Gann’s work, not a single tool, and not so many tools that it becomes confusing. The premise which resulted in this method was "find out what works, n to apply it, and then use it". I hope you will use the simple methods in your work, those with a minimum amount of effort. You will have to devote time to this method, but those times and prices which are apparent from drawing the angles, using the cyclical counts and doing the basic mathematical calculations, will give you the information you need to trade. Do not attempt to use all of the methods for every trade, to find every of division every range, or every high, forPAGE 2 you will find that you have too much information and it will become confusing. I struggled through this originally, When I was using every technique, I found that I had too much information, too many squares, too many counts to make a decision. Over the years, I have sifted through the individual methods, isolating the ones which I know I can trade from. Realize that the information which comes from these techniques is only useful when one has a knowledge of how and when they work. Certainly there are many things to know, and there are many things to consider, but the main thrust is to keep the work simple. Don't push yourself to prove a turning point in time, merely because you want it to be there. If your simple methods presented herein, do not show it, don’t trade it. The trade may be there, but why force it when you’ can find a trade easier in another stock or market? Edison said that genius was one percent inspiration and ninety nine percent perspiration, and you will have to work to make this method a success. It requires a good deal of time, to establish trading charts and keep them up to date, but, work reveals the reward. The methods explained in this book are put to use in the middle and latter chapters, in combination with the separate package of charts. Therefore, you can see how the tools come together to give you excellent ‘trading opportunities. I urge you to try this method on any stock or commodity. I am giving you the necessary information to start your work, but you Will not know that it works, or realize how it works until you use the methods yourself. Take the time to bring a chart up to date, then find the turning points in the past, and find the ones in the future, and you wifl'see the method. there is no better vay to prove this to yourself than by using it, | In my case it took years of work on undreds of charts to find the applications of specific rules. I would expect that it will also take you some time, although this book should speed the process. Once you have proven it, you can trade from it. In this text I have attempted to reduce all of Gann’s methods down to those which are easy to use and work often. That is the rule. Why these methods work, I will not attempt, to fully explain. Such an attempt would probably do nothing more than confuse. Let me brush that aside by saying that like many things in life, these are excellent tools. You do not have to know how or where a’ hammer was forged in order to drive a nail. But, if you have an intense desire to know why it works, you are in for years of study. In my studies of Gann’s writing, I have found that he wrote in the same manner as the ancient mystics. This method gives a major premise, and possibly a minor premise, the truth is given, and from that, you have to draw the conclusion. You have to’ earn the knowledge that is given, as it is not spelled out directly. They wanted you to work for the knowledge. I studied the ancient masters for years, and W.D. Gann wrote as they did. Perhaps, that is why it easy for me to read his work. I knew that he was speaking in syllogisms. He did not give you the conclusion. WhatPAGE 3 he did in the case of the number ninety, or in virtually any of the other cases, was give you an idea similar to, "You can look for top 90 to 99 days after a move starts." That is not 100 percent true, if you take every move in a market or stock, and you look for top: or a change in trend 90 to 99 days after the start of the move, it going to happen only occasionally. But, there are circumstances where it works almost perfectly. One last point that is very important. The foundation to successful trading is knowledge of price movement and volume- the ability to view a chart and know if there is a probability of a top or bottom- the understanding of “blowoffs* and the opportunities they represent. Therefore, a portion of this text will be devoted to an understanding of price movement.THE PSYCHOLOGY OF TRADING MASTERING HOPE, FEAR AND GREED Generally, when a trader writes about the psychology of trading it is directly from his own experiences in the market. Usually there is other added information from the trader’s observations of the actions of other traders. Most, if not all of these perspectives cone from personal. experience, and. they generally repeat in each individual's trading patterns. Mr. Gann’s first book, written in 1923 and titled, “Truth of the Ticker" was just such a writing. In this book he emphasized the pitfalls to successful trading which come from human emotions. I too have gone through most all of the emotions which Gann presented in that 1923 book- hope, fear, greed, the need for patience, and the need for both nerve (or courage) and knowledge. Trading is in many ways an art rather than a science. The importance of being able to master yourself is far greater than any system of analysis. If you have a systematic approach that finds trading situations which will be right 80 percent of the time, you may still loose money. You have to be able to execute the trade, and this is where many traders go wrong. Many either wait too long, which is a problem with courage or fear. Or they don’t have the patience to wait until the time is right, and enter the trade to early. The most important part of trading the markets is mastering yourself. Gann said that you must be prepared for hope, fear, and greed, and you must be aware of when you are trading from a basis of these emotions. Successful trading requires virtually every trader to change certain habits and attitudes. In most cases, identifying and changing these attitudes is a difficult proposition. What makes you successful in business and life is different than what makes you successful in trading. In normal situations success comes from being able to control circumstances, subordinates, machines and so forth. You make decisions, stick by them, make plans work and manage your subordinates. Control is what helps make you successful. If you make decisions and you don’t play out the plan ou loose. But the market is different in that you cannot control he market. You may find yourself trying to control it with expectations, and this will lead to trouble. ‘As you Gannot control the market, you must flow with it. You will probably find, if you have not found this already, that you have to change yourself to trade successfully. The reasons for this are numerous, and as I am not a psychologist, I can only touch upon them. It seems that many thangs that a person naturally matures with, and learns from years outside of the markets, do not apply to the markets. Everyone, I do not care who they are, or what they've done, has to change in some way to become a successful trader. It just doesn’t come naturally.PAGE 5 Of the mistakes that traders make, emotion can be one of the greatest. Greed, the desire to gain more than a position will naturally give is one of these problem areas. Greed can cause one to overstay a profitable position. You may find yourself thinking, “If it just moves three more points I’ve got a 100 percent profit*. When you find yourself thinking in this fashion, or routing cheering for a marker which is moving your direction, be careful. A second effect greed has upon many traders is to cause them to over position, or take a larger position in a trade than should be taken if good money management is being used. When you put more into that position than you know you can afford, you may find yourself in a panic to get out of what could otherwise be a profitable trade. You should plan your trading in such a fashion as to keep yourself out of stressful situation. If your normal position is ten percent of your trading account and you see that great trade coming up, and you put in fifty percent of your money, you will probably panic if the trade starts to move against you. You may close out such a trade before your plan is complete, before your protective stop is hit, only to find you have sold out of a long position at the low of a counter trend movement, or out of a short position at the intra day high and that your plan you devised while the markets were not trading was correct after all. It is one thing to be certain that a trade is a good trade and take a position, but it is another thing, entirely, to be greedy and over position in that trade. If your wrong, you will loose too much, and if your trade is correct, you will find yourself constantly concerned with it and probably loose sight of the original plan. Some individuals can manage themselves well in this type of situation, but this is not the norm. If you find that you are concerned with a trade to the point of not being able to sleep, or thinking of that one position constantly, greed is a problem. Over positioning, or investing too much capital in a trade, can be a trader’s worst mistake. Hope, or expectations, will also manifest itself in such a fashion as to foil as excellent trading plan. If you buy a security in the hope that it will go up in price : you will profit, with no method or evidence, or buy on a “tip", what you might think is a bit of inside knowledge, then you have entered the market on the wrong basis. Remember, when hope is the basis for investment strategy- beware. Reason and evidence should be the basis for trading. A second effect of hope is when a position moves against you and you have not used a protective stop. In this situation you may find yourself hoping that the price moves back, replacing action with hope. : Fear is another problem that must be conquered. I believe most psychological problems are fear based. Fear of missing the move will cause you to position early and likely stopped out at the point you chould be getting positioned. It can cause you to trade out of a long position near the low, or exit a short position nearPAGE 6 the high. On the other hand, a healthy fear of the market can help you trade by a plan. Gann gaid that a fear of the market was the first sign of a successful trader. On the other hand, you must not fear taking a loss. Respect of the market helps to give you the discipline to trade only when you have the right plan and circumstance. But, fear of taking a loss will often result in the failure to take a trade. So, here you have to develop a balance which gives you a respect of the market, so that you trade from evidence and a plan, and courage to take that trade when the time is right. Wost traders run into a problem when they make a losing trade. When you make that losing trade and you take the loss, and you don’t become emotional about it, then you are doing well. But if you make that losing trade, (which is inevitable), and you punish yourself, or feel bad, or start looking at your checkbook, etcetera, then you probably had better take some time to assess your situation. Plan to Keep yourself out of trouble. Do not involve your self esteem in your trading. Try not to tell people what you are trading and why, because thi will involve your self esteem, and you will find hope coming into your mind. Try not to make predictions of events from your work. Of course with this work, you will find it hard to not do that, but if you avoid telling people what you feel will happen in the market, you will avoid expectations in your trading. If you have made a certain prediction, your expectations of that happening will increase. You will want it to happen. Hope becones involved again, and this will muddle your thinking. By keeping your thoughts to yourself, your self esteem is not involved, and you will not have to fight that psychological problem. Do your best to avoid the emotional problems that trading can bring on. You will know that you have reached a point of beii psychologically able to trade, when you can make a plan and no’ change it. When you can watch the market move against you, with your plan in action- your stop in the market, and not have the desire to get out before the market hits it, you are ready. You should make your plan when you are not emotionally involved in the market. When the market starts to gyrate, if you have the urge to change your plan and you don’t, then you are ready. There is a cycle that many traders go through. Often, a trader will start out with a reasonable plan. He uses good money management and doesn’t expect more from a trade than it will reasonably give him. He starts to make money, only trading what he should trade, and when he should trade it. He has respect for the market, but no fear of taking a loss, or of trading from good evidence when the time is right. He begins by doing well, making money, catching some good moves in the stocks or options or gommodities, and he starts to feel as if he is a pretty good trader. ‘At one time or another, this trader looses his respect of the market. He begins to overposition and loose sight of the originalPAGE 7 plan. He starts loosening up on stops, and avoiding plans, possibly even ignoring his work on the market because now he is certain that he is right. The losses start to catch up with this trader, and possibly at one time or another, he gives back all of the money he had made previously. Now, he starts over again, with a greater respect for the market. He goes back and assumes the original plan and the cycle is completed. Of all of the valid times to trade that I will give you in this book, and those that you know or will learn for yourself over time, should there come a time when you that you are not usin, them; but are trading just to trade, watch out. ‘The market will have your money. When trading seems suddenly to be so easy, where before it seemed so hard, take a good look. It is not easy, and you must do the work. Maintaining the plan, and having the patience to wait for the setup to trade from is essential to making money in the market. From our earliest days we are taught that to be wrong, wrong in school, wrong our judgement of any situation, is undesirable- bad. The’ idea that being wrong is bad, which most people carry with them forever, must not stop you from admitting that you are wrong in trading. Being wrong in trading means taking a loss, admitting defeat. We are taught in our youth that to be wrong is not acceptable, but in the trading business, we are going to be wrong. Plan for it. Take the loss when you are wrong and make it unemotional. When you can take a loss and it is unemotional, then you have reached the stage where you can trade successfully. ‘One more problem that is caused by the psychology of the individual, is having a bullish or bearish bias. I have analyzed my own trading record for this and discovered that I have a three to one tendency towards short trades. You may have a similar tendency, or one towards long positions, but it is important that you realize your own tendency. In a bull market, my bearishness works against me, while in a bear market, it works for me. This is just one more reason that I have found to trade from evidence and a plan rather than feelings about the market or stock. The psychology of trading is an exceptionally important, part of the business, and is something that you should always be aware of. Hope, fear, and greed, are major factors, and must be conquered. ' Expectations are part of hope, and I would like to say something about expectations. If I told you that this was a book on how to play golf, and that after reading this book, you could expect to go out on the pro tour and make a living, what would you think? You would know that jou would have to put in a lot of practice, you would have to play ournaments, and, if you have ever played golf for money, you know that you can choke on a two foot put. It is a game of mastering performance under pressure. It is psychology, as well as, knowledge, skill and practice. The same is true of trading. In this book I am going to present you with tools, with setups or situations that are tradable. If you follow the method, taking only trades which are based on the setups, and use a good tradingPAGE 8 plan you may well achieve eighty percent accuracy in your trading. You will see these situations or set-ups over and over again in the market, and if you are patient, you will make good trades from them. ’ Part of what we will do in this book is to look at these situations on numerous stocks. You will see the reactions are predictable, which will give you the confidence to trade. DISCIPLINE AND PROTECTIVE STOPS In his last book, "45 Years on Wall Street", which Gann wrote in 1949, at the age’ of 72. He emphasized the same points of trading 'and psychology as "in hig ‘First, but he placed added emphasis upon what he obviously felt were the most important ideas. He said first, and most important, was to place a stop loss order at the same time as you place a trade, and to never cancel it. If you experienced a conversation with your broker concerning whether or not to take that emall loss, you know that this is a difficult decision to make during that time, so you must make that decision beforehand. Gann also emphasized’ that over-trading, or trying to position in too many trades was a problem that he dealt with personally. You must look at trading the market as if it is a business, However, you must be aware that this business is different than any other business. Trading is a business in which losses are inevitable, and there is nothing wrong with taking a loss. Other businesses, in which you can control events to some extent, lead to situations where losses indicate failure. Trading, makes losses part of the business because you cannot control events in the market. There is nothing wrong with them, and taking a small loss in an unemotional way actually is a success in this business, although, it is not the type of success you want to have often. In 4 normal situation, you wouldn’t go into a business saying, "I'm going to take some losses in this business." If you did this, you would probably not enter the business to bagin with. This type Of thought is just not in your mind. But when you go into, the business of trading, you have to accept that losses are part of the e business, and you have to learn to live with that. Not learning to live with losses, and not examining why they occur, will cause the failure of your business of trading. Being able to gracefully admit that you have a loss and allow the protective stop (which is part of your original trading plan to take you out of that position is an important part of successful! trading. Don't punish yourself for this type of trade, just take the loss, and remember that staying with the losing position is another form of punishment. When you have a loss, go back and analyze it. Ask yourself, “ What mistake did I make, why did I take this loss?" Understand it as best you can. It may be an error in judgement of information, or it may well be because of an outside influence of situation. Once you are reasonably certain ofPAGE 9 why the loss occurred, you can put it aside, and hopefully avoid a similar loss in the future. Approach it logically, not emotionally. When ie are about to put ona trade search your mind and see what thoughts are dominate, see if its fear of a loss (living in the past) or very high expectations of profits (living in the future). Remember, the only thought that should be in your mind is now, the present. Fear from the past or expectations about the future and not real. Only this position and the present are real. Always remember that eighty percent of this business is psychological. It is an art of mastering your self. The Beycholog, is more important that anything else I will pi nt in this book. You must learn how to master your self, conquer or control all of the problems that you are going to face. I’ve been aware of those problems that you are going to face. I’ve been aware of those problems for ten years, and I’m still trying to conquer them. It’s a lifetime endeavor. You have to understand what is inside of you and cope with that all the time. Two types of capital are involved in trading, money capital, and psychological capital. If you loose your psychological capital you are bound to loose your monetary capital. Learn to recognize the effects of fatigue. You must be in good health and have few outside pressures. If you get a letter from the IRS that says, “We’re going to audit you next week,“ don’t trade the market. Trading is decision making. Decision making is stressful, and yee must plan to avoid other stresses. If you don’t make clear aded decisions, the market will take your money away. Just as you use a stop loss in the market to protect your capital, use a Stop loss to protect your psychological capital. When you feel that you are tired, or stressed, searching for trades that are not there, ‘step back from the, situation for awhile. " finally, Gann emphasized that knowledge, in and of itself, is very important and that you can never have too much of it. PARTIAL POSITIONING This section on partial positioning could have been included into almost any chapter in this book. I included it in this chapter dealing with psychology because of the initial reason I decided to trade with partial positions. It was for personal, psychological reasons- an attempt to overcome an inability to stay With positions for more of the trend and thus much larger profits. This is always a continual problem as you must learn to take a rofit while it is still there. Every hit is not going to be a me run. Always start with a full position. For purposes of illustration, we'll use 10 contracts as our position and a half hour chart as the primary focus of our analysis. If I were trading the S & P contract and went long, the first thrust in my direction, I would sell 1/4 to 1/3 of this position. I’ve found the mimimumPAGE 10 movement on the half hour chart to be 1 1/2 points. I, then, have an option to move my protective stop a little closer and lose some of the fear of a loss or, at least have my transaction gost paid. Then, through, analysis, there willl be 2 resistance level that is obvious and I would liquidate another 1/4 or 1/3 of the position. This now leaves me with a guaranteed profit on the position, and I can now move the protective stop to a point below what would be a counter trend move, if the trend were up. I could possibly look to add back some contracts after a successful test of that level. This will become a little easier to understand when exact examples are given later in the book. Personally I found it much easier to stay with a trade once I have taken some profit out. Also, eight years ago I reviewed my trading and found I had many break even or small loss trades that were profitable right from that start. Since changing my positioning strategy to trading partial positions, most of those trades are now 10 to 20 per cent profits. Over a few years, that can amount to a great deal of Money, and'as you will find’ using an intra-day chart there are a great many trades you will find that will be difficult to qualify the magnitude of the movement.HOW MARKETS MOVE In order to become a good trader you should develop an understanding of the manner in which markets or individual securities move in price through time. Study of charts, and the normal moves in the market, will increase your awareness of what is likely to happen under any given circumstance. Being able to recognize “blowoff movements" is critical to success. Recognition of patterns of movement in the market is important to success in the market, and with this in mind, you should obtain charts and books which describe the normal market movements. Study them closely. An excellent and longstanding text, Edwards and McGee’s book, “Technical Analysis of Stock Trends," as well as, "The Elliott Wave Principle* by Frost and Prechter, should be included in your library for your understanding of market movements. H.M. Gartley’s text, “Profits in the Stock Market", is also recommended, as is, Wyckoff’s exceptional work on volume analysis. I am going to devote portions of this text to price movement. understanding price movement is the FOUNDATION to successful trading and al. else is built upon this knowledge. FOUR INVESTMENT STRATEGIES All markets go through four phases. They are topping formations, bottoming formations, and bull and bear campaigns. You should have four strategies in your trading or technical arsenal, One for bull campaigns, which includes an understanding of countertrend movements, both in price and time, Another strategy for topping patterns with an understanding of “blowoff" patterns, including both price and time. Third, a strategy for bear campaigns which includes an understanding of countertrend movements and how those differ from the countertrends of bull campaigns. And finally, a strategy for trading the possibility of a bottom formation. The bull market strategy goes into effect when you have determined that a bottom has taken place, and the trend is changing to up. The bull strategy is to take long term positions in stocks which’ are showing strength already, using reasonably long term protective stops developed from your knowledge of countertrend movements. These stocks can be identified by their price movement, and should be making higher lows while the market 1s making lower lows with a loss of downward momentum. While this strategy is in effect, you will be looking for an indication of a change in trend. Knowing that the first indication, possibly a loss of momentum on the daily chart, is an indication that a consolidation or countertrend movement is about to begin and not a change in trend from bull to bear. This is a point where your knowledge of