One of our most requested Guest Bloggers is Mark McRae, author of Traders Secret Code, and today I'd like you all to welcome him back! I've asked Mark to touch on a subject that most seasoned traders know, and rookie traders don't want to hear...most traders fail and a percentage of those failures turn into bankruptcy! Please read the article, comment to Mark or about the ideas, and check out Marks Traders Secret Code.
I was thinking about an article I read some time ago that 90% of traders who ever trade lose their account and that 10% actually go bankrupt. If the first number doesn't scare you then the second definitely should.
Why is it then that there is such a large number of traders failing? It is not because they are stupid; in fact most traders have an above average IQ and are above average in most categories such as education and income. So why do they fail?
Lack of trading education! ( INO TV will help solve this problem!)
By education I don't just mean learning how RSI works or drawing lines on a chart. I mean thoroughly educating yourself in all aspects of your chosen profession.
Educating yourself on the correct psychological approach to the market! Educating yourself in the correct risk management techniques relative to your account size. Educating yourself in the correct entry and exit methods for the trading style that suits you.
This, my friend, is where I hope to be of some help. I don't have all the answers nor do I profess to be some kind of guru but I will do my best to point you in the right direction.
MarketClub is known for our "Trade Triangle" technology. However, if you have used other technical analysis indicators previously, you can use a combination of the studies and other techniques in conjunction with the "Trade Triangles" to further confirm trends.
W.D. Gann was a trader in the early 1900s who devised a unique and complex trading method that parallels some of these other theories. His technique is sometimes referred to as geometric because of his use of the mathematical properties of certain geometric figures and angles to predict price behavior. Gann had a cyclic view of market behavior and placed enormous emphasis on proportional relationships between price and time. He believed market events occurred at intervals that could be determined mathematically. And like Elliott, he believed the relationships he “discovered” reflected the natural law of the universe.
Gann calculated price retracements on percentages derived from dividing price action into eights, i.e. 2/8 = 25%, 4/8 – 50%, etc. He also included the Dow and Fibonacci retracements of 1/3 (33%) and 2/3 (67%) in his list of key percentages. He constructed support and resistance lines (Gann lines) based on varying ratios of time units to price units. His most important trend line, plotted at 45 degrees (up from a market bottom or down from a market top) represents one unit of time movement per one unit of price movement.
He also placed lines with other time/price ratios, like 1:2, 2:1, 1:3. 3:1, etc. The angle of these lines corresponds to the strength and speed of a trend. As long as pries stay above (or below, depending on the direction of the trend) the 45-degree line, the trend will continue. Once prices break that line, they will theoretically proceed to the next line of resistance, 1:2 or 1:3, for example, as the trend is played out.
Gann determined “anniversary dates” for timing market events based on the degrees of a circle (30, 60, 90, 180, 360 days) as well as periods of 12 months and 144 days (144 is the only square Fibonacci number). For example, when a market made a high or low, Gann looked for another significant price milestone 144 days or a year in the future.
He also predicted future support and resistance points using “cardinal squares.” Starting with a low price for a contract, he spiraled prices clockwise around it on a grid until the prices reached the current trading range. Prices that fell on the “cardinal cross,” the perpendicular lines equivalent to the X and Y axes of a graph, represented probable levels of future support and resistance.
Gann techniques are most effective when used together. Instances in which a trend reversal corresponds to a previously calculated retracement ratio, a cardinal square price, an anniversary date and the breaking of a trend line would represent important market cycles.
Studying the writings of traders who were active in the first three or four decades of this century has often inspired me to do additional research. This has allowed me to develop additional tools and theories. In reality, what I present in this segment will not "pure" Gann. Instead, I will present applications and approaches which I have found to be useful and successful. Hopefully, this will provide a foundation for anyone who wants to study further on his/her own.
Many of the successful traders from the first half of this century have a reputation of being almost mystical. To many, this is especially true of W.D. Gann. Trader after trader has searched for Gann's "secret" to unlock the mysteries of the market. Many of his tools, and mine as well, are relatively simple and are not secrets. However, after delving into his writings, I have come to the conclusion that his biggest "secret" consisted of two things: HARD WORK and COMMON SENSE. Unfortunately, many would-be traders seem unwilling to do the first and lack the ability to use the latter.
Probably the easiest place to start explaining analytical tools is with a simple method to determine support and resistance levels. To locate what should be among the most important areas of support and resistance in a market, divide the move from one extreme to the other by eight.
As an example, oats posted a high in the summer of 1988 which may hold for some time to come. The monthly oats chart shows the range from the all-time low near 14 posted in 1932 to 393, the 1988 high, divided by eight. These eight points should prove to be important areas of support and resistance for years to come. One way to check this range is to examine whether the eight points have proven significant in previous action. In the oats, it is fairly clear the eighth points have been effective in previous years, which should give one a high degree of confidence these levels will be important in the future.
Gann indicated that the 1/3 and 2/3 divisions of a range (broken lines on monthly oats chart) were important as well. I have found the 1/3 and 2/3 points to be significant, but they will generally take a secondary role to the eighth points.
The divisions of price, primarily the eighth points, can be placed on not only the long-term monthly and weekly charts but on the daily charts as well. As the daily perpetual chart of December oats reveals, the long-term levels of support and resistance are significant to daily action. It was no surprise to see December oats find support at the 250 level as manifested during July and August, 1988. Since the point of the all-time range at 250 had been clearly broken, one would have expected to see this market fall to the level near 202 (which it later did).
The divisions of a range are not limited to the move from all- time low to all-time high. Any sizable range of movement can be divided by eight to determine lesser-degree levels of support and resistance. Note the upmove in 1991 in December silver from February to early June. Following the June high, the eighth points provided reasonable areas of support and resistance on the ensuing decline. The boxed area on the weekly December silver chart represents the action shown on the daily chart. The weekly chart didn't indicate this range was very significant, essentially a corrective rally; yet, the eight divisions still provided valuable reference points.
The power of this tool is obvious.The large-degree eighth points are invaluable as reference tools for support and resistance. Yet, the same principle we'll work on daily charts, smaller ranges and, yes, even intraday charts.