William Delbert Gann, also called WD Gann, was a finance trader who developed a technical trading tool known as Gann angles. Just as impressive as the trading tool he developed are the rules he traded by.
Those rules range from basic money management principles to the all-important mental game. However what’s truly amazing about these rules is that while they were written one hundred years ago, they are just as true today as they were then.
This article will expose some of WD Gann’s most ambitious rules by providing commentary on each one. My hope is that by the end of this article you will have a strong understanding of the idea that, although the markets may change over time, there are many trading rules that remain timeless.
1. Always use stop-loss orders
This one goes without much explanation. Using a stop loss is mandatory if you want to become a successful Forex trader. By not using one, you open yourself up to the potential of trading on emotion, which never goes well.
Trading without using a stop loss is like trying to drive a car without brakes. So always be sure to use one every time you enter the market.
2. Never overtrade
I’ve written about the importance of not overtrading before, stating that the potential for profits increases exponentially as soon as you reduce your trading frequency.
What does this mean, exactly?
It means that when it comes to trading, less is more. The more patient you become, the less you trade. The less you trade, the more you can focus on only trading confluent setups.
3. Don ‘t enter a trade if you are unsure of the trend. Never buck the trend
This rule is important for two reasons:
4. When in doubt, get out, and don’t get in when in doubt
If you’re ever unsure of a position, the best thing to do is get out, especially if the position is losing money. As a trader, there’s nothing worse than not having a plan for the current situation.
Over the years, I’ve found the number one reason a trader stays in a losing position is due to the fear of taking the loss, only to see the market move in the intended direction once the position is off the table.
The problem is, when you find yourself in unknown territory, there’s a 50/50 chance of making money or losing it. In essence, you’ve lost your trading edge and you should therefore remove yourself from the market.
5. Only trade active markets
This one is extremely important but is often overlooked by many traders. You can’t make money in a market that isn’t moving. This goes without saying, yet I see many traders attempting to trade sideways markets.
There’s nothing wrong with trading breakouts from sideways price action – I do it quite often. But to try and trade a sideways market is one of the fastest ways to lose money in the Forex market.
Your most profitable trades will always come from trending markets. This is because not only can you capitalize on the initial position, but a strong trend gives you the opportunity to multiply your profits through pyramiding.
6. Don’t close trades without a good reason
Have you ever exited a trade due to a fear of giving back unrealized profits, only to see the market continue in the intended direction? I’m sure you have. And if you haven’t yet, you will.
This is something every trader has to master – the ability to control emotions in a way that allows you to trade based on pure technical analysis. One way to keep your emotions in check if you feel the urge to close a position early is to simply ask yourself, “why am I closing this position?”. If your answer is anything other than a technical one, you are likely making a decision based on emotions.
7. Never average a loss
This one is as old as trading. You should never, ever add to a losing position.
There are several reasons why this is true, but most important is the fact that a losing position is a sign that your analysis may not have been correct. By adding to your position in this situation, you are increasing your risk without first having confirmation from the market that you are in a favorable position.
8. Never get out of the market because you have lost patience or get in because you are anxious from waiting
I often talk about patience and its importance to your trading success. But patience isn’t just about waiting for the perfect trade setup. It also plays a critical role when managing open positions.
The market isn’t on a schedule. It ebbs and flows according to the news and sentiments that impact it. This is why we, as traders, set profit targets but we don’t set time limits. A market needs time to see an open position through to the end just as it needs time to form the perfect setup; both of which require patience.
9. Avoid taking small profits and large losses
I read an article a while back (I won’t mention who wrote it to avoid embarrassing the writer) that claimed making money in the Forex market is hard work. While I agree with the overall sentiment that becoming profitable is hard work, I don’t agree with what was said next. The writer went on to say that it’s all about finding quick wins. In other words, making small profits each day.
This is completely backwards in my opinion. Becoming consistently profitable is all about letting your winners run. In essence, you have to make enough money on your winners to pay for your losers.
WD Gann had the right approach. He knew that becoming a consistently profitable trader means taking large profits and small losses.
10. Never cancel a stop loss after you have placed the trade
Why? Because once you enter the market, your judgment becomes skewed. You now have something to lose, which triggers the emotional side of your brain when making decisions.
On the other hand, when you determine your stop loss before entering the market, you’re able to make an unbiased decision about its placement. This allows you to stay disciplined by trading what the market is doing versus what you want it to do.
11. Avoid getting in and out of the market too often
Do you find yourself jumping in a position only to close it within the first thirty minutes only to go chase a “better” setup? This is a common theme among many Forex traders – the idea that there is always another setup out there that will make them more money in a shorter period of time.
The most common reason for this type of behavior is risking too much capital on a single trade. In order to let your winners run, you have to give the market room to breathe. If you are risking too much capital on a single trade, you’re going to be tempted to close the position too quickly, thus missing out on potential profits.
The weeks where I make the most money are the ones where I do absolutely nothing except for adding to winning positions at strategic levels.
12. Be willing to make money from both sides of the market
For us Forex traders, this one is easy. That said, I still see some traders preferring to only take long positions or only take short position.
While this may seem harmless at first, it does present a problem.
As price action traders, our job is to remain patient and wait for the market to show its hand before pulling the trigger. But if you are only interested in trading long or short but not both, you may miss out on opportunities. You may even try to convince yourself that a market is producing a valid short signal (because you only trade the short side) when in fact it’s producing a long setup, thus leaving you on the losing side of the market.
Always remain flexible in your approach to the markets. Try not to favor one side over the other as both can produce favorable trade opportunities.
13. Never buy or sell just because the price is low or high
The terms “low” and “high” are extremely relative when it comes to the markets. What’s low to one person may be high to another and vice versa. This is why I don’t advocate the use of the terms “overbought” or “oversold” in my price action community.
Instead of looking to buy a low market or sell a high market, it’s far more effective to make use of technical levels in combination with price action signals. This will give you a much better chance of catching a favorable entry.
14. Pyramiding should be accomplished once it has crossed resistance levels and broken zones of distribution
The key to a proper pyramiding strategy is to only add to a position once the market has broken a key level of support or resistance. This allows you to have a high degree of confidence that the market is likely to continue in the intended direction upon adding to your position.
15. Never change your position without a good reason
What is a “good” reason? Simply put, a good reason is a valid reason, and a valid reason must be based on the technicals.
Getting in or out of a market because you heard someone else mention it as a buy or sell is not a good reason. Similarly, getting in or out of a market because it has moved “too high” or “too low” is not a good reason.
On the other hand, if you are in a short position and the market reaches support and forms a bullish pin bar against your position, that is a good reason to at least consider closing the open position.
16. Avoid trading after long periods of success or failure
One reason why becoming a consistently profitable trader is arguably the hardest challenge you will ever face in life hinges on one word, “consistently”. Putting on a profitable trade or even a series of profitable trades isn’t all that hard to do, dare I say it can be easy given the right market conditions.
But to consistently grow a trading account over the course of many months and years takes much more than a few good trades. It takes a strong mental game, among other things.
Part of that mental game has to include the ability to remove yourself from the market after a series of profitable trades as well as a series of losing trades. Both scenarios can easily trigger emotional decision-making, which can be detrimental to your trading account.
By removing yourself from the market for a period of time following a winning streak or losing streak, you effectively reset your mind, thus allowing you to trade what the market is doing versus what you want it to do.
17. Don’t try to guess tops or bottoms
Guessing tops or bottoms in a market is pure gambling. As traders, our ability to make money consistently greatly depends on our edge, which is a combination of factors that help to put the odds in our favor. By trying to guess tops or bottoms, you nullify any edge you may otherwise have and thus leave your potential for profits to blind luck.
Many argue that a top or bottom in a market is not made clear until after the opposing move has already begun.
I disagree. While we can never know for sure whether a market has found a top or a bottom until after the opposing move has begun, we can determine the probability of such a move through the use of technical patterns and signals. This is why I always say that learning to use price action is essential to your success as a trader, regardless of the trading strategy you end up using.
18. Don’t follow a blind man’s advice
Ever visited some of the Forex forums out there? If you have, I’m sure you can relate to this next rule.
The arrival of the internet was an amazing advent. It not only gives us the ability to trade the Forex market from the comfort of our own homes, but it also gives us a plethora of information on the subject of trading.
But therein lies a problem…
With more information comes confusion, especially when the majority of that information is born from trading forums where everyone is an “expert”. These traders like to share their own convictions, which on the surface is harmless, but when other traders trade based on those convictions it can be disastrous.
The information from all Forex-related sites, even this one, should be used to generate trade ideas. Nothing more, nothing less. No site should ever be used to blindly enter trades.
In order to succeed as a Forex trader you must learn to perform your own technical analysis. Getting ideas from websites is fine, but make sure you always follow it up with your own analysis before putting your capital at risk.
19. Reduce trading after the first loss; never increase
Revenge trading is one of the most deadly sins a trader can make. It begins with a loss and ends with further losses.
One way to avoid revenge trading is to either scale back your trading immediately following a loss or simply remove yourself from the market altogether. I tend to opt for the latter.
In fact when I experience a loss, I will typically remove myself from the markets for at least 24 hours. This allows me to clear my head and regain my composure so that I know the next trade I take will be based on strong technicals rather than an emotional need to get back at the market.
20. Avoid getting in wrong and out wrong; or getting in right and out wrong. This is making a double mistake
Becoming a successful trader is all about timing. It isn’t enough to only get the entry right or to only get the exit right. You have to be right on both fronts to become consistently profitable.
What’s amazing to me is that after 100 years, these rules that WD Gann devised are just as applicable today as they were then. This goes to show that some of the most simplistic forms of technical analysis such as price action are here to stay, just as the most basic rules of trading psychology are timeless.
I hope this article has helped shed some light on how WD Gann traded and how these twenty rules can be applied to your own trading to make you a more well-rounded trader.
Which one of the rules above stands out most to you and why? I’d love to get your feedback in the comments section below.