Day Trading With WD
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DAY TRADING THE E-MINI WITH W.D. By Eugene Steele CTA President Daytradewithme Copyright 2002 W.D.Gann published a great deal about his trading methods. He contributed as much if not more to the history and knowledge of trading as any trader. These methods have not been improved with computers or indicators. The opportunity for success in trading today is as good if not better than 100 years ago. To accept his methods you must accept a universal law. THERE IS ORDER IN THE UNIVERSE There is order in everything around, below and above us. “God is a mathematician” said Sir James Jeans. Gann studied these relationships and applied them to trading. He did it as I have done by building on the work of those great traders that came before. …Pythagoras (569-500 B.C.), observed certain patterns and number relationships occurring in Nature. The Devine Proportion a study in mathematical beauty H.E. Huntley. Leonardo Fibonacci (i.e. filius Bonaccii) [1175-1240] introduced Europe to the use of Arabic numerals into commercial affairs. In 1202 he published Algeba et almuchabala; A short Account of The History of Mathematics, W.W.R. Ball. In his Liber abaci Fibonacci presents the problem of determining how many pairs of rabbits there will be in each generation if the first pair breeds one pair in the first and each succeeding month….. Fibonacci shows that the numbers of pair will be 2,3,5,8,13,21,34,55,89,144,233,377 in the first through twelfth months respectively… the ratios of the successive terms of the Fibonacci sequence are approximations to the numerical value associated with DEMR (division in extreme and mean ratio-“the golden number”) A Mathematical History of the golden Number Roger Herz-Fischler If a beam of light is incident upon two sheets of glass in contact, part of the light will be transmitted, part absorbed and the remainder reflected…The number of emergent rays is a Fibonacci number. The Devine Proportion a study in mathematical beauty H.E. Huntley. There are endless examples of this natural law in Nature. Flowers, insects, shells, planets all display it. Gann recognized this. “Everything in existence is based on exact proportion and perfect relation. There is no chance in nature, because mathematical principles of the highest order are at the foundation of all things”.
“Every Commodity makes a TOP or BOTTOM on some exact mathematical point in proportion to some previous high or low level. Subtract the low from the high to get the range. Then divide the range by 8.” P.34 Gann How to make Profits in Commodities. Why did Gann use 8? Here is a 1 min E-Mini chart that answers the question. Notice where the Fibonacci retracements fall. Compare that with the lower chart a Division of the high and low by 8.
When you compare the two charts you understand how the division by eight was derived. Gann observed that there is a growth pattern to the market beginning and ending with highs and lows. While Fibonacci never day traded and Gann did not use a computer these principals can easily be applied to trading the E-Mini with great success. Gann gave us the key when he explained the support and resistance levels by 8 but more importantly he simply stated prices move from lows to highs to lows to highs. The key is to identify the tops and bottoms for the time period we are trading. T.H.Murrey has adapted Gann’s’ method into a Murrey Math Trading System. “This trading system is so simple, that one need only be able to divide any number by 8, or multiply, any number by eight, to set our support and resistance line.” With my borrowed methods and tools you will learn to trade trends within a 1 min chart. We use a 1 min chart because it affords the best opportunity to make the most gain. If we were to use a 5 min chart we would miss 4 minutes of profit. While we use a 1 min chart we do not consider each minute or look at each bar as though it has significance. We look at the trend as though it were a ribbon showing us the direction of our market and the trade. If we are correct in picking exact tops and bottoms all we need is a .25 stop to protect use because by definition highs and lows do not move against us. We will now examine how to simply trade the 1 minute E-Mini chart using Gann’s method. The chart below tells you all you need to know about trading.
The average E-Mini day trader overtrades the market. Each time it moves up they are long and exiting or reversing when the market makes a wiggle. Here is the first tool I use to assist me with the Gann method, the standard deviation channel. It is formed by drawing a linear regression line with 1 standard deviation above and 1 below. This should give you a comfort range in trading. It is clearly predictive as it can be drawn early in the trade. There have been various price channel methods. Many methods are included in charting programs. Metastock includes the Raff Regression Channel, Standard Error Channel, Standard Deviation Channel and Andrews Pitchfork. All will give you direction but the Standard Deviation Channel works the best. Within 3 to 6 minutes the channel can be drawn. Once it is drawn it needs to be adjusted. Initially because there is little information in terms of price 2 standard deviations are used, as more prices are printed the channel is adjusted to 1 Standard deviation. I recommend you read the work of the developers of the other price channels. Andrews observed that if the prices did not close above or below the middle line the move would not continue The Best Trend lines Methods of Alan Andrews Patrick Mikula. He also was familiar with Roger W. Babson’s work Actions and Reactions.
“Professor Swain also suggested that Newton’s Law of Action and Reaction may apply to economics as it does to physics, chemistry, astronomy, and other fields… Our contribution to the analyzing and forecasting of business conditions was in connection with the study of the area above and below this Normal Line. Based on Newton’s Law of Action and reaction, we assumed that after a depression area, equal in area to the preceding area of prosperity, had developed, another period of prosperity would be due.” Actions and Reactions, Roger W. Babson Dr. Raffs’ book on Raff Channels is no longer in print but an article or two may be retrieved thought Stocks and Commodities.Trading the Regression channel, Gilbert Raff Don Vodopich authored a technical approach using angles. While the method is not a price channel it utilizes Gann angles and is very instructive. Trading for Profit with Precision Timing. It was useful in visualization and application of my final method. The Standard Deviation channel is not used to trade. It is use to manage your trade. It is used to hold your expectations of the wiggles so that you do not jump in and out of the trade when you are right about the direction of the trend. (Keep in mind that the space between each horizontal Gann line covers an area of 12.5 %.) Each security has its own personality. After a while you will be able to tell what is happening in the market by looking at the price action. It is important to note that the EMini begins its’ trend before the opening of the NYSE market. The above chart demonstrated a few simple observations. This trend began at 4:15 am. While you do not have to trade day and night it is important to be able to look back and see where the current trend began. If you are entering in the middle of the trend or toward the end you should be aware of that fact. You should not assume it just began because you just got there. Looking back a few days from your trading day can also be informative. The below chart is three days of a 1 minute chart. It demonstrates that trends on the 1 minute chart are clearly defined with highs and lows. Many great traders have been aware of the significance of Highs and Lows in the continuation of price moves. “...we know if the market moves a substantial amount in a direction from any days close, it is most likely to continue going in that direction until there is an equally strong impulse to the opposite side of the market.” The Definitive Guide to Futures Trading Larry Williams
Turning now to WD: You will always make the most money by following the main trend of the market, although to say that you must never trade against the trend means that you will miss a lot of intermediate moves which will make big profits. Your rule must be: When you are trading against the trend, wait until one of the rules gives you a definite indication of a buying or selling point at BOTTOM or TOP, where you can place close stop loss orders. P. 31 Gann How to make Profits in Commodities. Now we can summarize the rules. Sell the High buy the Low. That is all there is to trading the E-Mini with great success. Sell the High buy the Low. If we can agree on that we can move on to determine entry and exit or the high and low. Gann gave us the resistance and support power of each of the lines and how to trade them. However the 1 minute chart is a microcosm of the universe and it is not necessary for the beginning trader to be aware of the details of each line. It does give you comfort to see a reaction exactly as you expected. I am reminded of a reported comment of Gann’s “It has to go there” and if you trade between the High and the Low it has to go there. You will have to prove this to yourself by watching the market. I will give you some charts but until you see the ease of trading this high to low to high to low it will only be a theory to you. If you’re an in and out trader you may have looked back over a days trade and said ‘If I had just stayed in the trade I could have made more money’. You
might have said if I had stayed in the trade all day I would have made more money. What is it that Gann said that could have saved you? You will always make the most money by following the main trend of the market, Every Commodity makes a TOP or BOTTOM on some exact mathematical point in proportion to some previous high or low level. Let us begin our profitable trading day. Here is a chart in segments taken from the trading day I’m writing this article. These are the actual adjustments as it happens since you cannot spend the day with me. Here is a chart with a lot of chop lets see how the method works with this. Remember what Gann said: Your rule must be: “When you are trading against the trend, wait until one of the rules gives you a definite indication of a buying or selling point at BOTTOM or TOP, where you can place close stop loss orders”
Entry at the top to short at 888.75 target 872.25. Note the low before the target was 872.25 which was developed at 3:45 am. That low was displayed until we reduced the area of the chart and the software adjusted the low to 876. The low before the current target at 10:06 once the 876 was reached the position was held until our new target 875.25 at 2:45 was reached. Why do we have the software adjust the High and Low rather than using a fixed previous days High and Low because Gann gave us that clue. “Using the lowest Bottom as well as other Bottoms, and must never fail to use the
highest top, or the extreme highest level, as well as minor tops.” p.33 Gann How to make Profits in Commodities. Contained in that sentence is the entire success of trading the EMini with a charting system. What we did know once the high was hit was that the short would make money for us. Here is where a decision can be made and is often made. We know that we are due for a low. The low is not reached the market reverse most traders exit. We give back 6 points but we know the price has to go to the low. Were there is potential little profit to be made by holding we might want to begin trading against the trend. What is the best point for that? Fifty percent or the middle blue line. Look at the reaction on the 50% line. “Fifty percent or one-half of the lowest selling point is the most important point, for Resistance or for TOPS or BOTTOMS”. P.33 Gann How to make Profits in Commodities. However, this is not for beginning traders who should take profits or hold for the prices to reach the low. This method should yield 20 points or more a day if traded properly in the current market. Here is the interesting thing for all the technical traders with six monitors, 13 indicators, a squawk box and a horseshoe. If you want to make your fortune trading commodities go backwards not forward. Backward to a time when price action determined trades. Backwards to the Masters of trading. Backwards before market open. One chart one time period, one minute, and one commodity. There is a risk in trading commodities