Orson Merrick: Gann's "Forty-Five Years on Wall Street" 12 Rules for Trading Stocks

Author Orson Merrick

Hi, my name is Orson Merrick. Chief analyst and senior partner of British Polar Capital Holdings Co., Ltd., with more than 19 years of experience in the investment market. During this period, I help customers provide the best investment ideas and expertise, as well as develop and protect their family and personal investment assets, and provide customers with solutions to achieve their goals. The following content will be my personal 12 tips for trading stocks. I hope readers can read this rule carefully, as it can help investors reduce mistakes on their investment journey.

Rule 1: Analyze trends

Analyze the average index of the Dow Jones 30 Industrial Stock Average, 15 Utility Stock Average, or any other stock group you want to trade, then select the stocks you want to buy or sell from the stock group and observe whether their trend indicators align with the average index.

Rule 2: Buy at single bottom, double bottom, and triple bottom

Buy at double bottoms, double bottoms, or single bottoms near the previous bottom, top, or resistance level. Please remember this rule: When the market crosses the front heads and draws back, or slightly breaks through, those heads or tops that were originally selling points become bottoms, support lines, or buying points.

When selling at a single, double, or triple top, remember that when the previous top is broken through by several points and the market rebounds again to reach or approach this position, a selling point is formed. After completing a transaction, you should decide on an appropriate and safe location to set up a stop-loss order and immediately hand it over to your broker.

If you don't know where to set up a stop-loss order, then don't trade. Don't ignore the fact that the average number of measures or the fourth time a stock reaches the same price level is not a safe selling point because they almost always break through upwards, and applying this rule to the bottom is the same. When a stock falls to the same level for the fourth time, it almost always breaks through and continues to fall.

The double heads and double bottoms are significant. The double head of the average index can have a range of 3 to 5 points. However, except in extreme cases, most pairs of heads form within the range of l to 2 points. The formation of a double bottom is also the same. If there was already a bottom near the same position a few years ago, the average index may fall 4 to 5 points below the previous bottom, but this does not mean that the index will decline; it may form a double or triple bottom here. Individual stocks usually have a dual head within the range of 2 to 3 points, and sometimes also within the range of 1 to 2 points. The formation of double bottoms is the same: they make double bottoms within a range of 2 to 3 points, sometimes 1 to 2 points lower than the previous bottom.

A stop-loss order for an individual stock should be placed within a range of 1 to 3 points higher than a double or triple head, depending on how high the stock price is. A stop loss should also be placed at a position 1 to 3 points lower than the double or triple bottom. When the average index or individual stock reaches the same position for the third time, there will be a triple head or triple bottom. This is usually the safest buying and selling position, as the market leaves the triple head or triple bottom very quickly.

Rule 3: Buy and sell by percentage

Buy at positions where there is a 50% decline from any high, or sell at positions where there is a 50% rebound from any low, as long as these declines or rebounds are in the main trend. Just like using the percentage of the average index, you can use the percentage of individual stocks to determine resistance levels and buying and selling points. You can use percentages of 3% to 5%, 10% to 12%, 20% to 25%, 33% to 37%, 45% to 50%, 62% to 67%, 72% to 78%, and 85% to 87%. The most important resistance levels are 50% and 100%.

Rule 4: Buy and sell on a three-week upward or downward basis

When the main trend is upward, you can buy in a bull market after a 3-week adjustment or a downward jump, as this is the average adjustment time of a bull market. In a bear market, if you know the trend is downward, you can sell after a rebound of about 3 weeks. When the market rises or falls for 30 days, or even longer, the next time period to pay attention to the top and bottom is about 6 to 7 weeks, which will be a buying and selling point.

Of course, don't forget to set up stop-loss orders based on these resistance levels to protect your investment. If the market rebounds or declines for more than 45 to 49 days, then the next time period is about 60 to 65 days, which is the most common average time for rebound in a bear market and adjustment in a bull market.

Rule 5: Market segmentation movement

The stock market moves in three to four segments, or three to four waves. If the market has just moved up in the first segment, never assume that it has reached the final head, because if it is a true bull market, it will run for at least three segments before reaching the head, and it is likely to be four segments. In a bear market or downward trend, do not assume that the market has reached its bottom when it has just finished its first decline or first period, because before the bear market passes, it will run for three periods, or even four periods.

Rule 6: Buy and sell sports from 5 to 7 o'clock

Buy and sell when adjusting individual stocks by 5 to 7 points. When the market is strong, the adjustment will be 5 to 7 points, but not more than 9 to 10 points at most. By studying the average index of industrial stocks, you will find that a rebound or adjustment is often less than 10 points. However, for general buying and selling positions, it is important to note a 10- to 12-point rebound or decline. The next position that needs close attention is an 18- to 21-point rise or fall, starting from any important head or bottom. The reaction of the average index often indicates the end of a market round. One thing you need to do when buying or selling stocks is know when to take profits. Please follow the rules mentioned here and do not close positions before a clear reversal occurs.

Rule 7: Trading Volume

Study the trading volume of the New York Stock Exchange in conjunction with time cycles, and study the rules in the "Trading Volume" chapter at the end of the book. Study the trading volume of individual stocks according to the rules given in that chapter, as trading volume helps determine when the trend will reverse.

Rule 8: Time Cycle

When analyzing changes in trend, time factors and time cycles are most important because time can cause prices to lose equilibrium, and when that time comes, the written volume will increase and force prices to rise or fall. The dates of trend changes, stock market indices, and individual stock trends show seasonal variations, which constantly change over different years. However, by understanding important dates and carefully observing them, you can quickly judge a certain change in the trend by applying all the other rules.

These important dates are as follows:

1. January 7th to 10th, and January 19th to 24th. These are the most important dates at the beginning of the year, and trends that last for weeks, sometimes even months, often change around these dates.
2. February 3rd to 10th, and February 20th to 25th. These dates are only second in importance to January.
3. March 20th to 27th, a small reversal often occurs near this date, sometimes with important tops and bottoms.
4. April 7th to 12th and April 20th to 25th. Although not as important as the dates in January and February, the latter half of April is often a significant period for turning the tide.
5. May 3rd to 10th and May 21st to 28th. This reversal that has occurred is equally important as January and February. Many important tops and bottoms in the past were closer during these days and have subsequently undergone a reversal.
6. June 10th to 15th and June 21st to 27th. There will be small turns around these dates, and in some years, there will be extreme highs and lows.
7. July 7th to 10th and July 21st to 27th. The importance of this month is second only to January, as it is in the middle of a year when listed companies will distribute dividends, and seasonal changes and the company's condition will have an impact on changes in stock trends.
8. August 5th to 8th and August 14th to 20th. For the reversal, this month is, to some extent, equally important as February. By examining past records, you will find out how important reversals occurred near these days.
9. September 3rd to 10th and September 21st to 28th. These are the most important periods of the year, especially for the top or the final upward phase of a bull market, as the highest points are more likely to occur in September compared to other months. Some small turns, whether rising or falling, also occur near these dates.
10. October 7th to 14th and October 21st to 30th. These periods are quite important, and some important turning points have emerged here. If the market has been rising or falling for a period of time, it is necessary to pay more attention to these days.
11. November 5th to 10th and November 20th to 30th. Research on history has shown that these dates are crucial for turning trends. In election years, a turnaround often occurs at the beginning of the month, while in other years, the lowest price often appears between the 20th and 30th.
12. December 3rd to 10th, and December 15th to 24th. During a period that lasted for several years, the percentage of reversals was very high in the latter half of December and the period entering January.

When looking for a date for a reversal, please pay attention to whether the market has already left the highest or lowest price for 7 to 12 days, 18 to 21 days, 28 to 31 days, 42 to 49 days, 57 to 65 days, 85 to 92 days, 112 to 120 days, 150 to 157 days, or 175 to 185 days. The more important the top and bottom of these time periods are at the beginning, the more important the reversal becomes.

An imbalanced market, after an average index or individual stock has risen or fallen for a considerable period of time, will be unstable, and the longer this period, the greater the intensity of adjustment or rebound. If the duration of a decline is longer than the previous one, it means a reversal of the trend. If the stock price is much higher than the previous decline or adjustment, it means that the market has lost balance and a reversal is about to occur.

This rule, in turn, can be applied to bear markets. If a stock has fallen for a long time, then when a rebound time exceeds the previous one for the first time, it indicates that the trend is changing, at least temporarily. If the stock price rebounds for the first time by more than the previous magnitude, it means that spatial or price movements have lost balance and the turn has already begun. The change in time is more important than the reversal of price. When these reversals occur, you can apply all the rules to verify whether the reversal is inevitable.

When the market is approaching the endpoint of a long-term rise or fall and reaches the third or fourth segment, the price increase will decrease compared to the previous market movement, and the movement time will also be shortened. This is a signal that a reversal is about to occur. In a bear market or bearish market, compared to the previous market movement, if the number of shares falling decreases and the movement time is shortened, it means that the time cycle is about to end.

Rule 9: Buy people during high and low point relocation

Buy when the market's high and low points move up in sequence, as this indicates a major upward trend. Sell when the market's high and low points move downward in sequence, as this indicates a major downward trend. Note the previous time length from head to head and the previous time length from bottom to bottom. And it is also important to pay attention to the movement time of the market from the lowest point to the highest point, as well as the movement time from the highest point to the lowest point.

When the market is moving slowly and with narrow fluctuations, especially for the low price range, all you need to do is stick to drawing a high and low price monthly chart. When the stock price becomes active, you can start drawing a weekly chart of high and low prices, while for stocks operating at high levels, you should draw a daily chart of high and low prices. But remember, as a trend indicator, the 3-day turn chart is much more important than the high and low price daily lines.

Rule 10: Changes in Trends in Bull Markets

The reversal of trends often happens to occur near holidays. The dates below are very important. January 3rd, May 30th, July 4th, early September, after Labor Day, October 10th, November 3rd to 8th of the election year, as well as November 25th to 30th, Thanksgiving, and December 24th to 28th. The final period may extend until early January before the exact reversal is formed.

When the average index or individual stock price breaks through 9 points and turns to the previous lowest point in the chart, or turns to the previous lowest point in the chart on 3 days, it indicates that the trend is changing, at least temporarily.

In a falling market, if the stock price exceeds the highest point of the previous rebound on the 9-point chart or the highest point of the previous rebound on the 3-day chart, it is the first signal of trend change.

When the stock price is running at a high level, there are often several ups and downs. When the market breaks through the lowest point of the previous oscillation, it indicates a change in trend or reversal. At low levels, stock prices often slow down and run for a period of time within a narrow trading range, but if they cross the highest point of the previous rebound, it is crucial for the trend to change.

Always carefully check to see if the market is exactly 1, 2, 3, 4, or 5 years away from any extreme high or extreme low price. Looking back, let's see if the time span for the market to move away from any extreme bottom price is 15, 22, 34, 42, 48, or 49 months, as these are important time periods for monitoring trend changes.

Rule 11: The safest buying and selling point

Buying stocks is always the safest option after a certain trend has formed. After the stock bottoms out, there will be a rebound followed by a secondary adjustment and support at a higher bottom. If it starts to rise and breaks through the head of the first rebound, it forms the safest buying point because the market has already given a signal of an upward trend. The stop-loss can be set below the second bottom.

The safest selling point is that after a long period of upward movement, the market creates the last high price, and after the first rapid vertical downward jump, it will rebound and form a second top. The height of this top is relatively low, and then the market starts to jump down from this top and crosses the lowest point of the first decline. This is a relatively safe selling point because it gives a signal that the main trend has turned downward.

The most important time cycle in an active market is the 2-day pullback and 2-day rebound. The pullback only lasted for two days, and the month will not continue to decline on the third day. This situation occurs many times before any signs of reversal occur. If a stock or average index only experiences a two-day pullback, it indicates that the bullish sentiment is strong. In an active and rapidly declining market, the rebound is often steep and rapid, lasting only two days.

Remember, as long as the trend is upward, the stock will never be too high to buy, and as long as the trend is downward, the stock price will never be too low to sell. However, please do not overlook the fact that you must always use a stop-loss policy to protect your investment. Always follow the trend instead of going against it. Buy stocks in a strong position and sell stocks in a weak position.

Rule 12: Profit in Rapid Movement

When the market is very active and the rise and fall are very rapid, they move an average of 1 point per calendar day. When the average index or individual stock moves 2 or more points per day, it indicates that it has moved away from the normal track and cannot last for a long time. In a bull market, this movement occurs in short-term and rapid pullbacks or declines. In a bear market, when the trend is downward, these rapid rebounds will change the price in a very short period of time.

If you want to succeed in the stock market, you must spend a lot of time learning, because the more time you spend, the more knowledge you gain and the more profits you will gain in the future. 45 days of exploration and practice of these rules have proven to me what the necessary conditions are for your success. I have given you the rules that work; it is now up to you. You must learn these rules.