Short Term Trading Using WD Gann's Swing Trading Strategies

"Would you like to see my short term trading strategy in action in more detail with a trade by trade description of the positions I took as I traded the S&P 500 Index down into the low two weeks ago?" Peter asked Paul one afternoon.

Paul had spent the last week back testing the Trading System Peter had shared with him on several Stocks and the S&P 500 Index, with great results, and he was ready to learn more. "I certainly would," he replied.

"OK, lets get to it then," Peter said as he opened his charting software to a chart of the S&P 500 Index, then scrolled back to the top of the most recent leg down. Paul looked on as he took him through his recent trades.

"You can see on this chart," Peter continued - "That the 105 day and the 30 day moving averages are both trending down, therefore that is the direction successful people trade - until you know a lot more about time cycles and support and resistance, you will only trade in the direction of the trend," Peter told Paul.

"From the low, the Index managed to rally for a total of 8 trading days, which is quite common for a reaction in a bear market. 

It then fell for 3 days, rallied for one day, then had an inside day with a lower close, giving us 2 days up - I count inside days as continuing the trend, whichever way it is going at the time. 

"Inside days are usually signs of indecision, and they often give wonderful opportunities to enter fast moving trends - this one was a good example.

"If the low of this inside day was broken, it would confirm a lower top, indicating the daily trend was now down.  

As you know, I determine the major trend, then I try to enter with that trend as close to the end of the major reactions as I can. If the Index fell from this inside day, I wanted to be on board.

"As I have shown you previously, in the case of a downtrend like this, I look for a moving average crossover at the end of the reaction to indicate a change in the market's short term direction, then a lower high to get set on and actually give me a sell signal. 

This is what occurred here," he pointed out as they looked at the chart on the screen.  (The moving averages Peter is referring to aren't shown for clarity, but they crossed to give a short term sell signal on the inside day).

 "I placed a sell order 2 points below the low of the inside day - the second day of the reaction , with a stop loss order 2 points above the swing high. Therefore, if the Index traded lower, I would have a short position, with a stop loss order above the swing top.

"The next day, the downtrend did continue and I had an open short position with stop loss orders in place above the swing high.

If you would like to view a larger version of any of these charts, simply click on the chart itself and a larger version will open in a new window.

Source: Incredible Charts - www.incrediblecharts.com.au

"This next chart shows how the Index continued down for two more days, approaching an area of potential support at an previous low, which gave the buyers a chance to test the resolve of the sellers.

"The S&P Index rallied for one day, so I placed a new sell order 2 points below the low of that day in case that was all the rally the Index could manage."

Source: Incredible Charts - www.incrediblecharts.com.au

"The Index did fall sharply the next day, so my additional sell order was filled, the Index fell again the next day, then rallied again. I placed another order to sell below the low of this one day rally and that order was filled the next day as the downtrend continued. 

Source: Incredible Charts - www.incrediblecharts.com.au

"The Index had another day down, then had a 1 day rally, so. I placed another sell order below the low of this reaction.

"The strong downtrend continued the next day as the buyers were overwhelmed by continued selling and my order was filled, giving me a total of 30 short positions in this fast moving downtrend.

Source: Incredible Charts - www.incrediblecharts.com.au

"Because I was confident the Index would reach 775 points, and it would probably do it in some sort of panic selloff, I started to leave my stop loss orders quite loose, because I didn't want to be stopped out of the trend prematurely. 

Source: Incredible Charts - www.incrediblecharts.com.au

"It was fortunate that I did this, because a strong rally took the price back up to 1040 - just below my stop loss level above a significant swing high of 1045 points. After this powerful rally, the downtrend resumed. 

"I didn't take any additional short positions here due to the strength of that big rally, which actually broke a minor swing high. As the Index turned down again, I placed my stop loss orders 5 points above the most recent swing high and waited to see if my forecast of 775 would indeed eventuate.

Source: Incredible Charts - www.incrediblecharts.com.au

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