Stocks & Commodities V16:3 (127-129): Combining Gann’s 50% Rule With VIDYA by Gerald Marisch
INDICATORS
Combining Gann’s
50% Rule With VIDYA
Sometimes, the most puzzling of trading questions can be
answered with the simplest of technical methods. Here, two
such methods are combined for trading: Tushar Chande’s
variable indexed dynamic average (VIDYA), a moving aver-
age that automatically adjusts to the current market’s vola-
tility, is used as a trend indicator, and a classic rule of thumb
from early-day trader W.D. Gann known as the 50% rule is
added.
by Gerald Marisch
ff-floor, intraday traders are
faced with decisions through-
out the trading day. Two of the
simpler yet most perplexing
O questions are, first: Which way
are prices trending? And sec-
ond: Is the reaction occurring
during a trend, part of the trend,
or the end of the trend? For the
answers to these questions and
many more, consider W.D.
Gann’s 50% rule, and a previously introduced trend monitor
called the VIDYA 21,5.
WILLIAM D. GANN
Numerous books and articles written have been written about
legendary technician William D. Gann. Conflicts about his
analytical abilities to project market prices range from retro-
spective interpretation of price trends to his use of complex
proprietary numbers and their relationship, astrology and
psychology to generate profits. The reported amount of
Gann’s profits range from a moderate income from selling his
systems to a net lifetime gain exceeding $50 million from
trading the markets.
Whatever the case, Gann’s 50% rule is irrefutable and has
withstood the test of time. The strictures of the rule, according to
W.D. Gann’s How to Make Profits in Commodities, are:
• Always remember that the 50% reaction or halfway point of
the range fluctuation of the extreme highest point is a point for
support on the downside or for meeting selling and resistance
on the way up. This is the balancing point, because it divides
the range of fluctuation into two equal parts.
• You can make a fortune by following this one rule alone. A
careful study and review of past movements in any commodity
will prove to you beyond doubt that this rule works and that you
Copyright (c) Technical Analysis Inc.
can make profits following it. You will always make the most
money following the main trend of the market — by waiting for
a definite indication of the trend before buying and selling.
• The next most important point for tops or bottoms is three-
fourths, or 75%. Doubling the 50%, or 100%, is the next most
important point.
VIDYA 21,5
The concept of using the variable indexed dynamic average
(VIDYA) 21,5 concept for intraday trading, originally devel-
oped by STOCKS & COMMODITIES Contributing Editor and
analyst Tushar Chande, was introduced in the January 1998
issue. The VIDYA 21,5 is an exponential moving average but
mathematically structured to be sensitive to a bull or bear
trend and compared with a nontrending horizontal channel.
When combined with Gann’s 50% rule, VIDYA 21,5 results in a
greater interpretation of the market’s language. Definitions and
rules are paramount to trading successfully. Here, then, are my
first set of rules for using the 50% rule and VIDYA 21,5:
1 In a bear market, closes will always be below the
VIDYA 21,5.
In a bull market, closes will always be above the
VIDYA 21,5.
In a nontrending (sideways) market, the VIDYA 21,5
will be horizontal.
When the trend is changing direction, the VIDYA 21,5
will turn at a sharp angle.
2 In a bear market (the main, or impulse, trend is
down), a price retracement will occur at the 50%
level of the prior bear trend.
Retracements will find resistance at the 50% level.
Retracements finding resistance at a level less than
50% of the prior bear impulse trend is a sign of a
continuing strong bear trend.
Retracements finding resistance at a level more than
50% of the prior bear impulse trend is a sign of a
slowing bear trend.
3 In a bull market (the main or impulse trend is up), a
price retracement will occur at the 50% level of the prior
bull trend.
Retracements will find support at the 50% level.
Retracements finding support at a level less than 50% of
the prior bull impulse trend is a sign of a continuing strong
bull trend.
Retracements finding support at a level more than 50%
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 Stocks & Commodities V16:3 (127-129): Combining Gann’s 50% Rule With VIDYA by Gerald Marisch

of the prior bull impulse trend is a

sign of a weakening bull trend.

These concepts are illustrated in Figures 1

and 2. Both are five-tick charts of the De-
cember 1997 Standard & Poor’s futures
contract for December 2, 1997, between
2:08 p.m. and 3:04 p.m. (CST). The highest
highs and lowest lows are connected with
trendlines. The beginning of impulse trends
are indicated with “B” and the point num-
ber. The ends of the impulse trends are
indicated with “E” and the point number.
The 50% retracements are designated
as “R” for resistance in bear trends or “S”
for support in bull trends and the point
number. Figure 1 illustrates eight impulse
trends — four bear and four bull — with
associated retracement trends, totaling 16
points. The impulse trends are identified by
support/resistance lines, alternating in style
for easier viewing. Only closing prices are
used and appear as dots.

MARKET BEHAVIOR AND

TWO TECHNIQUES
Let’s walk through the market’s price
behavior and see how the two techniques
work together. First, in Figure 1 from
point 1 to point 2, a bear impulse trend
occurs. Then at point 3, prices retrace a
distance of 50% of the previous bear im-
pulse trend. Next, from point 3 to point 4,
a second bear impulse trend occurs.
Point 5 occurs as prices retrace a dis-
tance of 50% of the previous bear impulse
trend. Then, from point 5 to point 6, a third
bear impulse trend occurs. Point 7 is an-
other example of prices retracing a dis-
tance of 50% of the previous bear impulse
trend. Point 7 to point 8 is a fourth bear
impulse trend. At point 9, something dif-
ferent occurs — prices, rather than retrac-
ing 50%, retrace approximately 75% of
the previous bear impulse trend.
Remember the rule that prices exceeding
a 50% retracement in a bear trend is a sign of
a slowing trend, and maybe the start of a bull
PATRICK KELLY

trend? Let’s take a look.

In retrospect, it can be seen that point 8 is pivotal. Retracement
points prior to point 8 (points 3, 5 and 7) find resistance at the
50% level. After point 8, retracement points (points 10, 12, 14
and 16) find support at 50% levels.
At point 10, prices retrace 50% of the previous impulse trend,
but point 8 to point 9 is a bull trend. Rather than finding resistance
at the 50% level, as at previous 50% points of 3, 5 and 7, prices
now find support.
From point 10 to point 11, a second bull impulse trend
occurs. At point 12, prices retrace a little past 50% of the
previous bull impulse trend. This is a sign of a weak bull trend.
From point 12 to point 13, a third bull impulse trend occurs,
although small. At point 14, prices retrace almost to 100% of
the prior bull impulse trend, but not to the lowest close at point

Copyright (c) Technical Analysis Inc. 2

 Stocks & Commodities V16:3 (127-129): Combining Gann’s 50% Rule With VIDYA by Gerald Marisch
TRADESTATION (OMEGA RESEARCH)
FIGURE 1: S&P 500 FIVE-TICK CLOSING PRICES. Four bull and four bear trends
are overlaid on the chart. Note how the retracements in the bear trend (R-B) line up
with 50% retracement levels. The support levels (S-B) also occur near 50%
retracement points.
12. This is important, indicating that prices may be in a small
consolidation from point 11 to point 14. From point 14 to
point 15, a fourth bull impulse trend occurs. Point 16 again
illustrates how prices retrace a distance of 50% of the prior
bull impulse trend.
Figure 2 is the same contract price range and time range as
Figure 1. Dots for closing prices have been replaced by tick
bars. VIDYA 21,5 (the smooth line) has been added.
Now, let’s combine Gann’s 50% rules previously listed,
and the VIDYA 21,5 for trading signals.
The first trade was a sell at point 1 at 976.25 when prices
touched the declining VIDYA 21,5. The retracement rules and
declining trend indicator indicated the market participant
should stay short. Then the shorts were covered shortly after
point 8, at 973.00, and at the same time, the market bought at
973.00 as the price crossed the flat VIDYA 21,5. Finally, a
market on close (MOC) order was placed at 3:04 p.m. and
thereby letting the trade go at 975.10. Allowing for slippage,
15% deducted for expenses and the new half rate for the
Standard & Poor’s 500 index, this simple strategy netted
approximately $1,140 per contract. Of course — and unfor-
tunately — not all days or fills will be this straightforward.
CONCLUSIONS
Could more profits have been made with more confidence if
more trading rules had been used? Sure. There are additional
indicators that can enhance a trader’s proficiency, but this is just
an example of combining two well-known, conservative and
proven studies to generate profits. Sometimes, the simplest
methods can work the best, and following this set of guidelines
will help you in your intraday trading:
1 When in an overall price trend, anticipate 50% retracement
trends to occur after impulse trends.
2 In an overall bear trend:
A Retracements should find resistance at the 50% level
Copyright (c) Technical Analysis Inc.
FIGURE 2: S&P 500 FIVE-TICK BARS. The same data is shown with the high, low
and closing prices filled in.
of the prior impulse trend.
B If retracements are less than 50%, it may be a sign of
a strengthening bear trend.
C If retracement are more than 50%, it may be a sign of
a slowing bear trend.
3 If the overall trend is a bull trend, retracements should find
support at the 50% level of the prior impulse trend:
A Retracement should find support at the 50% level of
the prior impulse trend.
B If retracements are less than 50%, it may be a sign of
a strengthening bull trend.
C If retracements are more than 50%, it may be a sign of
a weakening bull trend.
4 If 50% retracements are now finding support at 50%
retracements instead of resistance, the trend has changed
from bear to bull.
5 If 50% retracements are now finding resistance at 50%
retracements instead of support, the trend has changed
from bull to bear.
6 Look for 50% retracements — bull or bear — to find
support or resistance at the VIDYA 21,5 trend line.
Gerald Marisch is a private trader.
RELATED READING
Chande, Tushar [1995]. “Identifying powerful breakouts early,”
Technical Analysis of STOCKS & COMMODITIES, Volume 13:
October.
Gann, W.D. [1942]. How to Make Profits in Commodities,
Lambert-Gann Publishing Co., Pomeroy, WA.
Krausz, Robert [1998]. “The new Gann swing chartist,” Technical
Analysis of STOCKS & COMMODITIES, Volume 16: February.
Marisch, Gerald [1998]. “Breaking out of channels,” Technical
Analysis of STOCKS & COMMODITIES, Volume 16: January.
†See Traders’ Glossary for definition S&C
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