Let me share with you a trading secret that can make
you rich. This secret has been used for decades by some of the top
traders. You might wonder why these traders would be so secretive, and
not share their great knowledge with all of us. Well, to be honest with
you, they did share it with us. Many times they spoke about and wrote
about this trading rule.
W. D. Gann said "You can make a fortune by following this one rule alone."
Burton
Pugh called it "one of the most valuable of market habits and the
trader should follow and profit by this most dependable of all market
laws."
So, why doesn't everybody listen to these great sages of
Wall Street? To tell you the truth I don't know, maybe it's because
this trading rule is so simple that it gets overlooked. I find that
people often think that if something is this simple it couldn't
possibly work. Well, I have some advice for them. Don't over complicate
things, "KISS" (Keep It Simple Silly).
OK, so you want to know
what this great Stock Market secret is? It's the 50% Rule. Simply put,
a stock often retraces 50% of the previous price movement. This rule
works in an upward trending as well as a downward trending market.
Let's
imagine that ABC stock started its most recent run at $10 and advanced
to $20 before it began to pull back. A buy order would be put at $15
(50% of the previous move). A stop could then be placed just below the
62% retracement. Many of you will recognize these as Fibonacci
Retracement Lines, and you would be correct. Traders were using the 50%
rule before anybody ever associated it with Fibonacci. I'm not telling
you that price will always retrace back to the 50% mark. No, sometimes
price might not make it all the way to the 50% mark, and sometimes it
might move past it, somewhere between 50% and 62%. You get the picture.
This
rule works at amazing regularity. Just remember, that if a stock is in
a trading range, or currently in the process of forming a chart
pattern, the 50% rule will not apply.
Most charting services have
a Fibonacci Retracement Tool that draws the 38%, 50%, and 62% lines,
making it very easy for you to draw the lines without having to do any
figuring. Keep the 50% rule in mind. Check for it on historical charts.
You will be amazed how often it occurs and how well it works.
