Gann's Law of Vibration

William Delbert Gann (1878 -1955) claimed he had discovered a repeating pattern of time and price that allowed him to predict market tops and bottoms. Collective behavior creates cycles through time, and that is what Mr. Gann called the “Law of Vibration”.

Vibration’s Theory in Financial Trading

If group behavior creates a repeating pattern, by calculating where the pattern appears next, you can make precise predictions regarding where the general market is heading. However, no one has ever precisely explained how Mr. Gann's law of vibration actually works. In this article, we are going to investigate the Vibration theory and its implications in financial trading.

From Pythagoras to Gann -The Ancient Origins of the Vibration’s theory

Vibration theory’s origins go back to the fifth century BC. The school of Pythagoras (570 BC –490 BC) thoroughly examined the natural frequencies of several fundamental systems (strings, vessels, etc.) and concluded that the natural vibration of a system is a pure property. A key feature that appears independently from any excitation. According to Pythagoreanism, everything in nature is connected. The movement of one thing generates harmonic associations (vibrations) to all other things in the system. The key to revealing the truth behind these natural associations is observation and mathematics.

Later, the legendary analyst William Delbert Gann developed the “Law of Vibration” and use it to predict the broad movements of equity and commodity markets. WD Gann was a very successful trader that used mathematics and astrology to investigate key patterns and time cycles due to certain market events.

Natural associations create patterns: “The pattern is said to emerge as a result of discontinuities in the perpetual processes of expansion and contraction within the cosmos. According to Mr. Gurdjieff, the discontinuities are a function of the Law of Seven, and the forces of expansion and contraction are a function of the Law of Three.” {Tony Plummer (2013)}

Read more: A Modern Trading Approach to the Law of Vibration (W.D. Gann)

High Trading Cost and Risk as your Worst Enemies

These two factors are responsible for traders who lose money in the long-run and they will be analyzed below.

The Trading Cost and Trading Risk Becomes Greater in Short Periods of Time

The Trading Cost when trading common stocks or other non-leveraged financial assets is limited. But when comes to derivatives, the trading cost can be really significant.

An Example on EUR/USD

Measuring the Cost in terms of the Spread Charged

The cost of derivative trading includes mainly the spread between the Ask/Bid and trading commissions based on volume. In our following analysis, we will assume the trading cost includes only the spread and no trading commissions.

When trading the most popular Forex pair, EUR/USD, the trading spread is between 0.5 and 4.0 pips maximum. You may find even narrower spreads but remember that we assumed no-trading commissions.

In other words, the spread on EUR/USD is from 0.00005 to 0.0004 of the actual value of the trade.

■ The spread counts about 0.00005 to 0.0004 of the value of the Trade

To show up our case we will assume an average spread of 1.5 pip on EURUSD without commissions or other fees charged.

A trader opens a Forex / CFD account by depositing $1,000.

Now if this trader opens a position of one micro lot ($1,000), he will pay:

■ $1,000 X 0.00015 = 15 cents USD

But no derivative trader opens an account worth $1,000 to open positions worth $1,000. So if we assume a deposit of $1,000 and that an average trader uses leverage 100:1 he will open an average position of 1 standard lot ($100,000) then the trading cost in a EURUSD trade of 1 lot will be:

■ $100,000 X 0.00015 = 15 USD

It seems like a reasonable cost given the profit potential. But the thing is that this is the cost of a single trade. Usually, day-traders and especially beginners are executing tens of trades each day. Let's assume 5 EURUSD trades per day.

■ 5 trades X 15 USD = 75 USD

In just a trading week (5 days) this trader will have pay:

■ 5 days X 75 USD = 375 USD

In overall, the trading cost for a trading week will count of 37.5% of the total value of this trader’s account.

It is obvious that even in the most competitive trading asset (EURUSD) the trading cost can be disastrous when executing a lot of trades. We assume no profits and no losses. Why? Because in the short-term you are exposed to what is called the “Market Noise”. Market noise cannot be forecasted and thus cannot be traded profitable, especially as concerns non-professional traders.

Read more: Market Noise and Earthquake Comparison

Jesse Livermore Trading Method

Jesse Livermore is a legendary stock-market trader who made a fortune by short-selling during the American stock market crashes of 1907 and 1929. Jesse Livermore became world-known through the book written by journalist Edwin Lefèvre “Reminiscences of a Stock Operator (1923)”.

Jesse Livermore Rules

Livermore used to say: "Whatever happens in the stock market today has happened before and will happen again”

Here are some key rules by Jesse Livermore:

1. Markets are never wrong opinions often are. Back your judgment and don't trust your opinion, until the action of the market itself confirms your opinion
2. Few people ever make money on tips, beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket
3. Money is made by sitting, not trading. It takes time to make money. Don't give me timing; give me time
4. Buy right, sit tight. Big movements take time to develop. Men who can both be right and sit tight are uncommon
5. Money cannot consistently be made by trading every day or every week during the year
6. Nothing new ever occurs in the business of speculating or investing in securities and commodities
7. Never average losses
8. The human side of every person is the greatest enemy of the average investor or speculator. Wishful thinking must be banished

Read more: Jesse Livermore Method and Rules

TOP STOCK-MARKET RULES

These are some rules for equity traders.

1^st Stock-Market Rule

“The Market is Unpredictable”

You can never predict the future, if you ever can, don’t waste your time investing in stocks and other financials. 

• Don't try to outsmart the market, instead, build several scenarios based on probabilities.

2^nd Stock-Market Rule

"Portfolio Diversification is Crucial"

Always diversify your portfolio, risk diversification is the only rule that applies in every single asset class.

• Diversify your holdings in terms of different asset classes, different assets, different countries, and different currencies.

3^rd Stock-Market Rule

"Smart-Money is Stronger in the Short-Term"

When you trade the market in short time periods (i.e. intraday), you compete with skilled professional traders and other market specialists (hedge funds, dealing rooms, etc). These professionals are called 'Smart Money'.

• Smart money is almost invisible and cannot be beaten by retail traders.

4^th Stock-Market Rule

“Buy The Rumor, Sell the Fact”

Buy the rumor and sell the fact is a tactic widely used by professional traders.

• Stock-market prices incorporate all rumors at early-stages.

Read more: Stock Market Rules