A Guide to Granville’s Rules, Buy Signal 1, and Sell Signal 5. Technical analysis, market trends, and proven trading strategies
Trading Signals using Granville's Rules
Granville’s Rules have four buy-side trading signals and four sell-side trading signals, which show the relationship between the position of the moving average (200-day MA) and the price. These signals are usually illustrated using conceptual charts, but actual live charts should be used for technical analysis.
Granville's rules are a specific set of trading signals that incorporate the principle of mean reversion. However, similar to all technical tools, they should be utilised alongside other forms of analysis. Although moving averages are a main technical tool, they are a lagging indicator that follows price action. This approach also comes with challenges, such as determining the correct period for the MA settings, which is why traders must consider different types of tools alongside Granville's rules.
This article summarises the buy signal 1 and sell signal 5 that occur when a trend reaches a turning point (the start of a new trend).
Buy signal 1 and sell signal 5
Starting in September 2021, we will trace the daily candlestick chart of the EUR/USD to see the status of these signals and analyse the trend, the price range, and the period duration after the signals appear.
Buy signal 1 and sell signals 5 between March 2018 and September 2021. Source: TradingView.com. The information presented is historical information and past performance is not indicative of future performance.
Price movement following a signal in EURUSD chart
Buy signal 1 and sell signals 5 between April 2014 and October 2017. Source: TradingView.com. The information presented is historical information and past performance is not indicative of future performance.
Granville's Rules Trading Images Buy Signal 1 and Sell Signal 5
We employ buy signal 1 and sell signal 5 to assess trend initiation, aiming to capitalise on major price moves, typically longer term. However, instances may arise where the trend reverts to the moving average post-signal or false signals occur amid ambiguous market fluctuations and a lack of clear direction, necessitating strict risk management.
In addition, when trading on a daily candlestick chart, we should be careful when encountering ultra-long-term trades held for several years. In such cases, traders need to ensure they have enough margin on their account in case of an adverse price move, and be aware of finance charges/rollover fees they might incur over time as the position remains open. As for the swing or intraday trading strategies, traders may consider the 4-hour or the 1-hour candlestick charts.
Trading strategies
The effectiveness of buy signal 1 and sell signal 5 in capitalising on price differences varies based on market conditions but can bring benefits from price differences. It is important to note that closing positions when the trend changes direction is a strategy by itself; in some cases, it can protect a floating profit, or limit additional losses, but relying solely on buying at sell signal 5 or selling at buy signal 1 may not always be successful. Additionally, while the idea of avoiding profit-taking during the initial period is presented, it's crucial to recognise that market dynamics can shift, and prudent risk management may involve securing floating profits at opportune times rather than relying on prolonged price gaps.
Granville's Rules Trading Images Buy Signal 1 and Sell Signal 5-04
Buy signal 1 and sell signal 5 between March 2006 and August 2008. Source: TradingView.com. The information presented is historical information and past performance is not indicative of future performance.
Above, we see an example of using the EUR/USD daily chart to trade according to the rules above. Entering at buy signal 1 (March 2006) and selling at sell signal 5 (August 2008) results in a major price move of approximately 2800 pips.
Next, we will examine sell signal 5 and the price movement following that signal.
Sell signals 5 and Buy signal 1 between July 2007 and February 2012. Source: TradingView.com. The information presented is historical information and past performance is not indicative of future performance.
Above, we see an example of using the USD/JPY daily candlestick chart to trade according to the above rules. Entering to sell at sell signal 5 (July 2007) and closing the trade at buy signal 1 (February 2012) captures a major market move.
This article and its contents are intended for educational purposes only and should not be considered trading advice.
