Granville’s Rules Trading: Buy Signal 4 and Sell Signal 8 Explained

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.

Granville’s Rules have four buy signals and four sell signals, which show the relationship between the position of the moving average (200-day MA) and the price. These signals are usually explained using conceptual charts, but actual candlestick live charts, like the ones used in technical analysis, should be considered here. This article introduces buy signal 4 and sell signal 8 for trading at a level that deviates significantly from the moving average.

Above, we see the EUR/JPY daily candlestick chart, with buy signal 4 appearing twice. After signal A appeared, the price moved higher, broke above the MA, however, shortly after, it turned out to be a false breakout, the price reversed falling below the MA again. After that, it moved upward again and finally returned to the moving average. However, after signal B appeared, the price rose to the MA, broke through, and continued to move upwards. As a result, the downtrend shifted to a strong uptrend.

One feature of this price movement is that when a trend is ongoing, it may change at any stage or time. Let’s look at sell signal 8 and the price movement after sell signal 8 appears.

Above, we see the EUR/USD daily candlestick chart, with sell signal 8 appearing twice. After signal C appeared, the price attempted to return to the MA several times, however, a shortfall took place, and price resumed its uptrend, and the deviation increased again. In contrast, signal D was immediately followed by a downtrend, towards the moving average. This was like the situation after signal C appeared, where the price did not return to the MA and the price deviation increased further, requiring extra attention and applying strict risk management rules.

Buy signal 4 and sell signal 8 are trading signals where the price returns to the MA after deviating significantly away from it. Such trades are contrary to the general trend, so it is difficult to determine when to enter the market.

In addition, after the signal appears, the trend may not return to the moving average and it is possible that the price resumes its original trend. If you trade with buy signal 4 and sell signal 8, you should manage your intraday trading cautiously.

Here are some trading strategies to use with buy signal 4. In this example, we will use the OANDA_Multi_MA_Deviation indicator as a separate tool to measure how far price has deviated from the MA. The average candle is used to determine the entry point. It should be noted that a significant deviation from the MA means that the trend is strong and likely to continue. Traders need to implement strict risk management rules, have an exit strategy by placing stop loss orders and strictly observe intraday trading rules.

When trading at A and B, where buy signal 4 appears, Granville's approach suggests that the price deviation from its MA has exceeded its historical levels and may be due for a reversal back towards the average. In the case of A, it was a false signal, price dropped further and the deviation continued to exceed its prior figures. However, at point B, the deviation reached a new extreme and price moved higher back towards the MA.

Now, let’s analyse the trading strategy of sell signal 8.

A similar example to what we saw on the buy signal, but in the opposite direction. At point C, deviation reached a new peak, suggesting that price may fall back to the MA, however, it turned out to be a false signal as price resumed its uptrend. In the case of D, the signal worked and the price dropped back to its MA.