A Guide to Granville’s Rules and Signals. Technical analysis, market trends, and proven trading strategies.
What are Granville’s Rules?
Granville’s Rules were created by Joseph Granville, a renowned volume and price chart analyst in the United States. This method takes advantage of the relationship between prices and moving averages as the basis for potential buying and selling and is a well-known trading strategy.
Granville’s Rules state that the price of any financial instrument fluctuates in a certain way, and the moving average (MA) represents the direction of the trend, so when the price deviates from the trend (that is, from the MA), it is expected that, at some point, it may experience a mean reversion back to the MA. Therefore, when a deviation occurs, a significant buy or sell signal is triggered.
Granville’s Rules use the changes between the price and the moving averages, including the way they interact with each other, how prices break through the MAs, and the scope of their deviations, to propose eight different scenarios. These scenarios are the basis for entering and exiting the market:
Red line: moving average Black line: stock price movement
| Potential Buy signals | Conditions |
|---|---|
| Breakout | When the MA moves from a downward trend to a horizontal consolidation or rise, and the stock price breaks above the MA, it can be identified as a potential buy signal. |
| False Breakout | The stock price drops below the moving average but then returns to above the MA, and the MA still shows an upward trend, which can be identified as a potential buy signal. |
| Support | The stock price rises above the MA, then falls but it doesn’t move below the MA, and then rebounds and moves up again. This can be identified as a potential buy signal. |
| Bargain hunting | The stock price falls sharply to far below the MA, then rises and moves toward the MA. This can be identified as a potential buy signal. |
Granville's Buy Signal
| Potential Sell signals | Conditions |
|---|---|
| Fall below | When the MA shifts from an upward trend to a sideways market or a downward trend, and the stock price falls below the MA from top to bottom, it can be identified as a potential sell signal. |
| False Breakout | The stick price rebounds beyond the MA but then drops below it; the MA still shows a downward trend, which can be identified as a potential sell signal. |
| Resistance | The stock price continues to move below the MA and cannot break above it even if the stock rebounds; the MA acts as a resistance, which can be identified as a potential sell signal. |
| Reversal | The stock price rises sharply and deviates significantly above the MA, the stock price reverses and falls, bringing the stock price closer to the MA. This can be identified as a potential sell signal. |
Granville's Sell Signal
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.
The four key points of Granville’s Rules
- Traders may stay short when the MA is rising, but not go long when the MA is falling.
- The MA can act as support or resistance and experiment with upswings and downswings, creating a trend line for long- and short-term trading.
- Long and short positions follow the price trend. Once the long/short position is reversed, action is required in the opposite direction.
- The moving average’s golden cross and death cross intersect with price. Once the intersection occurs, it may lead to an upward or downward trend, offering opportunities to react to the trend..
The five limitations of Granville’s Rules
- As Granville’s Rules rely heavily on moving averages, there is a delay in the occurrence of signals.
- When prices move sideways, they will generate false signals.
- When choosing a MA with a shorter duration, such as a 5-day MA or a 10-day MA, there will be a smaller time gap but more false signals.
- When choosing a MA with a longer duration, such as a 120-day MA or 200-day MA, the resulting signal will be more effective, but there will be a delay. For example, the stock price moves up or down before the buy/sell signal appears.
- If a trader decides to hold a position for a long-term, they need to be aware of any finance charges/rollover fees they might incur over time as the position remains open.
As mentioned above, Granville’s Rules rely heavily on moving averages, the most frequently used tool in technical analysis. Here's how the rules apply to CFD trading:
Trading with Granville’s Rules
Granville's - potential buying opportunity on upswing. The information presented is historical information and past performance is not indicative of future performance.
Above, we have the daily CAD/JPY candle chart. The orange line is the 200-day MA. In the rising pattern above, investors are trading based on Granville’s Rules, buying at ①②③ and selling at ⑧.
OANDA Granville's- potential selling opportunities in downswing. The information presented is historical information and past performance is not indicative of future performance.
Above, we have the daily NZD/JPY candle chart. The orange line is the 200-day MA. In this falling pattern, investors are trading based on Granville’s Rules, selling at ⑤⑥⑦ and buying at ④.
Details of Granville's Rules
| Example | Content |
|---|---|
| Buy signal 1 / Sell signal 5 | Illustrating the example of potential buying at signal 1 and potential selling at signal 5 that appears when a trend changes (a new trend starts). |
| Buy signal 2 / Sell signal 6 | Illustrating the example of potential buying at signal 2 and potential selling at signal 6 that appears when the price moves against the MA, falling below (breakout) and returning to the trend. |
| Buy signal 3 / Sell signal 7 | Illustrating the example of potential buying at signal 3 and potential selling at signal 7 when the price gradually approaches the MA but does not break through it before returning to the trend. |
| Buy signal 4 / Sell signal 8 | Illustrating the example of potential buying at signal 4 and potential selling at signal 8 for trading at a level when the MA diverges sharply. |
OANDA Granville's- examples
Hopefully, you now have a better understanding of Granville’s Rules. As this method relies heavily on moving averages, it can be used with underlying instruments such as stocks, FX, gold, oil. There are many CFD trading opportunities and instruments available out there.
This article and its contents are intended for educational purposes only and should not be considered trading advice.
