A Guide to Granville’s Rules and Signals. Technical analysis, market trends, and proven investment 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 buying and selling signals and is a well-known investment strategy.
Granville’s Rules state that the price of a stock or 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
Granville's Buy 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 FX technical analysis. Here's how the rules apply to FX trading:
Trading with Granville’s Rules
Granville's - buying opportunity on upswing
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- selling opportunities in downswing
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
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 stocks, FX, gold, oil, and other instruments. There are many 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.
