Granville’s Rules Trading: Buy Signal 2 and Sell Signal 6 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 candlestick live charts should be considered for a complete technical analysis process.

This article introduces buy signal 2 and sell signal 6, which appear when the price moves away from the moving average, falls below the MA (breaks out), and then returns to the trend.

Let's look at buy signal 2. First, we’ll introduce the features of the price movement after the signal appears.

Above, we can see the GBP/JPY candlestick chart, with buy signal 2 appearing four times. First, after signal A appears, the price moves up, but the action is not sustained. The trend falls to the same extent as the previous rise, returning to the MA level again. After signals B and D appear, the trend surges and rises significantly without immediate reversal or decline.

However, the price barely rises after signal C appears and falls below the MA; this is known as a false signal. In this example, we notice that price was unable to move higher as the MA acted as intermediate resistance, keeping the uptrend on hold temporarily.

Let’s look at sell signal 6 and the price movement after it appears.

Above, we can see the GBP/USD daily candlestick chart, with sell signal 6 appearing three times.

After signals E and F appear, the price moves down but then returns to the MA. A very different movement follows signal G. The price does not fully return to the MA after falling, attempts to reach the MA but experiences a shortfall, and then moves down again after consolidation. This example also shows the MA acted as resistance and price was unable to break above it.

Buy signal 2 and sell signal 6 indicate that a return to the original trend will follow a low or a rebound. Although the signal is expected to follow the original trend, it may last for some time. The price can return to the MA or become a standard false signal, which requires extra attention and the application of risk management tools.

Let’s look at a simple trading strategy rule using buy signal 2: enter when the price crosses the MA upwards and close at the recent high.

The idea behind trading buy signal 2 is the attempt to fade the falling price action. In other words, the fact that the price broke below the MA and reversed back up above it, with the MA acting as a support level, suggests that the downward move was due to volatility, and a continuation of the uptrend may materialise. Traders have multiple options to protect their trades, for example, from a technical perspective, stop-loss orders can be placed below the MA or below the swing low (The lowest point where price is reached below the MA). It is also essential to consider all other factors when deciding on a stop loss level.

Points A, B, and C on the above chart are examples of instances where price briefly broke below the MA, however, it reversed afterwards, finding support above the MA, which was followed by a strong price move to the upside.

Now, let’s look at the trading strategy of sell signal 6.

The idea behind trading sell signal 6 is also an attempt to fade the price move, however, in the opposite direction.

This time, the price is moving in a downward direction, and succeeds to temporarily move higher above the MA, however, the move doesn't last, and the downward trend resumes. Points D and E on the above chart reflect how price briefly broke above the MA, however, the price fell back down with MA acting as a resistance level.

Traders have multiple options to protect their trades, for example, from a technical perspective, stop-loss orders can be placed above the MA or above the swing high (The highest point where price reached above the MA). It is also essential to consider all other factors when deciding on a stop loss level.