Granville’s 8 Rules are a set of technical analysis guidelines developed by Joseph E. Granville, a pioneer in the field of market analysis. These rules are designed to help traders identify trends in the stock market and make informed trading decisions.
The eight rules are:
1. On-Balance Volume (OBV) should confirm price movements.
This means that if the price of a stock is going up, the OBV should also be going up, and vice versa. OBV is a momentum indicator that uses volume to predict price movements.
Also see: On-Balance Volume
2. Volume should confirm the trend.
This means that if the price of a stock is going up, the volume should also be increasing, and vice versa. A change in trend is likely to be confirmed by a change in volume.
Also see: Volume Analysis
3. Draw trendlines and/or price channels on price charts.
A trendline is a line that connects two or more price points and is used to identify the direction of the trend. A trendline should be drawn through the highest or lowest points in an uptrend or downtrend, respectively. A price channel is formed by drawing two parallel trendlines around the price action of a security to identify areas of support and resistance. The upper trendline of a channel represents resistance and the lower trendline of a channel represents support. The price channel can help traders identify potential buy and sell signals based on the price action within the channel. When the price breaks out of the channel, it can signal a potential trend reversal or continuation.
4. The trend is your friend.
This means that traders should always try to trade in the direction of the trend. In an uptrend, traders should look for opportunities to buy, and in a downtrend, they should look for opportunities to sell.
5. Do not fight the ticker tape.
This means that traders should not try to go against the prevailing market trend. If the market is going up, it is usually better to be long, and if the market is going down, it is usually better to be short.
6. Use relative strength analysis to identify the strongest stocks.
Relative strength compares the performance of one stock to another or to a benchmark index. Traders should look for stocks that are outperforming their peers or the market as a whole.
7. Use momentum indicators to confirm price trends.
Momentum indicators, such as the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD), can be used to confirm price trends and identify potential turning points.
8. Sell when buying demand is exhausted and buy when selling pressure is exhausted.
Traders should look for signs of buying or selling exhaustion, such as a decrease in volume or a decrease in momentum, and use these as opportunities to enter or exit trades.
Overall, Granville’s 8 Rules provide a useful framework for traders to analyze the stock market and make informed trading decisions based on technical analysis. However, it’s important to remember that technical analysis is just one tool among many, and traders should also consider fundamental factors and market sentiment when making trading decisions.