TRUTH

OF
THE STOCK TAPE
A STUDY OF THE STOCK AND COMMODITY MARKETS
WITH CHARTS AND RULES FOR SUCCESSFUL
TRADING AND INVESTING

BY

WILLIAM D. GANN

IN FOUR BOOKS
EMBRACING
The Preparation and Knowledge
Required; Methods of Operating
And Determining Position of
Stocks and Commodities

FINANCIAL GUARDIAN PUBLISHING CO.

91 WALL STREET NEW YORK.

This E-Book is not to be sold.

It is a free educational service
in the public interest
published by

Gann Study Group

 BOOK IV

COMMODITIES
There is a principle which is a bar against all information,
which is proof against all argument, and which can not fail to keep
a man in everlasting ignorance! That principle is condemnation
before investigation. -- SPENCER.
_______

CHAPTER XXVII

HOW TO TRADE IN COTTON

The cotton market offers good opportunities every year

for making profits both as an investment and as a speculative
proposition. Trading in future options is just as legitimate
as buying and selling stocks. It is not necessary to buy the
spot cotton outright, carry it in the warehouses, pay insurance
and storage, for if spot cotton is going up or down, future
options will fluctuate more than the cash article, and there is
no expense in carrying futures outside of the margin require-
ments.

The course of cotton prices is based on supply and de-

mand, and it is much easier to form a correct judgment on
the cotton market than it is on the stock market, on account
of there being so many stocks and different groups of stocks
which cause a mixed trend, some stocks declining while others
advance. With cotton it is different. If one option goes
up, they all go up. You might be right on a certain group
of stocks and yet pick the laggard to buy, and not make any
money; but with cotton you could not miss it; if you were
right on the trend you would make money. A man who
trades in cotton with the proper capital and uses stop loss
orders to protect his capital and also to protect his profits
will be able to make more money than he will trading in
stocks, especially when the cotton market is active.

The great trouble with the people in the Southern states,

where cotton is grown, is that they are always bulls. They

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never see but one side of the market and are always holding
on and hoping for it to go higher, no matter how high the
price advances. For this reason, 90 per cent of them lose
money simply because they are unwilling to see both sides
of the market. They ignore the bear side and refuse to
sell short in a bear market. I have known many traders to
buy cotton when it was high and lose anywhere from
$1,ooo to $2,000 on 100 bales by simply sitting and
watching it decline day after day, and holding it for no other
reason than that they hoped it would go up. Remember my
rule -- When you have nothing else to hold on for but hope,
get out quick. Never trade without a reason. The time to
hold on is when the market is going in your favor and not
against you.

When cotton is at extreme high levels and starts down-

ward, it goes down fast and continues down for a long time,
as past records will show. In the spring of 1920, cotton
was selling around 38 to 37 cents per pound, and in Decem-
ber same year, it sold below 15 cents per pound. Now,
what chance did a man have who was long of the market
and held on and hoped for a rally? The decline continued,
subject to rallies, until it got below the 11-cent level in June,
1921. Of course, the same rule applies to a man who sells
short against the trend and holds on and hopes. Cotton
was selling around 13 cents per pound in the middle of
August, 1921. The advance started and in thirty days it
advanced to around 21 1/2 cents per pound. Therefore, the
only thing to do in trading is to limit losses and go with the
trend. It is easy enough to make up a loss of 20 or 30 points,
but it is hard to make back losses of 200 to 400 points. Let
your rule be: Cut short your losses and let your profits run.
But remember, profits must be followed up with a stop loss
order, because it is just as foolish, after you have large
profits, to let them get away from you, as it is to lose part
of your capital by not protecting it.

REPORTS, NEWS, RUMORS AND VIEWS

Learn to discount reports which come from the farmers.

They are honest, but they have cotton to sell and are always
154

hoping for higher prices. They go to the extreme either

way. If crops are bad, they exaggerate the damage. If
crops are good, they are likely to become too hopeful and
exaggerate the good condition. The man who produces the
cotton to sell and the spinner who buys it are diametrically
opposed to one another. Both are working for their own
interests and you can not blame them, but you must discount
their reports and opinions.

The tape tells you the consensus of opinion and reveals

the predominance of the opposing forces and shows the trend
according to supply and demand. Ignore the news, reports,
opinions and views of everyone if it disagrees with what the
chart and tape shows, for supply and demand must govern
in the end, and if the selling power is greater than the buying,
prices will decline, regardless of bad crop news or anything
else. On the other hand, if the demand, or buying power,
exceeds the selling, prices will advance regardless of good
crop news. Of course, the general trend of the market does
not continue for long contrary to natural conditions, but sup-
ply and demand govern the prices and the market discounts
future events. Therefore, before you act too strongly on
any good or bad news, be sure that your chart, which is but
the reading of the tape and the correct interpretation of it,
confirms the news and shows that it is yet to be discounted.

Do not try to trade too often. Jumping in and out of

the market confuses you; the more trades you make the more
chances you have for getting wrong, and increasing the per-
centage against you. You can always make profits if you
wait for the opportunities. If you make two or three con-
secutive trades and they go against you, and you have to take
losses, better quit for awhile and look on. Wait until your
judgment gets clear, and the market shows a definite trend.
You can always form a better judgment when you are out
of the market than when you are in it, because you are not
influenced by your hopes and fears.

It makes no difference whether you trade on the New

Orleans Cotton Exchange, N. Y. Cotton Exchange or in
Liverpool, the trend of the market is always the same, once
it shows conclusively that a move has started. Liverpool
may go contrary to New York for one day, but it seldom
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ever goes two. The same with New York or New Orleans.
They always run on a very close parallel.

AMOUNT OF CAPITAL REQUIRED

One of the most important things that traders overlook

is the amount of capital required to make a success trading
in cotton. A lot of people think that when cotton is around
the normal level, from 9 cents to 12 cents per pound, that
$200 or $300 is enough capital to use in trading in 100
bales. This is financial suicide, because if a man loses
20 or 30 points on the first trade, his capital is crippled so
that he cannot make a second trade. A man should go into
the cotton market the same as he goes into any other busi-
ness, -- to make a success and not a gambling proposition. If
you make speculation or investment a business, you probably
will be able to accumulate a fortune over a number of years,
but if you go into it to gamble and expect to make it all on
one deal, you will lose all your money and have nothing left
but hope.

When cotton is at an abnormal high level, as it has been

since 1915, selling between 15 cents and 40 cents per pound,
it requires a larger amount of capital because stop loss orders
will be caught more frequently and at the same time profits
will be much greater. I consider $2,000 the amount of
capital that should be used for trading in 100 bale lots.
Nothing less is safe. This money is not to be used to put
up on 100 bales and hold it if it starts going against you.
It is for the purpose of paying several small losses and still
have capital enough left to continue to trade until you hit it
right and begin to make big profits.

HOW STOP LOSS ORDERS SHOULD BE USED

In normal markets, when fluctuations are narrow, you

should use a stop loss order not more than 20 points away.
In very wild active markets, where fluctuations are wide, you
should use a stop loss order about 40 points away, but a risk
of $200 should be the maximum on any one deal. If
your capital is $2,000 and you make five trades and lose
half of your capital and then make one trade which shows
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a profit of 200 points, you would be even. Most people

trade the other way -- They take 20 to 40 points profit and
200 to 300 points losses. There is no chance of beating the
cotton market that way. Of course, before you make a trade,
you should try to determine the trend and be as near right
as possible, but if you see that you are wrong, there is one
sure way to play safe and that is get out at the market or
place a stop loss order for your protection which will auto-
matically put you out.

Once you make up your mind and place a stop loss order,
do not cancel it, or change it to where you have a greater
loss if it is caught. In 99 cases out of 100, you will be wrong
when you place yourself in a position to take a greater loss
than you first decided on. It may be well enough some times
to cancel orders for taking profits if the market is going your
way, but never cancel an order to stop a loss. The sooner
a loss is stopped the better both for your capital and for
your judgment. As long as you stay in the market and a
trade goes against you, your judgment gets worse all the
time; in fact, you have no judgment. It is simply a big hope
that the market will turn and go your way.

HOW TO PYRAMID

In rapid markets successful pyramiding can be carried

on. Of course, the condition of the market has to deter-
mine how close pyramids can be made safely. As a rule,
after you buy 100 bales, you should not buy the second lot
until the market has moved 6o points in your favor. Then
place a stop loss order on your 200 bales so that if the stop
is caught you will not lose as much money as your original
risk on the first 100 bales.

We will assume that on the first 100 bales, you place a

stop loss order 40 points away, which would be a loss of
$200. Now, when you buy or sell the second 100 bales,
place a stop loss order 40 points away on 200 bales. If the
stop is caught, you will lose 40 points on the last 100 bales,
but will make 20 on the first 100 bales, which places you in
a better position than if the first trade had gone against you.
If the market continues to move in your favor and your stop
 157

loss order is not caught, you can continue to buy or sell on

the way up or down, but dont forget that the more the
market moves in your favor, the nearer the end of the move
is over, and buying must not be increased near the top after
a long move, nor selling increased near the bottom after a
long decline.

STRADDLES OR HEDGING ON COTTON

Many cotton traders get the idea that they can sell one
option and buy another, thereby making a straddle which
will work closer together and show them a profit. In nine
cases out of ten, it works exactly opposite, and instead of a
profit the result is a big loss. If you cannot form a judgment
of the trend of the market, then do not try to play both
sides at the same time. Something always happens to upset
all calculations when traders figure out a dead sure cinch on
a straddle. As a trader once said to me, My broker recom-
mended something safe and sure -- a good straddle -- and I
got on for a joy ride and the straddle tore both my legs off.
This is the way most straddles work out.

Another great mistake that traders make is that when

they buy one option and it starts to go against them, they
refuse to see that they are wrong and accept a loss, but sell
another option to hedge. Then they are both long and short
of the market, and they have to make two guesses as to
where they will get out right. It can not be done. They
invariably close the trade that shows a profit and hold the
one that shows a loss. In this way, they undo the wrong
side of the hedge. A man can not have a clear judgment
trying to play two sides of the market at the same time. It
is bad enough playing one side. Therefore, keep out of
hedges and straddles; try to determine the trend and fol-
low it.
 CHAPTER XXVIII

PROPER WAY TO READ THE COTTON TAPE

The cotton market, as I stated before, is governed by

Supply and Demand. The only difference in reading the tape
on cotton and reading it on stocks is that the cotton tape
does not show the number of bales traded in on each sale.
This makes it a little difficult at times to determine the trend,
but while we do not know the amount of trading that is going
on, the fluctuations on the tape show very plainly whether
the volume is extra heavy or very small. The market does
not stand still on large buying or selling; it moves one
way or the other. Therefore the activity tells us whether
or not there is big business going on. When fluctuations are
very narrow and the market is dull and inactive, it shows that
the buying and selling is reduced to a small scale, and no
big move is indicated. Therefore, the only thing to do is to
watch and wait until you see activity start, and then go with it.

The best way to read the cotton tape is the same as stocks
-- stay away from it; keep up a chart and read the tape
quietly, away from the influence of the brokers office and
the gossip which is always prevalent there, that will mix your
judgment and invariably cause you to see things in the wrong
light.

The cotton tape fools you just as often as the stock tape,
because local weather condition, good or bad, will cause quick
declines or advances which in no way change the major trend.
Yet, while looking at the tape, it will appear extremely strong
or weak and at the time you are convinced and act upon it.
Afterwards you find that you have bought at the top or sold
at the bottom, and then when the main trend is resumed, you
are wrong, and of course, the tape whispers hope and you
hold on. If you are away from it, you will make your trades
according to your rule, place your stop loss orders, and will

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not be influenced by hope or fear. The same rule applies

in narrow markets as in markets of wide fluctuations. Dis-
tribution has to take place before any important decline and
time has to be allowed for accumulation before any big ad-
vance takes place.

DISTRIBUTION OR TOP ZONE

Chart No. 13 on cotton shows the October option from

November, 1919 to January, 1923, that is, all important
tops and bottoms, accumulation and distribution. Notice
that from December 6, 1919 to December 13, it declined
from 2970 to 2700. Then followed an advance up to 3140
on January 17, 1920; then a decline to 2760 on February 7.
The following week the market started to rally, after making
a higher bottom than the one in December. After that note
the progressive bottoms and tops. The advance continued,
every week making higher, until the week of April 17 it
advanced to 3715. The following week, ending April 24,
it advanced to 3725, which was the final high. It declined
quickly to 3430, but as distribution had not been completed,
it required time. The market fluctuated up and down over
a wide range, running up near the 37-cent level several
times. On May 22, it advanced to 3690; then declined to
3410, and on June 5 made the last rally to 3670. After
that it declined to 3170 on July 3; then rallied to 3530 on
July 24, but the decline on July 3, as you will see, had broken
under the distributing level, which indicated that the big
trend had turned down and that cotton was a short sale on
all rallies.

LIQUIDATION

A rapid decline followed, which carried prices down to

2550 on September 4, 1920, followed by a rally to 2960
on September 8. Note the following week was a narrow
range. Then the decline started again, and drastic liquida-
tion continued, carrying prices down to 1440 during the week
ending November 27. After this the market rallied to 1650;
declined to 1360 on January 1, 1921, rallied to 1640 Janu-
162

ary 22, which was slightly above the top on December 18,
1920, where it again met selling. Notice that fluctuations
were narrowing down, but bottoms were getting lower and
tops also decreasing. The decline continued to March 5,
and prices reached 1200. A slow rally followed, prices get-
ting back, as you will see, to the 14-cent level during May
and early June. Then followed another decline down to
1120, making final low on June 25.

ACCUMULATION

This was a sharp bottom and a quick rally followed,

which carried prices to 1320 on July 16, 1921; then a reac-
tion to 1190 on July 30; followed by a rally which carried
prices up to 1350 on August 6, for the first time since prices
broke under 30 cents per pound making a higher top after
an important new low level. Here the market rested for a
couple of weeks and then advanced above the August high.
This was the cue that the trend had changed and that it was
time to buy, because after several months of narrow fluctua-
tions at a low level, prices became very active on the advance.
Now when the 14-cent level was crossed, which was above
all of the tops made in May and June, it was another sure
indication that a big move was on, and this would be the
place to pyramid. Prices advanced rapidly in September, and
crossed the high levels around 1650 which were made in
December, 1920, and January, 1921. The advance was
rapid, and by September 10 had reached 2150. Then fol-
lowed a sharp reaction to around 1810. This is where your
stop loss order would have put you out when the reaction
started.

You can not expect a big move upward or downward to

start until after accumulation or distribution has taken place.
The market halted for a few days above the 18-cent level,
then rallied right back to 2150. This would have been the
place to go short with a stop loss order 30 to 40 points above
the old top. After this, prices again declined to around
1930 where they became dull and narrow. The advance
started again and on October 8, 1921, rallied, mak-
ing a slightly higher top at 2175. A decline started and
 163

continued downward till prices reached 1520 the week ending

November 19. Then a slow rally for several weeks, carry-
ing prices up to 1730 on January 7, 1922; followed by a
decline to 1510, making a double bottom against the low of
November 19, 1921. This would be your buying point with
a stop loss order 30 to 40 points under the previous bottom.

SECOND STAGE OF BULL MARKET

After this, a slow advance started. On February 25,

1922, prices were up to 1720, just under the high price made
in January. A reaction followed carrying prices to around
1640, where the market became very dull and narrow. In
this position you should wait and see whether prices broke
under the level made on the first reaction during the week
of March 4, or whether they advanced above the high price
made on January 7. During the week ending April 22, prices
crossed the high level made in January and March. This
showed that the trend had turned up, and as big accumulation
had taken place over a long period of time, you could expect
a big advance. The trend continued upward until June 24,
when prices reached 2290. Then followed a sharp decline
down to 2070; then a quick advance up to 2325. Here the
market became narrow and dull around the top levels and
you should have sold out and gone short.

RESISTANCE LEVEL

A decline followed to 2090 during the week of July 29,

1922; then an advance to 2290 the week of August 5, fol-
lowed by a sharp decline down to 2000; then a rally to 2290
on August 26, prices again failing to get above the high
levels made in the early part of July and August. This in-
dicated distribution around the 23-cent level, and you should
sell out and go short with stop 30 to 40 points above old
tops. A decline followed, carrying prices down to 2000
again during the week ending September 30. 2000 was the
level reached on August 12, and you should cover shorts and
wait, or you could buy with a stop loss order 30 to 40 points
under this level, which was not broken.
164

THIRD STAGE OF BULL MARKET

An advance started, the market moving up rapidly, carry-

ing prices above the 23-cent level, and over all of the tops
made in July and August. This was an indication that prices
were going higher. They reached 2400 the week of October
28, 1922. Then they declined to 2260; rallied to a new
high, 2415, but became narrow and dull and your stop loss
order would have been caught on a reaction. The next point
to watch was the last low level made on November 4. When
prices reached this level the week of December 9, you should
have bought with stop loss order 30 to 40 points lower and
your stop would not have been caught. After this, the ad-
vance was resumed, the market continuing to make higher
prices until the October option reached 2677 on January 24,
1923, the date of this writing. After distribution is com-
pleted at these high levels, a long decline will start which
will carry prices back to the 15-cent level or lower.

This chart is all you need to learn about reading the tape
on fluctuations in cotton, because the same principles are fol-
lowed whether the market is a narrow normal market or an
abnormal market selling at extremely high prices. I have
simply used this chart to illustrate the principle of trading.
You can apply it to any other option or any period in the
past or future, and will find the market working out the same.

It always pays to trade in the active options, and not

trade when they get too close to maturity. There is no use
taking chances on wild fluctuations and bad executions when
you get near delivery dates. Trade in the next option where
you can get good executions.
 CHAPTER XXIX

HOW TO DETERMINE A CHANGE IN TREND

When the market is fluctuating in a very narrow range,

you should keep up a chart of every 10-point move made
during the day. In this way you will be able to see whether
accumulation or distribution is taking place, and discern
where resistance levels are formed. When it breaks out into
new territory you can then follow the trend. In very active
markets, when prices are high and the range wide, fluctua-
tions of 10 points mean very little, and you should keep a
chart of every move of 30 to 40 points made during the
day. In this way you will be able to locate the resistance
levels and tell when it breaks out of the zone of accumulation
or distribution.

You should always keep a monthly, weekly, and daily

high and low chart on the active options you are trading in.
It will only require fifteen to twenty minutes each day to do
this and you will be well repaid for your trouble. The value
of charts is to determine where support is given and where
it is withdrawn; also where resistance is met on an advance
and where it is overcome, thus enabling you to buy and sell
and place a stop loss order as close as possible for your
protection.

After violent fluctuations up or down, the market nearly

always comes to a standstill before the next move starts.
Buying and selling becomes about equal and the market nar-
rows down, then activity starts one way or the other and
you should go with it. Of course, there are bound to be
false moves at times. After accumulation is shown some
news may develop which will cause a sharp drive down,
followed by a quick rebound. Then if prices go above
the levels previously established, you can consider that the move
has reversed and that prices will continue upward.

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Often when the first top is made, a lot of profit taking

will be encountered and a short interest will be built up.
Something will occur of a favorable nature to scare the shorts
and they will cover, forcing prices to a slightly higher level,
which weakens the technical position. Then a quick decline
will start, and if previous low levels are broken and the
market is very active on the decline, it will be an indication
that the trend has again turned down.

Do not try to trade every day. Watch and wait for

opportunities and once you see you are in right and with
the trend of the market, follow it up or down until you see
a sign that the trend has reversed. Do not close your trade
just because you have a profit, but always be convinced by
the position of the chart and the general condition, that the
trend has changed. Never buy after a lot of very bullish
news comes out, nor sell after an extremely bearish report.
Both good and bad news is nearly always discounted. Of
course, consider whether the trend is up or down when good
or bad news is made known.

Never try to start to pyramid after a long advance or

decline. The chances are against you. Begin pyramiding
when the trend first turns up or down after long moves.
When prices reach top or bottom, as a rule, a series of rapid
fluctuations take place; then the market gradually narrows
down and lays the foundation for another important move.

If prices are high in the spring of the year, after a very

short crop, be very careful about buying, as a decline may
start which will discount a new crop six months later. The
same applies to selling short in the spring following a very
large crop. If prices are low, they have already discounted
the old crop, but have yet to discount the future, which may
be more favorable or unfavorable. After everybody knows
about a large crop, or an extremely short one, it is too late
to trade on it to advantage, except on rare occasions, and
your chart will always show you when these changes are
taking place at high or low levels.

Do not sell cotton short just because it may be at a very

high price. Remember it can always go higher if conditions
are right. Neither buy it just because it is at a low level,
as it can always go lower. Never buck the trend, and do
 167

not try to guess the top or bottom. Wait until the chart
shows you that the trend has turned. You can always make
plenty of money buying or selling after the trend is well
defined. The man who is in too big a hurry will lose money
and miss opportunities just as often as the man who is too
slow to act.
 CHAPTER XXX

THE BOLL WEEVIL

This little pest began his ravages on cotton in Texas

about twenty years ago. He has grown gradually worse,
working further north every year until he finally crossed the
Mississippi, doing great damage in the Southern cotton-grow-
ing states. Man has used all of his resources at hand to
destroy this little monster and at the present writing every-
one seems to think that the boll weevil is unconquerable. It
reminds me of 1893, when cotton was selling at 4 cents per
pound and people were disgusted and leaving their farms.
Uncle Henry said Things are so bad that something has
to be done. You cant beat that old head of a man for
figuring out things. Of course, after fields were abandoned
and people went to the saw-mills to work, crops decreased
and prices went up. When conditions go to the extreme one
way or the other, something always happens and men get
busy, start thinking, and figure out a way to bring about a
change.

In 1917, when the English and French had their backs

to the wall, and Germany was driving them rapidly back,
the time had come when something must be done, and it was
Uncle Sams boys that turned the tide and saved the day.
The American people, while extravagant, are resourceful in
many ways, and every age produces its genius. Whenever
we reach extremes and there is a great demand for brains,
they are always forthcoming. Millions of dollars have been
raised recently to solve the problem and exterminate the boll
weevil and there is no doubt but that the man of the hour,
some American genius, will appear with a new invention or
destructive poison, which will spell doom to the little boll
weevil. Then the bulls who were talking and hoping for
40 cents and 50 cents per pound on cotton, like the boll

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weevil, will pass away and the bears will again reign supreme
with cotton back in the teens.

Cotton has held at high levels since 1915, when the

advance started from 7 cents per pound. I remember well
in the Fall of 1914 when the South was in deplorable con-
dition, and they were urging everyone to buy a bale. Cot-
ton could only be sold for about $30 per bale, but to save
the South, people were urged to buy it at $50 per bale.
I recall, one night I was in the McAlpin Hotel, and in the
lobby there was a bale of cotton with a big sign on it: Buy
a bale and help save the South. This was the extreme of
over-production -- big supply and small demand; of course,
helped by the outbreak of the war, which temporarily
stopped European buying.

With cotton around 29 cents a pound, and having been

higher for many years, people are convinced that the boll
weevil is the Kaiser of the hour, and that cotton can never
be grown again in sufficient quantities to supply the demand.
But a change will come, and a supply in excess of the demand
will be produced. Why? Because there is big money in
growing cotton at 25 cents per pound. People will always
go into a business where money can be made, and over-
production is sure to come. It is the other extreme which
must follow the present conditions of small supply and large
demand. I have no hesitancy in predicting that a large crop
will be grown in 1923 and that before the spring of 1924
cotton will sell at the 15-cent level and in a few years will
again be below 10 cents per pound.

When extremes occur and everybody is radically bearish

and can see no hope for prices ever advancing, or when prices
are abnormally high and everybody believes that conditions
are such that there is no hope for prices ever going down,
that is the time to go against human judgment and follow the
tape and charts, for they will point to the correct course of
prices according to the natural law of supply and demand.
 CHAPTER XXXI

WHEAT AND CORN TRADING

The Wheat and Corn markets, like Cotton, are easier

to follow than stocks, as I have explained before, because
they are less confusing. Once you determine the trend, all
options move with it. If you buy or sell and are correct on
the trend, you will make profits; while in trading in stocks,
you might be correct on the trend of rails, for instance, but
if you picked the laggard stocks to buy or sell, you would
make very little money or might even have a loss, although
you were right on the trend. This can never happen when
trading in grain. Therefore, it is well to make a careful
study of the commodity market, as it offers several oppor-
tunities every year for making substantial profits when the
seasonal moves take place.

ABNORMAL MARKETS

Remember that abnormal markets, with wide fluctua-

tions, only occur years apart. Therefore you must not expect
unreasonable profits in normal times. During the past seven
years, or since the war broke out, we have had abnormal
markets, and Wheat and Corn have made a wide range of
fluctuations, much greater than can ever be expected in
normal times. Many traders miss opportunities for fair
profits at the present time because they are looking and hop-
ing for war profits. There is no reason or sound basis for it.
They are simply gambling on hope.

The price of Wheat, Corn and Oats is to a great extent

determined by the purchasing power of the dollar. The
farmer could make more money in 1895 and 1896 growing
Wheat and selling it at 6o cents per bushel, than he can
selling it today at $1.00 per bushel, because the purchasing

170
 171

power of the dollar has decreased. Labor and land values

have increased. When these conditions change and farm
labor is again back to normal, Wheat and Corn, as a natural
consequence, will seek lower levels. All of these factors
which govern natural conditions must be considered in judg-
ing the trend of a market.

CAPITAL REQUIRED

The amount of capital depends upon whether Wheat is

in a narrow range in a normal year or making wide fluctua-
tions in an abnormal year. I consider that at least $2,000
should be used under any condition for trading in 5,000-
bushel lots. Then, if you limit your losses to 2 cents to 3
cents per bushel, you can make enough trades on your capital
to continue until your profits exceed your losses.

Suppose you use a stop loss order about 4 points away,

which would mean a loss of $200 on each 5,000-bushel
lot. This would enable you to make ten trades on your
capital. If you made five trades and they all showed losses,
you would still have plenty of margin to make another trade,
and if you were successful in working with the trend, two
trades that are right should wipe out five losses.

In a normal market you should use about $1,000 for

each 5,000 bushels of Corn that you trade in. Losses should
be limited to about 2 cents per bushel and stop loss orders
should never be more than 3 cents per bushel away. It is
not safe to risk more than 3 cents on any one trade. If you
are wrong, you should get out and wait.

STOP LOSS ORDER FOR PROTECTION

In trading in Wheat or Corn, stop loss orders should

always be used on every trade. The man who trades without
a stop loss order will sooner or later lose all his money. As
a rule, it never pays to risk more than 2 cents to 3 cents
per bushel on any one trade, and even in abnormal wild
markets not more than 5 cents per bushel. If you can not
guess the top or bottom within 5 cents per bushel, you are
wrong and should get out and wait for a change in trend.
172

Never buck the trend, because your stop loss orders will
be caught more often. In a bull market, always buy on a
reaction; in a bear market, sell on rallies. Do not try to
guess when the market has reached top or bottom, but wait
until the tape shows it. Give the market time, and supply
and demand will tell you when the trend has definitely
changed.

PYRAMIDING

In active markets, you can pyramid. The distance be-

tween your trades in pyramiding depends, of course, upon
the market. In a narrow market, you should not buy or sell
a second lot until after the first trade has moved 4 cents to
5 cents in your favor. In markets like we had during the
war, you can pyramid about every 7 cents to 10 cents per
bushel up or down. In normal markets, when Wheat moves
10 cents to 12 cents per bushel, you can always expect a
reverse move of from 3 cents to 5 cents per bushel. There-
fore, you have to be careful about buying or selling on the
bottom or top of a 10-cent move.

Once the market gets away from the accumulation period

and the trend is well defined up or down, reactions are very
small. While accumulation or distribution is taking place,
you should trade for small scalping profits, and never attempt
to start to pyramid. Wait until the accumulation or the
distribution zones are cleared before buying or selling a
second lot.
 CHAPTER XXXII

JUDGING ACCUMULATION AND DISTRIBU-

TION ZONES

The same rules that apply to stocks and cotton apply to

grain. Before any move of great importance or of long
duration takes place, time is required for accumulation or
distribution. In an active option, you should keep up a daily
high and low chart, a weekly, and a monthly chart. The
daily chart will enable you to tell when the minor moves
start, which only last for a few days; while the weekly and
monthly charts will enable you to determine when there is a
change in the major trend, and thus you can buy or sell in
time to catch the big moves.

MONTHLY RANGE OF WHEAT PRICES

Supply and demand govern the course of commodity

prices, but the tape, or a chart, which reveals the concen-
trated buying or selling power, will show which way the main
trend is moving.

In 1894 and 1895 Wheat sold at 50 cents per bushel,

which was the lowest since the Civil War. Prices did not
advance rapidly but held at low levels for several years.
Note Chart No. 14 from 1895 to 1898. The bottom on
May Wheat was made at 56 cents in December, 1895; then
rallied to 68 cents in February, March and April, 1896;
declined to 56 cents in May, 1896, the same level made in
December, 1895. After that, prices crossed the 68-cent
level, which was above the distribution zone, and advanced
to 85 cents, where you will notice they made the same level
of tops for four months. Then followed a decline to 64
cents in April, 1897. After this, the advance started, which
carried prices above 85 cents, the highest they had been for
several years. Prices reached $1.00 per bushel in August,

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 177

1897; then reacted to 88 cents, fluctuating in a narrow range

between 88 cents and 95 cents for four months. In Decem-
ber, 1897, prices advanced to 98 cents which was above the
high level for the past four months.

Remember we have stated that before any big advance

or decline takes place, there must be a long period of time
for accumulation or distribution before the move starts.
From August, 1897, until February, 1898, accumulation had
taken place at a level above the high prices for several years
past. In other words, prices were maintained at a level
which was really a new high level of values, for a period
of seven months, and once the trend turned and advanced
above $1.00, it continued up to 1.09, showing a big move
was on. During the month of March, 1898, trading was
in a narrow range between 1.07 and 1.02 for the May
Option, but every indication showed that the trend was up.
Then the big advance started which carried May Wheat to
1.85 in May, 1898. This was the Leiter Corner. Mr.
Leiter had accumulated a large line of Wheat but was unable
to sustain prices at a high level, with the result that the
Corner collapsed and Wheat immediately broke back below
$1.00 per bushel.

In September, 1898, notice that May Wheat again de-

clined to around 62 cents per bushel. It held for three
months around this level and in January, 1899, advanced to
79 cents. After that the market was a narrow, normal affair
and prices again advanced to around 79 cents in July and
September, 1899; then declined to 64 cents in March, April
and May, 1900, where you can see that the fluctuations nar-
rowed down to 3 or 4 cents per month.

SWING CHART

After that followed a long period of narrow fluctuations,

but you will note from Chart No. 15, which shows only the
big swings -- major tops and bottoms -- that from the early
part of 1895 prices continued to work higher every year;
that is, making a slightly higher bottom every time, until the
war broke out in 1914, which again carried prices to ab-
normal high levels, reaching 3.25 in May, 1917.
 179

Notice the top in the fall of 1904 and the early part of
1905, when Wheat reached 1.20, which was the highest price
since the Leiter Corner. Note that distribution took place
between 1.08 and 1.20, and that when prices broke below
this level, they rapidly declined, reaching 82 cents in June,
1905. This is what always follows a long period of accumu-
lation or distribution. Once prices break out of the accumu-
lation or distribution zone, a rapid move follows.

Note the bottom made between March, 1906, and April,

1907 -- a period of twelve months in a very narrow range.
In September, 1906, prices declined to 75 cents and never
rallied above 81 cents until May, 1907, a period of nine
months of accumulation in a very narrow range. In May,
1907, when prices advanced to 82 cents they were out of the
accumulation zone and immediately moved up rapidly to
$1.00 in May, and on the Green Bug scare in October, 1907,
Wheat sold at 1.12.

Note on Chart No. 15 that the low price on Wheat in

April, 1911, was 84 cents and that it advanced to 1.19 in
May, 1912. Then followed a long period of accumulation
in 1913 and 1914. In June and July, 1914, prices were
again down to 84 cents, the last low level of 1911. Here
was a period from October, 1912, to July, 1914, when prices
held in a range of 6 to 10 cents per bushel most of the time,
which plainly showed another period of big accumulation the
same as was shown in 1906 and 1907.

The war broke out the latter part of July and the advance
started. When prices crossed the accumulation level of $1.00
it plainly indicated a big advance. Despite the fact that this
country had a large crop and enormous surplus, prices ad-
vanced to 1.32 in September, 1914. Then reacted to 1.11
and after several months of accumulation, advanced to 1.67
in February, 1915, at which level, you can see, they held for
about four months while distribution was taking place. Prices
declined to 93 cents in September, 1915; advanced to 1.38
in January, 1916; declined to 1.04 in May, 1916.

After this, the scarcity of Wheat in Europe and the

enormous buying by foreign countries, carried prices to 3.25
in May, 1917, when the Government stopped trading in
Futures and fixed the price of Cash Wheat at $2.50 per
180

bushel. Trading started again in July, 1920. The Decem-

ber option opened at 2.75. Prices continued downward until
April, 1921, when the May option reached 1.20. Then
followed a squeeze during May, 1921, which carried the
May option up to 1.85. In November, 1921, the price again
declined to 1.04, which was the last low level reached in
May, 1916.

Then followed several months of accumulation in a nar-

row range, as you can see from the chart, and in February,
1922, May Wheat advanced to 1.49 7/8. You can see that
during the months of February, March and April it advanced
to around this same level, but failed to exceed the top made
in February. During the early days of May, 1922, the
May option was selling at 1.47, and everybody was bullish
and hoping for $2.00 Wheat, but the chart, which is a record
of the tape and shows the balance of supply and demand,
plainly indicated that somebody had been supplying Wheat
between 1.44 and 1.48 for nearly four months.

The decline in May, 1922, was rapid, carrying prices

down to 1.16. Wheat continued to slowly work lower, and
the May option declined to 1.05 in August, 1922. It re-
mained between 1.12 and 1.o6 during August, September,
and October; then crossed this level and advanced to 1.26 3/4
in December, 1922. Note that the last low level, 1.04, was
made in May, 1916, and again the same level in November,
1921, and in August, 1922, 1.05, which was practically the
same level. The next time that Wheat declines to 1.04 for
the May option, it will indicate lower prices and will prob-
ably continue down to around 93 cents to 90 cents per bushel.
Should it cross the last level, 126 3/4, made in December,
1922, it will then be an indication for higher prices.

Make up a chart on any option of Wheat, Corn, Oats

or Barley, and judge it in the same way that I have explained
and you will be able to determine the zones of accumulation
and distribution. When once prices break out of these zones,
you should follow the trend until it changes again. Never
trade without a reason. Do not sell because prices are high
or buy because they are low. Wait until you see an indication
that the trend is plainly indicated; then go with it.
 181

WEEKLY CHART

Wheat and Corn make both sharp and flat tops and
bottoms. Chart No. 16 a shows weekly high and low on
May Wheat. Note on April 16, 1921, May Wheat declined
to 1.19; rallied to around 1.32, holding two weeks in a
narrow range; then made a rapid advance to 1.85 at the end
of May. This was a straight run-up from a sharp bottom
in which only two or three weeks were used for accumulation;
then a rapid advance on short covering to a new high level.

Note the weekly chart from October, 1921, to January,

1922. You will see that over 14 weeks of accumulation was
plainly shown and that prices never got as low as 1.03 1/2,
the level reached on November 5, 1921. The fact that they
held for a long time without going lower showed accumula-
tion, but if you waited until you had a plain indication, when
prices reached 1.20, which was above the accumulation zone,
you would have caught a fast advance which carried prices
up 28 cents per bushel in four weeks.

After prices reached 1.49 7/8 on February 27, 1922, notice

a sharp decline to 1.30 took place. Prices held for four or
five weeks in a narrow range, reaching the lowest level,
128 1/2, around April 1 to 8; then advanced again to 1.49.
Here they halted, failing to cross the high price of February
and for five weeks distribution was going on, giving you
plenty of time to sell out and go short with a stop loss order
2 to 3 cents above the high price made in February and the
latter part of April.

After this, a rapid decline followed in May and prices

worked slowly lower until the May option reached 1.04 1/2
in August and September, 1922. Here you find another
level in a narrow range with five or six weeks of accumula-
tion. During the week ended September 23, prices advanced
above the accumulation level and showed that the trend had
turned up. They reacted after that, but continued to work
higher until they reached 1.26 3/4 in December, 1922, and
here is where the daily chart helps us to get out near the top.
 183

DAILY CHART

I have shown on Chart No. 16b daily high and low from
December 13 to 29, 1922. Note that on December 20
prices reached 126 1/4; on December 22, 1.26 1/2; on Decem-
ber 27, 1.26 3/4 and on December 28, the high was 1.26 1/2,
from which the decline started. The high price on December
18 was 1.25 1/2 and for ten days prices failed to gain more
than 1 cent per bushel, which showed that a level had been
reached where supply was in excess of demand and after this
period of time when prices broke back below 1.25, which
was under the distribution zone on the daily chart, it was an
indication to sell out and go short. Thus you see that the
daily chart will help to give you a minor change and get you
in or out close to tops and bottoms before the weekly and
monthly charts show a change in the major trend. But the
daily chart will often fool you, as the time period is short
and many false moves occur which are the reverse of the
main trend and do not in any way change it.

DETERMINING CHANGE IN TREND

By study and experience and by considering the activity

of the market, you will often be able to determine very
quickly an important change in trend. Of course, there is
no way of knowing the exact amount of Wheat or Corn
traded in daily; therefore the only way to judge when there
is a large volume of business, is by the rapidity of the fluctua-
tions. For instance:

Suppose May Wheat trades between 1.24 and 1.26 dur-

ing the day, but fluctuates between the high and low price
five or six times; that is, moving up or down over the same
range. Then we would conclude that there was a large
volume of business being transacted and that somebody was
supplying large quantities of Wheat around 1.26 and buying
around 1.24. Now, if it declines the next day below 1.24,
it would be an indication that support had been withdrawn,
or if it advances above 1.26, it would be an indication that
the supply of Wheat at that level had been absorbed and that
prices are going higher. But suppose the same day Wheat
184

trades between 1.24 and 1.26, it simply opens at 1.24 and

advances to 1.26 without making any reverse moves up or
down. Then we would conclude that the volume of trading
was not large enough to indicate that it was getting ready
for any immediate change in trend.

SUPPLY AND DEMAND

When a market starts to advance, it continues upward

until it reaches a level where supply and demand are about
equal and prices come to a standstill. Then supply increases
until it exceeds demand, and prices start to decline.

In a long decline or a long advance, a level is reached

where the supply is absorbed and prices go on to the next
level, where they meet another large supply and absorb it,
and finally to a level where the supply is so much greater
than the demand that distribution takes place and prices start
on a long trend down. This is why many weeks and some-
times several months are required at bottom or top to com-
plete accumulation or distribution before a big move starts.

People who buy or sell the first or second time that the
market halts after the trend turns, invariably lose money
because it is simply a halting period to absorb offerings or
to supply a demand at that level, after which the main trend
moves on to the next level. For this reason, it does not pay
to buck the trend -- always go with it. If you trade against
the trend for a quick turn and get a small profit, accept it;
do not expect too much. At the same time, protect your
trade with a stop loss order and do not let it run against you
when you are bucking the trend.
 SELECTING A BROKER

Last, but not least of all, selecting a reliable broker is

most important. Millions and millions of dollars have been
lost during the last few years through failures of unreliable
brokers. Therefore, it is just as important to know that
your money is safe and that you will get your capital and
profits if you make them, as it is to know when to buy and
sell.

Make the proper investigation and be sure your broker

is safe, not only as to his financial standing, but also try to
ascertain whether he or his firm speculates. I do not consider
any broker safe who speculates or permits others to speculate
on a credit with the firm or customers money.

I do not advise trading at all with brokers who are not

members of the New York Stock Exchange, New York Cot-
ton Exchange, or Chicago Board of Trade. There are a
few houses who are members of other exchanges that are
honest and reliable. Therefore, investigate the house before
you open an account.
_______

I have written what I believe is required for your success.

It is practical and based on the result of my years of labor
and experience. Read this book over several times, for each
time you will learn something new and get new ideas of your
own which will benefit you. If you will follow the instruc-
tions carefully and trade conservatively, never buying or
selling a stock without a reason nor being in too big a hurry
to get in or out, I feel sure that you will make a success and
after a few years will have cause to thank me for starting
you on the right road to Successful Speculation and Invest-
ment.

W. D. GANN.

FINIS

185