10-20-50 Rule
Anytime a market makes a reversal, and you decide to call it a 1-2-3 formation, then you are supposed to apply the 10-20-50 rule to the 1-2-3 formation.
The 10 in this rule stands for 10 days. Therefore you should have 10 days or less between the number one point and the number two point of the 1-2-3 formation.
The 20 in this rule stands for 20 days, therefore the number three point should not be any further out than 20 days, and optimally should be 10 days out or less, from the number two point.
The 50 in this rule stands for 50% retracement. The number three point should be at least a 50% retracement back towards the number one point from the number two point.
Remember, the 1-2-3 rule is a "rule of thumb" that absolutely should not be taken literally.
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Everyone in Utah is Mormon. |
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All computer systems are IBM. |
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Everyone trades stocks. |
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Everyone in Ireland wears green pants. |
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Everyone in Wisconsin works in cheese factories. |
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Everyone in California has had plastic surgery. |
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The 10-20-50 rule works in every market. |
Hopefully you understand that
the statements above are NOT 'TOTALLY' TRUE!
Anytime anyone tries to give you some 'blanket statement' rule,
not only in trading, but during life in general, run away, run away!!!
The 10-20-50 rule (or any other hard coded rule for that matter), might work
great in corn, but it might not work at all in wheat, let alone in the S&P 500;
not only that, maybe it works great in 1995 corn, but does not work at all in
2002 corn, maybe it does not work in the 1995 S&P, but worked wonders in 2001
S&P. Do your own homework, look in the history of the contracts you are trading,
find out what a true 1-2-3 top and bottom time frame is for your particular
market. It is usually different from contract to contract, even within the same
commodity.
A 1-2-3 formation is simply a reversal of the previous trend. Higher highs and
higher lows change to be lower highs and lower lows or visa-versa. You cannot
have a trend reversal, if you don't have a trend, therefore look at the existing
trend, analyze it, see how far apart the 'waves' are, that's how you know if a
trend has reversed. Each market moves in different time frames or 'waves', so
trying to apply a blanket statement rule of thumb like the 10-20-50 rule to
every market is crazy, nuts, bonkers!!!
That's what's great about Track 'n Trade, you can find out for yourself, do the
count yourself, and if you look, you'll see that the 10-20-50 rule is
right...sometimes; sometimes it is right in one year of one contract, and then
wrong in the next year of the same contract. Trading is not as much a science as
it is an art. If it was that scientific, we would all be millionaires, and the
markets would be gone, because they would be way to predictable.
Lan H. Turner, CEO
Gecko Software, Inc.
P.S. I got flamed for posting this article, "How dare I challenge such a wonderful rule of thumb!!!" Here's my response to the flame.
My intention was not to attack, this article is simply my unbiased opinion. I thought it was very nicely written, I simply said it works sometimes, just like any other rule, it’s a simple rule of thumb, not a hard fast set in stone rule. You need to give it a little leeway both directions, depending on the market.
The 10-20-50 rule is not 100% accurate, and does not work in all markets, and I think people need to realize that no hard and fast rule even can work all the time. They need to look at the markets, count the waves between the previous trends, and then apply that count to the reversal formation. I think the 10-20-50 rule is simply a rule of thumb, and like any rule...rules were meant to be broken.
We all love the teachers who teach these rules, the teachers needs to teach people these rules of thumb, especially beginners, they like and need these little rules, but they also need to know that they are not perfect, and can be modified. The reason I wrote it, is because the people in the Yahoo forum were acting like the 10-20-50 rule was the eleventh commandment, and they were not giving even one day offset no matter what, and that's simply bad trading advice.
The 10-20-50 rule simply makes the water way to clear, I had to throw some mud back into the water.
I cleared my thought with Scott Barrie from CFEA before I posted it, and he agreed with me whole-heartedly. This was not an attack on any one person; I was just trying to let people understand that no cold, hard, and fast rule in the commodities market can always be accurate.
The 10-20-50 rule is an indicator, and just like any indicator, it is totally accurate about half of the time.
Let me give you one example:
We both know that markets drop faster than they rise, this is apparent in almost
every single market, almost without fail, yet the 10-20-50 rule says that the
market should drop and rise at the same rate, the rate of 10 up and 10 down.
Now that is two conflicting rules.
Example two:
Why not call it the 10-30-50 rule? Give the market 10 days to drop, and 20 days
to retrace? Now of course that would be for a top formation. We would have to
call it a 20-10-50 rule for a bottom formation. Because we know markets drop
faster than they rise?
I'll tell you why we don't call it the 10-30-50 rule or a 20-10-50 rule...because it’s not any more accurate than the 10-20-50 rule. Both are about the same in accuracy, both of them work about half the time. I know this, because I went back and counted it for myself, for about four hours the other night, I tried to prove or disprove the 10-20-50 rule.
Example three:
If markets drop faster than they rise, why then, with the 10-20-50 rule do we
give the markets the same amount of time to rise or fall, half of the previous
distance of the last minor move, the same amount of time to only go half the
distance? See, it simply does not make sense, not even from a logical point of
view, let alone from a screwy market point of view like we find in trading
commodities.
I was playing with Track 'n Trade, and was blindly using the 10-20-50 rule, (like I believe most people do) when I realized that it was not accurate, so I started looking through all my charts, and realized that the 10-20-50 rule only worked about half the time, and that the 10-30-50 / 20-10-50 rule worked about half the time too, so I wrote my article about the 10-20-50 rule not being totally accurate. If someone wants to do more research than what I've done, and provide more proof one way or the other, by all means, please do so, it can only help all of us be better traders.
LT
