A ship without a trim tab capsizes in the first swell. A trader without position sizing blows up in the first losing streak. Gann understood this before modern portfolio theory existed. His risk rules are not suggestions. They are survival equipment.
Whatever amount of capital you use to trade with, follow this rule: Divide your capital into 10 equal parts and never risk more than 10% of your capital on any one trade.
The 10% rule does two things simultaneously. First, it limits the damage from any single error. Second, it forces you to calculate position size before entry — which means you must know your stop before you trade. No stop, no trade. The math makes this automatic.
2. Rules — The Three Pillars
2.1 The 10% Rule
Signal Flag: The 10% Rule
Divide capital into 10 equal parts. Never risk more than one part (10%) on any single trade.
- Capital: $3,000 → Max risk per trade: $300
- Stop is 3 points on 100 shares = $300 risk ✓
- Stop is 8 points on 100 shares = $800 risk ✗ → reduce to 37 shares
The 10% rule is not about returns. It is about survival. With 10 parts, the market must beat you ten consecutive times at full size to wipe you out. No trader following Gann's rules has ever experienced ten consecutive max-loss trades — because the 3-loss rule intervenes first.
2.2 The 3-Loss Rule
Signal Flag: The 3-Loss Rule
After 3 consecutive losses, reduce your trading unit. Risk only 10% of your remaining capital.
- $3,000 → lose 3×$300 = $2,100 remaining → new risk: $210
- Lose 3×$210 = $1,470 remaining → new risk: $147
- Lose 3×$147 = $1,029 remaining → new risk: $103
- The market must beat you 10+ times at EACH level to wipe you out
The 3-loss rule is psychological as much as financial. After three losses, confidence is shaken, judgment is impaired, and the temptation to break rules peaks. Reducing size forces you to slow down. It prevents tilt — the emotional state where revenge trading destroys accounts.
The Math of Recovery
After 3 losses from $3,000: with rule = $2,100 remains, need 43% to recover. Without rule = next 3 losses = $1,200, need 150% to recover.
2.3 Stop-Loss Placement
Stops are placed relative to the week that triggered the color change — not arbitrary percentages, not ATR multiples, not support levels you hope will hold.
Signal Flag: Stop Placement
- Longs (Green entry): Stop below the low of the week that turned Green. 1–3 points below. High-priced stocks ($100+): max 5 points.
- Shorts (Red entry): Stop above the high of the week that turned Red. 1–3 points above. High-priced stocks: max 5 points.
| Stock Price | Minimum Capital | Max Stop |
|---|---|---|
| $15 – $30 | $1,500 | 2 points |
| $30 – $100 | $3,000 | 3 points |
| Above $100 | $4,000 | 5 points |
| Small units (10 shares) | $300 per 10 shares | 3 points |
This Method will make the most money trading in high-priced stocks, and for trading in stocks selling above $100 per share, you should use a capital of $4,000 and adhere strictly to all the rules.
High-priced stocks trend better, carry less manipulation, and attract more institutional participation. The Green/Red signals have better follow-through when smart money is already aboard.
3. Strongest and Weakest Positions
Not all entries deserve the same size. Gann identified specific structural positions where probability is highest — and where maximum capital should be deployed.
3.1 Strongest Position (Bull Market)
After the 2nd or 3rd higher bottom has been made, and then the top of a previous rally has been crossed, the stock is in the strongest position.
The sequence: prolonged decline ends → first higher bottom (potential bottom, cautious) → second higher bottom (confirmation, add) → third higher bottom + previous top crossed = STRONGEST (full position). The big advance follows with small reactions. This is where you make money fastest.
3.2 Weakest Position (Bear Market)
A market is weakest when it is making lower tops. The 3rd or 4th lower top is the safest place to sell.
The sequence: prolonged advance ends → first lower top (potential top, cautious short) → second lower top (confirmation, add) → third/fourth lower top + last low broken = WEAKEST (full short). Fast decline follows.
3.3 The Last Stage Warning
In the last stage of a bull market, reactions get smaller as stocks work higher — until the final run ends and a sharp reversal hits. In the last stage of a bear market, rallies get smaller as prices work lower. Never buck the trend in the last stage. Wait for the color change.
4. The Confluence Matrix — Buying & Selling Points
Gann's Three Buying Points and Three Selling Points integrate with Green/Red to create a conviction ladder. More confirmations = higher probability = larger size.
| Signal | Buying Point | Description | Conviction | Size |
|---|---|---|---|---|
| Green + BP#1 | Old bottom | Green change + price at old support | High | 2 units |
| Green + BP#2 | Crossing top | The Green signal itself — standard entry | Medium | 1 unit |
| Green + BP#3 | Secondary reaction | Green established, first pullback held | Highest | 4 units |
| Red + SP#1 | Old top | Red change + price at old resistance | High | 2 units |
| Red + SP#2 | Breaking bottom | The Red signal itself — standard exit | Medium | 1 unit |
| Red + SP#3 | Secondary rally | Red established, first rally failed | Highest | 4 units |
The greater number of confirmations the surer the chances of making profits.
5. Position Size Calculator
Trim Tab Calculator
Enter your capital, entry price, and stop. The calculator applies Gann's 10% rule and tells you exactly how many shares to buy.
How This Works
The calculator applies Gann's rules in sequence:
- Max Risk = 10% of your trading capital. This is your hard ceiling.
- Stop Distance = Entry price − Stop price. This is your per-share risk.
- Shares = Max Risk ÷ Stop Distance, rounded down to the nearest whole share.
- Position Value = Shares × Entry price. This tells you how much capital is tied up.
- Actual Risk = Shares × Stop Distance. This should be ≤ Max Risk.
If your stop distance exceeds the max stop for your stock's price tier, the calculator warns you. You must either widen your capital base, choose a tighter stop, or accept a smaller position.
Worked Example
Scenario: You have $3,000 capital. A stock turns Green at $105. The low of the Green week is $100. You place your stop at $97 (3 points below the low). Your conviction is standard (BP#2).
If you had ignored the 10% rule and bought 100 shares, your risk would be $800 — 26.7% of capital. One loss would require a 36% gain to recover. Two consecutive losses and you are down 53%, needing a 113% gain to break even. The 10% rule keeps you in the game.
Related Guides
The Running Lights
The complete Green/Red Trend Line system: activation rules, asymmetry, and the two commandments.
BeginnerThe Standing Orders
Why mechanical rules work, how to handle losses, and the confidence loop that separates survivors from casualties.
BeginnerThe Night Glass
When to add daily charts, how to adapt Green/Red for forex, crypto, and modern indices, plus software implementation.
IntermediateFair winds.