The Running Lights

A mechanical trend-following system that captured 62.8% of all market movement over 42 years — using nothing more than weekly highs, weekly lows, and two colors.

18 min readBeginner Source: How to Make Profits in Commodities by W.D. Gann (1942)

1. Theory — Two Trends, One Chart

Markets always have two trends simultaneously. Always. The major trend lasts months or years. The minor trend lasts weeks and moves against the major. Most traders confuse the two — and confusion is expensive.

There are always two trends — a major trend and a minor trend. The minor trend is a reversal of the main trend, which lasts for a short period of time.

— W.D. Gann, Chapter 2

Gann's Green/Red Trend Line cuts through this confusion with a simple state indicator. It does not predict. It does not forecast. It confirms. The color tells you which trend is currently in control — and therefore which side of the market you are allowed to trade.

Signal Flag: The Two Trends

  • Major Trend — Identified on monthly or multi-year weekly charts. Series of higher highs/higher lows = bull. Lower highs/lower lows = bear.
  • Minor Trend — Identified on weekly charts via Green/Red. Lasts weeks. Reverses within the major trend.
  • Green/Red does NOT distinguish major from minor. Persistence reveals the difference: Green for 2+ years = major bull. Green for 2–3 weeks during a bear market = minor rally.

The discipline is absolute: trade with the main trend. When the main trend is down and Green appears, that Green is a rally to sell short — not a trend to buy. When the main trend is up and Red appears, that Red is a reaction to buy — not a trend to short. Counter-trend trades are only permitted at Buying Point #1 with a tight stop, and even then, they are aggressive, not standard.

Context matters: For measuring where you are in the major trend, see The Swell and the Setback. The Running Lights operates on the weekly timeframe; for multi-year structure, you need higher-timeframe analysis.

2. Rules — The Color Change Mechanics

The entire system rests on two rules: how Green activates, and how Red activates. Everything else — entries, exits, stops, position sizing — flows from these two rules.

2.1 Green Activation (Red → Green)

Green Signal — Both Conditions Required

  1. Higher bottom — this week's low > previous week's low
  2. Higher top — this week's high > previous week's high

When BOTH conditions are met after a week closes, the line turns GREEN and is placed at the HIGH of that week. It continues moving up each week while both conditions hold.

Why both? Because a higher bottom alone could be a bear-market rally — a higher low that still fails below the previous high. A higher top alone could be a lower high in an uptrend — a bull-market pullback. Both together = genuine reversal, not a bounce.

WeekLowHighSignalLine
1100105Bottom of decline—
2101106GREEN ↑106
3103108Green continues108
4102107Lower bottom — Green STOPS—
5104109GREEN ↑109

Critical: The color change is only confirmed after the week closes. A Thursday breakout means nothing if Friday collapses. Do not anticipate.

2.2 Red Activation (Green → Red)

Red Signal — One Condition Required

  1. Lower bottom — this week's low < previous week's low

When this single condition is met after a week closes, the line turns RED and is placed at the LOW of that week. It continues moving down each week while lower bottoms persist.

Gann was more sensitive to downside breaks. A lower bottom is definitive — it breaks support. A lower top without a lower bottom could just be a tight range. One condition for Red, two for Green. This is not an oversight. It is intentional architecture.

WeekLowHighSignalLine
1120125Top of advance—
2118123RED ↓118
3115120Red continues115
4116121Higher bottom — Red STOPS—
5114119RED ↓114

2.3 The Asymmetry — Gann's Built-In Bearish Bias

Green Flip (Red → Green)

Conditions: 2 required

Higher bottom AND higher top

Difficulty: Harder — must prove both sides

Psychology: Keeps you in cash during uncertainty

Red Flip (Green → Red)

Conditions: 1 required

Lower bottom only

Difficulty: Easier — support break is definitive

Psychology: Exits you fast when structure breaks

This asymmetry creates a natural bearish bias in choppy markets. It is harder to flip to Green than to Red. Gann designed this deliberately: in uncertainty, cash is the position. The market must work harder to prove it is going up than to prove it is going down.

2.4 The Two Commandments

BUY WHEN THE RED TREND LINE CHANGES TO GREEN. SELL WHEN THE GREEN TREND LINE CHANGES TO RED.

— W.D. Gann, Chapter 2

These are mechanical rules. No discretion. No interpretation. The color change IS the definite change Gann demanded. It removes hope, fear, ego, and analysis paralysis in a single stroke.

Signal Flag: The Commandments

  1. Buy Rule: Market in downtrend → week closes with BOTH higher bottom AND higher top → color changes to Green → BUY at close or on breakout above that week's high → Stop below that week's low (1–3 points, max 5).
  2. Sell Rule: Market in uptrend → week closes with lower bottom → color changes to Red → SELL longs at close → SELL SHORT if trading both directions → Stop above that week's high (1–3 points, max 5).

3. Worked Example — The Full Sequence

Let us walk through a complete cycle: decline, bottom, Green entry, advance, top, Red exit. Real numbers, real decisions.

Phase 1: The Decline

WeekLowHighSignalAction
1120125Red activeShort or flat
2118123Red continuesHold short
3115120Red continuesHold short
4116119Higher bottom, lower topWait — NOT Green
5114118Red continuesHold short
6108112Red continuesHold short

Week 4 is the trap. Higher bottom (116 > 115) but lower top (119 < 120). The impatient trader buys here and is punished in Week 5. Both conditions are required for a reason.

Phase 2: The Turn

WeekLowHighSignalAction
7109113Higher bottom, higher topWait — previous week was Red
8110115GREEN ↑BUY at 115

Week 7 fails because the previous week (Week 6) was Red, and Week 7 does not meet both conditions relative to Week 6. Week 8: Low 110 > 109, High 115 > 113. Both conditions met. Green confirmed. Buy at 115.

Entry
115
Week 8 high
Stop
107
Week 8 low (110) − 3 points
Risk
8 points
115 − 107
Position
37 shares
$3,000 capital, 10% max risk = $300 ÷ 8 pts

Phase 3: The Advance

WeekLowHighSignalAction
9112118Green continuesHold — 2 units now confirmed
10116122Green continuesHold — add to 4 units on breakout
11119126Green continuesHold
12120128Green continuesHold

Position sizing escalates with confirmation: 1 unit on first Green (test), 2 units on second Green week (confirmation), 4 units on third+ week with breakout of previous swing (conviction). Never exceed 10% total capital at risk.

Phase 4: The Exit

WeekLowHighSignalAction
13118126RED ↓SELL at 126

Week 13: Low 118 < 120 (Week 12 low). One condition met. Red activated. Sell longs at 126. Profit: 126 − 115 = 11 points × 37 shares = $407 on $3,000 capital = 13.6% return in 5 weeks.

Try it: Calculate your position size automatically with the The Trim Tab calculator. Enter your capital, entry price, and stop — it handles the 10% rule and share rounding for you.

4. Common Mistakes — The Reefs Below

Even a simple system fails if the practitioner breaks the rules. These are the most common errors observed in Green/Red trading.

Mistake 1: Anticipating the Color Change

Wrong: I think this week will be Green, so I'll buy early on Thursday.

Right: Wait for the week to CLOSE with both higher bottom AND higher top. The color change is confirmed only after the week completes.

Don't try to get ahead of the market. Don't guess if it is making a change in trend and be wrong. Wait until it shows a definite change in trend.

— W.D. Gann

Mistake 2: Ignoring Both Conditions for Green

Wrong: Week makes higher bottom but lower top → buy because bottom is higher.

Right: BOTH must be higher. A higher bottom with lower top is a lower high — bearish, not bullish. See Week 4 in the worked example above.

Mistake 3: Trading Every Color Change at Full Size

Wrong: Taking every Green/Red signal with maximum position.

Right: First color change after extended trend = possible minor trend only. Use 1 unit (test). Second week same color = 2 units (confirmation). Third+ week or breakout = 4 units (conviction). Full size only when strongest/weakest position criteria are met.

Mistake 4: Forgetting Main Trend Context

Wrong: Buying Green in a bear market because rules say buy Green.

Right: In a bear market, Green signals are rallies to sell short, not trends to buy. Context always matters. Only trade WITH the main trend direction.

5. Psychology — The Waiting Game

The Green/Red system generates an average of 4.2 trades per year. That means 47+ weeks of waiting. Most traders cannot handle the boredom. They force trades. They anticipate. They rationalize exceptions. And they lose.

After you have acquired knowledge you will need to learn PATIENCE, if you have not already learned the value of patience. You must learn to wait for a definite indication of a change in trend before buying or selling.

— W.D. Gann

The color removes emotional decision-making entirely. Green = only longs. Red = only shorts. The line location = your stop reference. No exceptions. No but this time is different. The system forces patience because patience is the edge.

The 42-year proof — 177 trades, $257,291 profit on $5,000 starting capital — exists because the system kept Gann out of the market 42% of the time. Cash is a position. Cash preserves capital. Cash lets you buy the next Green at full size instead of nursing wounds from the last premature entry.

Read next: For the full story of how Gann proved this system across four decades, see the Sea Shanty The Navigator's Ledger. For the discipline required to follow mechanical rules through boredom and drawdown, see The Standing Orders.