Trading The Wyckoff Way

[DbPhoenix 42]

Richard Wyckoff was a pioneer of technical analysis. While Dow contributed the theory that price moves in a series of trends and reactions, and Schabacker classified those movements into chart patterns, developed gap theory, and stressed the role of trader behavior in the development of patterns and support/resistance, Wyckoff contributed the study of the relationship between volume and price movement to detect imbalances between supply and demand, which in turn provided clues to direction and potential turning points. By also studying the dynamics of consolidations or horizontal movements, he was able to offer a complete market cycle of accumulation, mark-up, distribution, and mark-down, which was in large part the result of shifts in ownership between retail traders and professional money.

 

Wyckoff sought to develop a comprehensive trading system which (a) focused on those markets and stocks that were “on the springboard” for significant moves, (b) initiated entries at those points which offered the highest probability of success, and © exited the positions at the most advantageous time, all with the least possible degree of risk. His favorite metaphor for the markets and market action was water: waves, currents, eddies, rapids, ebb and flow. He did not view the market as a battlefield nor traders as combatants. He counseled the trader to analyze the waves, determine the current, “go with the flow”, much like a sailor. He thus encouraged the trader to find his entry using smaller “waves”, then, as the current picked him up, ride the current through the larger waves to the natural culmination of the move, even to the extent of pressing one’s advantage, or “pyramiding”, as opposed to cutting profits short, or “scalping”.

 

“Trading Wyckoff”, then, is more than just relating price and volume. It is a complete trading strategy, ranging from finding the most attractive opportunities through strategy development and trade management to the best moment to close the trade, all with the least possible degree of risk.

 

Below are copies of Wyckoff's Studies in Tape Reading, which has been reformatted into The Day Trader's Bible and is as good a place to start as any, along with Reminiscences of a Stock Operator by Jesse Livermore, a contemporary of Wyckoff's. We've also included a chapter from Wyckoff's original trading and investing course. This chapter consists of Wyckoff's analysis of an entire year of price action as it relates to the essential elements of Wyckoff's approach: volume, support, resistance, climactic activity, tests and retests, etc.

 

.

DTB, 1919.pdf

RSO.pdf

Wyckoff Analysis 1930-31.pdf

Edited April 27, 2014 by DbPhoenix

[gassah 10]

This is exciting!

 

I'm trying to plot volume by price for the higher trading range of the SP500 but I can't go back that far with the MP module in MarketDelta. Any other suggestions in order to get back to June '07? I can do the price composite with Market Analyst and the TPOs probably match up with the volume areas but I'd like to see anyway.

 

nic

[Eiger 10]

This thread looks like it will have some excellent material. I am really looking forward to it. Thanks for starting it.

 

Eiger

[DbPhoenix 42]

This is exciting!

 

I'm trying to plot volume by price for the higher trading range of the SP500 but I can't go back that far with the MP module in MarketDelta. Any other suggestions in order to get back to June '07? I can do the price composite with Market Analyst and the TPOs probably match up with the volume areas but I'd like to see anyway.

 

nic

 

Does this help?

 

[gassah 10]

Thank you. Is that from stockcharts.com? Do you find the number of horizontal volume bars adequate? Can it be broken down into finer levels?

[erierambler 10]

Well, just for grins, here's my chart of the Wwave .

erie

 

 

 

[gassah 10]

Is the Wave from the SMI components?

 

nic

[DbPhoenix 42]

Thank you. Is that from stockcharts.com? Do you find the number of horizontal volume bars adequate? Can it be broken down into finer levels?

 

No, BigCharts. I use the horizontal bars for a "clue". I judge the distribution by eye, by looking at the price waves and noting where the tightest range clusters are. Some may find it easier to do this by using candles and ignoring the tails.

 

It's all a matter of areas anyway, as opposed to rigid lines. If going from the outside in is a problem, first find the midpoint, or the "POC", then work outward. When activity noticeably diminishes, that's probably your first SD.

 

Anyone looking for further examples can check the Dailies section in my Blog.

Edited April 12, 2008 by DbPhoenix

[erierambler 10]

Is the Wave from the SMI components?

 

nic

 

Yes , I believe it is, now that you mention it, since I've had this for about 3or 4 years.

erie

[treadstone 10]

Thanks for starting this thread, Db.

 

Really looking forwards to seeing it develop.

[dandxg 10]

Does this help?

 

 

Thanks for letting us know it's from big charts. I could never get my VP in Sierra to look anything like that. It always showed as dynamic or "globbed" together and it never looked as clear as the ones you showed in this other pictures.

[gassah 10]

As I read through the Buying and Selling Waves section of W's course I remembered how I wanted to do a better job of comparing waves (swings). Ray Barros also does this and uses it to guide him on whether or not swings or trends will continue or reverse.

 

Market Analyst makes it relatively easy. This chart shows the swings compared: the mean bar size and volume have dropped in the second swing. Barros likes to see a 30% change to call it significant. There's something called Swing Strength with a big decline. I don't know what it measures and I'm having trouble accessing their web site at the moment to find out.

 

Anyway, just an idea. I haven't played around with it much.

[DbPhoenix 42]

JUDGING THE MARKET BY ITS OWN ACTION

 

The business of Wall Street is to finance corporations and to sell the securities - stocks and bonds - which result from this financing. Some securities are good; others not so good. Those who manufacture and sell them to the public know their value best. The public has comparatively little idea of their real value, except for seasoned securities—those which have been on the market for a long time and which, therefore, have established earning power and intrinsic value.

 

In every case the banker who does the financing and the dealers who help distribute, have paid for their securities either in cash or in services, or have underwritten them. The object is to market these stocks and bonds at as high prices as possible. This marketing is done through distributing houses and syndicates, by private sale, by public offering, and by means of listing on the stock exchanges.

 

In the latter case, the stock is advertised by making it active on the tape. If the price be advanced, and the transactions made large, the activity attracts buyers, and those who are handling the stock are thus able to dispose of their shares.

 

Sponsorship is sometimes continued after the market is thus made for a company’s shares. The bankers operate for themselves, or others operate for them. After a stock is floated, its sponsors try to create a stable market and support the price as well as they can without taking back too much stock. When it is thoroughly distributed and enough people are interested in the stock to make a market which takes care of itself, under ordinary conditions, the original banker, syndicate or sponsor may discontinue operations and turn attention to some other stock which affords a new opportunity for money-making.

 

Other interests may begin operations in that stock. Generally speaking, there are usually one or more sponsors or large operators working in every stock. Sometimes there are many. These interests see opportunities for profit, accumulate a line, mark up the price when conditions are favorable and then sell out. Or they may sell short, depress the price and cover.

 

No one can deny that in Wall Street the big fish eat the little ones. Large operators could not operate successfully without the large number of people making up the public; that is, if there were only ten big interests in the market and no public, these ten could only make a profit by dealing with each other. It would be difficult for one crowd to deceive any of the nine others. But when the public enters the stock market, the large operator’s game becomes easier for him.

 

Tape Reading and Chart Reading enable one to detect and profit by these inside operations or manipulation; to judge the future course of stocks, by weighing the relation of supply and demand. This sometimes can be done from price movement alone, but if you consider also the volume of transactions you gain an additional and vitally important helpful factor.

 

By accurately judging this supply and demand, you are able to determine the trend of the whole market and of certain stocks; also which stocks to buy or sell, and, what is even more important, when to do so.

 

You always aim to select the most promising opportunities; that is, the stocks which are likely to move soonest, fastest and farthest. You make no commitments without sound reasons and you avoid undue risks.

 

Whenever you study the tape or a chart, consider what you see there as an expression of the forces that lift and depress prices. Study your charts not with an eye to comparing the shapes of the formations, but from the viewpoint of the behavior of the stock; the motives of those who are dominant in it; and the successes and failures of the buyers and sellers as they struggle for mastery on every move.

 

The struggle is continuous. The tape shows all this in detail. The charts enable you to pick the market apart and study whatever portion or phase of it you choose.

 

Supply and demand may be studied on the tape of the stock ticker, and to even better advantage from charts.

 

The tape is like a moving picture film. Every minute of the day it is demonstrating whether supply or demand is the greater. Prices are constantly showing strength or weakness: strength when buyers predominate and weakness when the offerings overpower the buyers. All the various phases from dullness to activity; from strength to weakness; from depression to boom, and from the top of the market down to the bottom – all these are faithfully recorded on the tape. All these movements, small or great, demonstrate the workings of the Law of Supply and Demand. By transferring to the charts portions of what appears on the tape, for study and forecasting purposes, one is more readily enabled to make deductions with accuracy.

 

And now that you are undertaking to learn this Method, it is best that you prepare your mind for it by discarding most of the factors that you have heretofore employed in forming your judgment and making your decisions, such as: tips, rumors, news items, newspaper and magazine articles, analyses, reports, dividend rates, politics and fundamental statistics; and especially the half-baked trading theories which are expounded in boardrooms and popular books on the stock market.

 

It is not necessary for you to consider any of these factors because the effect of all of them is boiled down for you on the tape. Thus the tape does for you what you are unable to do for yourself; it concentrates all these elements (that other people use as a basis for their stock market actions) into the combined effect of their buying and selling.

 

You draw from the tape or from your charts the comparatively few facts which you require for your purpose. These facts are: (1) price movement, (2) volume, or the intensity of the trading, (3) the relationships between price movement and volume and (4) the time required for all the movements to run their respective courses.

 

You are thus far better equipped than the man who is supplied all the financial news, statistics, etc., from the whole world.

 

I, therefore, claim that:

 

You need never read anything on the financial page of your newspaper except the table of stock prices and volumes.

 

You need pay no attention to the news, earnings, dividend rates or statements of corporations.

You need

never

study the financial or the business situation.

 

You need not understand railroad or industrial statistics, the money market, the crop situation, the bank statements, foreign trade or the political situation.

 

You can absolutely ignore all the thousands of tips, rumors, reports and especially the so-called inside information that flood Wall Street.

You can discard

all

of these

completely

and

finally

.

 

UNLESS YOU DO THIS YOU WILL BE UNABLE TO GET THE BEST RESULTS FROM YOUR MARKET OPERATIONS.

[DbPhoenix 42]

BUYING AND SELLING WAVES

 

Every upward or downward swing in the market, whether it amounts to many points, only a few points, or fractions of a point, consists of numerous buying and selling waves. These have a certain duration; they run just so long as they can attract a following. When this following is exhausted for the time being, that wave comes to an end and a contrary wave sets in. The latter may attract more of a following than the former. By studying the relationships between these upward and downward waves, their duration, speed and extent, and comparing them with each other, we are able to judge the relative strength of the bulls and the bears as the price movement progresses.

 

All stock market movements, however large or small, are made up of buying and selling waves. The market does not rise and fall like the water in a tank which is being filled or emptied. It moves to a higher or lower level by a series of surges - a good deal like an incoming or outgoing tide, with successive waves higher or lower than those preceding.

 

The small buying and selling waves which occur during every stock market session run so many minutes. They are caused largely by the restlessness of active professional traders, much like the ripples produced by the wind upon the ocean. Traders must have activity; they make their livelihood by trading on fluctuations. Therefore, they engage in a ceaseless tug of war, trying to put prices up whenever the condition of the market is favorable, or drive them down when they find that the bulls are weak or have over-extended themselves. The degree of success or failure attending their efforts enables us to determine whether the market is growing stronger or weaker.

 

These small waves are part of the larger waves which run several days, and eventually make up movements of 3 to about 5 points [Note: this was the average daily range of the index at that time; today the average daily range is more than 200 points; adjust accordingly]. The 10 and 20 point moves are made up of 3 to 5 point waves, and the bull and bear markets are composed of many swings of 10 to 20 points or more.

 

You can easily confirm the above by examining any chart. It is important that you do this so as to impress upon your mind these numerous waves of various sizes, inasmuch as this will help you to understand the market. You will thereafter think in waves.

 

When you are looking for an opportunity to buy, watch for the down waves in the market and in your stock. After you have bought, you sit through a number of small, medium and good-sized waves, until finally you observe that it is about flood tide in that stock. Then watch for an especially strong up-wave and give your broker an order to sell your stock at the market.

 

The waves of the market furnish a clear insight into changes in supply and demand. By learning to judge all sizes of market waves, you will gradually learn to spot the time when a rising market or a rally, and the time when a declining market or a reaction, has halted and is about to reverse. These are the turning points.

 

To be able to say when these turning points are occurring - at the bottom of a bear market, or at any important rallying point on the way down to the bottom, or at the top of a bull market, or at any important reactionary point on the way up - is a mark of ability in an investor as well as a trader.

 

Remember: The market itself tells us everything we need to know about its probable future action. Every significant change in supply or demand is registered on the tape. When you have learned to analyze the market by its own action, as recorded on the tape or on your charts, then you will be proficient in the art of operating in stocks.

 

Of all the things that are most desirable to know about the stock market, these two are most important:

 

(1) First, to be able to determine the final top of a bull market, and second, to determine the top of the intermediate swings, and finally the top of the minor moves.

 

(2) To be able to determine the final low in a bear market, the bottom of the intermediate swings, and the end of the minor moves.

 

Master this branch of the subject thoroughly, it is vital.

 

But there is one step more: Your education will not be complete until you can cover all your shorts and go long at the bottom of a panic, a depression or of an intermediate swing, and sell out all long stocks and go short at the top of a boom or an intermediate bull movement. This will be the result of practice, training, and experience. It requires great flexibility of mind and absolute control of your emotions. You can learn to do it if you will study and faithfully practice this Method.

[dandxg 10]

Thanks both of you for this thread. I am sure it will be a favorite at TL.

[DbPhoenix 42]

.

About Monday:

 

Last week, I posted charts of seven of the sectors (I didn't include utilities or healthcare) here, including the support and resistance zones contained by my world-famous boxes. Price was turned back in every one of them.

 

As for the Dow and SPX, and using the SPY and DIA as proxies, I see no reason -- absent evidence to the contrary -- why we shouldn't complete these patterns and revisit the January/March lows.

 

 

 

.

Given that, and given that we closed outside the range, a short on the NQ anywhere in the 1800 to 1820 area looks good, if the market provides it (I'm using BigCharts because it's available to everybody to play with as they like).

 

 

.

[gassah 10]

I was thinking along the same lines as I went through my list of stocks; nearly all of them are getting rejected at resistance.

[DbPhoenix 42]

I was thinking along the same lines as I went through my list of stocks; nearly all of them are getting rejected at resistance.

 

Maybe you should show them how to develop a list of stocks using The Method.

 

C'mon, folks, give 'im a hand :applaud:

[gassah 10]

My "thanks" was full of sarcasm. :crap:

[cantana 10]

Well, since you brought up the “look inside” theme.

 

There's 3 sectors out preforming the S&P since the Jan low. And some sub–sectors within these sectors have been going great guns.

Just looking for rotation I guess. It do seem like an awful lot of money is congregating in a relatively small area of the market.

[DbPhoenix 42]

My "thanks" was full of sarcasm. :crap:

 

Don't you love being put on the spot?

 

That's what comes of being a sponsor.

[DbPhoenix 42]

Well, since you brought up the “look inside” theme.

 

There's 3 sectors out preforming the S&P since the Jan low. And some sub–sectors within these sectors have been going great guns.

 

Just looking for rotation I guess. It do seem like an awful lot of money is congregating in a relatively small area of the market.

 

Hello, sulong. Yes, materials and energy have been doing well, and that would be the place to look for longs when we turn. Do you think it's too late to short?

 

Incidentally, I should have mentioned that transports are having trouble at resistance as well.

[cantana 10]

Hello, sulong. Yes, materials and energy have been doing well, and that would be the place to look for longs when we turn. Do you think it's too late to short?

 

Incidentally, I should have mentioned that transports are having trouble at resistance as well.

 

Over all, no.

I did this DIA overlay with a Mamis sentiment chart. On it you can see where my best guess is.

 

[DbPhoenix 42]

Over all, no.

I did this DIA overlay with a Mamis sentiment chart. On it you can see where my best guess is.

 

 

How cool. Where did you get this? Do you subscribe to his newsletter?

[gassah 10]

Stock Selection Part 1

 

Buying Tests

 

1. Objective Accomplished On Down Side - Point & Figure chart used to estimate targets from upper range(s)
   
2. Activity Bullish - volume increasing normally on rallies and decreasing on reactions
   
3. Preliminary Support- selling climax in background
   
4. Stronger than Market - responsive on rallies and resistant to reactions
   
5. Downward Stride Broken - supply (down trend) lines penetrated
   
6. Higher Supports
   
7. Higher Tops
   
8. Base Forming
   
9. Estimated Probable Profit Exceeds Indicated Risk