Trading The Wyckoff Way

[cowseathay 10]

You have already drawn trendlines on the 1min chart, if you were long, your exit would be either the break of TL or break of previous swing low, refer to Dbphoenix forum and blog for further info. on how to apply Wyckoff principles in this regard.

 

Thanks for your reply Bearbull. I understand that had a long been taken, I could exit at the break of the TL. However, I was wondering if there were any clues in the price-volume relationship that would preclude taking the long in the first place?

[Bearbull 10]

Thanks for your reply Bearbull. I understand that had a long been taken, I could exit at the break of the TL. However, I was wondering if there were any clues in the price-volume relationship that would preclude taking the long in the first place?

 

 

You had all the signs of reversal to the upside around 10-11 above a support area of 156.72, infact a higher low, ( climatic sell off followed by sharp reversal and then a test on low vol), had this test been on high vol i.e down bars with increasing vol, then that would negate the reversal signal and it would expect the support to fail, in which case you would continue to monitor and look for further signs of reversal via price-vol relationship. I would strongly urge you to study Dbphoenix threads in Wyckoff forum and his blog, there is a ton of invaluable info. there, well worth the slog:)

[DbPhoenix 42]

Hi,

 

I am a novice to Wyckoff and am trying to learn and apply his principles.

 

Often I have trouble telling a retracement from a reversal and I want to post a chart of the Euro from today to illustrate my problem.

 

I'm posting the one minute chart and also the five minute chart for context. Around 12:20 price started breaking out of resistance with great volume and pace. Around 12:23 the price and volume action was indicating (to me) a potential buying climax (the volume peaked). Another clue was that price stopped at a well established resistance from earlier in the day and from last week. Then it began retracing and after a few bars the first up bar came about with what seemed to me like good buying pressure (for one, the volume was higher than the prior down bars). However price turned around and started going lower and you can see what happened. But it never went back up to test the high that was just made, and instead just kept going slowly lower. There was even a large volume bar around 13:00 in which the price went higher which I thought could be the buying pressure coming back in but then price kind of died out and started grinding lower and lower.

 

I'm just wondering, were there any clues that that there was not going to be a complete retracement and that price is instead reversing? Or am I just thinking too deeply into it and should just accept that the trade didn't work?

 

Any help is greatly appreciated.

 

Thank you,

CowsEatHay

 

You got your reversal when price failed to break through R. You then got your retracement at 1300. It didn't retest R, but it was a retracement nonetheless. That volume is "higher" doesn't necessarily mean buying pressure. Look at those upper tails. That's not buying pressure. That's failure.

 

As for going long, you failed to break through R, so why go long? If you're going to go long, wait for the breakout, if any. If you instead want to buy a retracement back to R now S after the BO, that's up to you. But any retracement after a failure to break through R will just as likely end up being a lower high, and a reason to go short, as in this case.

 

You have to think about the purpose behind a retracement, which is to give people who missed the real trading opportunity a second chance to enter. Here, there was no missed buying opportunity since price never broke through R. The missed opportunity is instead the short entry at the reversal, and the retracement afterward represents a second opportunity to enter the short.

Edited July 2, 2008 by DbPhoenix

[cowseathay 10]

You had all the signs of reversal to the upside around 10-11 above a support area of 156.72, infact a higher low, ( climatic sell off followed by sharp reversal and then a test on low vol), had this test been on high vol i.e down bars with increasing vol, then that would negate the reversal signal and it would expect the support to fail, in which case you would continue to monitor and look for further signs of reversal via price-vol relationship. I would strongly urge you to study Dbphoenix threads in Wyckoff forum and his blog, there is a ton of invaluable info. there, well worth the slog:)

 

 

Thanks for your reply and explanation Bearbull. I see what you're saying but I was actually referring to the reversal to the downside that happened after 12:23. Sorry if I wasn't clearer. And also, I have been and continue to study Db's threads and his blog and am trying to assimilate his insightful presentation of Wyckoff's methods but I know I have a long way to go. It's easier studying it in hindsight than applying it in real time but I know it just takes a lot of practice as with any other endeavor.

 

CowsEatHay

[cowseathay 10]

You got your reversal when price failed to break through R. You then got your retracement at 1300. It didn't retest R, but it was a retracement nonetheless. That volume is "higher" doesn't necessarily mean buying pressure. Look at those upper tails. That's not buying pressure. That's failure.

 

As for going long, you failed to break through R, so why go long? If you're going to go long, wait for the breakout, if any. If you instead want to buy a retracement back to R now S after the BO, that's up to you. But any retracement after a failure to break through R will just as likely end up being a lower high, and a reason to go short, as in this case.

 

You have to think about the purpose behind a retracement, which is to give people who missed the real trading opportunity a second chance to enter. Here, there was no missed buying opportunity since price never broke through R. The missed opportunity is instead the short entry at the reversal, and the retracement afterward represents a second opportunity to enter the short.

 

Wow, thanks for that explanation db. I didn't really think about the purpose behind the retracement like you mention, but what an insightful way to look at the market. Your explanation makes perfect sense. I just need to keep practicing and learning to perceive the markets in this way.

 

CowsEatHay

[cowseathay 10]

I have another question about the same thing.

 

I'm attaching today's chart of the Euro, 3-minute, 1-minute and also an updated 240-minute if anyone is interested in the big picture.

 

In the 3 minute chart you can see how around 3:00 price sold off at R (red line) and you can see the long tails indicating a good chance of reversal.

 

Around 4:30 you can see how price tested R again and see that it reversed. What db said applies directly to this price action (I believe), as price stopped right at R and if you look at a 1-minute chart at this time (which I have not posted) then you can see price tested R again after 2 bars but sold off and closed much lower showing a good sized tail, which might be a good place to go short.

 

Now, if you look at the place where I have put a red arrow in the 3 minute chart you can see how price stopped at R again but it closed higher than the red R line and also higher than the prior swing high at 4:30. My question is would you consider this as price having broken R or stopped at R since it still closed below the high of the bar at 2:45 (around 157.91, visible as a long tail). Furthermore price then heads lower in the next bar perhaps signfiying that it has stopped at R and is now retracing. The reason I feel this is important is because whether or not one classifies this as a break thru R or a stop at R determines whether one should short or go long (near the blue arrow).

 

Another related question is the place where i've put a yellow arrow. By now it is clear price has broken thru R, however it was sold off and closed below the high and you can see the tail in the bar. Then price sold off a bit further. Does this suggest selling pressure or should one just keep in mind that price broke R and the best thing to do now is to look for a long?

 

I know I'm being very nit-picky and looking at individual bars and such but I'm just trying to get a decent grasp on all this so I would appreciate any help in this regard. I hope what I'm saying is clear, if it isn't please let me know and I will clarify.

 

Thanks,

CowsEatHay

Edited July 3, 2008 by cowseathay
uploaded wrong chart

[DbPhoenix 42]

You're too focused on bars, and that prompts the nit-pickyness. Focusing on bars rather than price movement will cause you to devote your attention to what is essentially trivial and ignore what matters.

 

In your first batch of charts, what mattered was that (a) price failed to BO and (b) didn't even come close to retesting R, creating a lower high. Whether this was illustrated by bars, points, lines, or not charted at all was irrelevant.

 

In this batch, price again fails to break thru with any conviction, falls back below R, but then comes right back again. This particular effort is stopped dead at R, and a short is called for.

 

But look at what's happening with the trading activity (or volume). It rises with those two down bars at 0827 and 0828, but then nothing. Trading activity falls off and there's no follow-through on the drop. Price then, instead of doing what you expect it to do, i.e., fall, makes a U-turn and rises instead. This is sufficient reason to exit the short, stand aside, and re-evaluate (you will at the very least BE).

 

Buyers then make yet another attempt to break thru R and stay there. You will have decided, I hope, whether or not you're going to go long on a BO, if any, wait for a retracement after a BO, if any, go short on a repeated failure to BO, if any, etc. In this case, price does break thru, but it then straddles R, then hugs it before finally taking off. What is most important, however, is not "the bars" but the fact that price isn't falling. That fact should speak to you and provide you with some guidance as to how to manage your position. If holding here for nearly 20m while price plays with itself is intolerable, then you may want to exit and wait for price to break thru "the wall" (you will likely find this wall on a smaller TF, e.g., 5s; the bars from 0855 thru 0858 appear to represent a springboard, which would be clearer on a 5s chart, but I don't follow this, so I can't say until I see the chart).

[cowseathay 10]

Thanks once again for your helpful reply Db, much appreciated. I knew I was focusing too much on individual bars and I understand what you are saying about focusing on price movement, it's just a matter of getting myself to perceive the activity in this way. Your analysis of what happened makes perfect sense to me when I read it, I just wish I could be able to do the same in real-time but I know it will take time and practice.

 

I'm uploading a 5s chart of the Euro with a box around the time you mentioned and I think it was a springboard (it looks like a hinge):

[DbPhoenix 42]

If you're following this in real time, you'll find it far easier to focus on price movement rather than bars. Otherwise, you're in for a struggle.

 

In any case, in addition to asking yourself what price is doing, also ask yourself what price is not doing. There are people in the chat room who trade by price action, though they may not necessarily go about it the Wyckoff Way. And there may not be anyone who trades the Euro. But it's worth checking out.

 

Remember also that you're going to be ignoring a great deal. If, for example, you plan on buying a test of support, there's absolutely no need to focus on every price/volume bar pair that prints in the meantime. If and when price approaches S, then pay attention to what traders are doing. Otherwise, open up a small window and play solitaire or something. Save your focus for when it will count.

 

And, yes, that's a springboard. Notice the lower high and the higher low along with quiet volume. Bracketing this sort of thing is pretty much a no-brainer.

[Bearbull 10]

Cowseathay, some great insight here, wish I had this kind of assistance 10yrs back, you certainly won't find it in weekend seminars or from trading gurus, this is pure wyckoff and is freely given. However if you are hell bent on getting entangled with fancy bar analysis, then so be it, but the way forward is embodied in the above couple of posts by Db.

As for it being hard to trade in realtime, well how long did it take you before you started driving on highways/motorways;)

[cowseathay 10]

If you're following this in real time, you'll find it far easier to focus on price movement rather than bars. Otherwise, you're in for a struggle.

 

In any case, in addition to asking yourself what price is doing, also ask yourself what price is not doing. There are people in the chat room who trade by price action, though they may not necessarily go about it the Wyckoff Way. And there may not be anyone who trades the Euro. But it's worth checking out.

 

Remember also that you're going to be ignoring a great deal. If, for example, you plan on buying a test of support, there's absolutely no need to focus on every price/volume bar pair that prints in the meantime. If and when price approaches S, then pay attention to what traders are doing. Otherwise, open up a small window and play solitaire or something. Save your focus for when it will count.

 

And, yes, that's a springboard. Notice the lower high and the higher low along with quiet volume. Bracketing this sort of thing is pretty much a no-brainer.

 

Thanks for your reply Db. I think its a really good idea to ask these questions that you mention, I will keep it in mind. Another question that I ask myself when looking at the price-volume relationship is something I picked up from your other posts: what was the result (in price movement) of this particular effort (amount of trading activity)?

Edited July 4, 2008 by cowseathay

[gassah 10]

Hi Tannis,

 

Following up on PENN: having reached the PnF target in an oversold position relative to the channel, with massive volume, this is where I'd be happy taking profits if I were short.

[Sledge 13]

It needn't be. As I've suggested, sell the first contract at R, the second at the break of the TL, the third at the breach of the LSL, and so on. It's only difficult if you make it difficult.

 

What is "LSL?"

[DbPhoenix 42]

Last Swing Low.

[Sledge 13]

Last Swing Low.

 

Thank you sir.

[Sledge 13]

Db-

I have been going back over all the material I had printed a while back that you have put together about S/R. One thing I am still pretty fuzzy on is this:

 

How does one determine the difference between a Support Line or Resistance line and a Swing High or Low? Is a Support Line and/or Resistance Line a "Major" and multiple tested area of the left of the chart vs a Swing High or Low that is, in a sense, a "Minor" S/R level to propel us further into the current trend?

 

Thanks

Aaron

[DbPhoenix 42]

Put simply, support is the price at which those who have enough money to make a difference are willing to show their support by retarding, halting, and reversing the decline by buying. Resistance is the price at which those who have enough money to make a difference attempt to retard, halt, and reverse a rise by selling. Whether one calls this money professional or big or smart or institutional or crooked or manipulative or (fill in the blank) is irrelevant. If repeated attempts to sell below this support level are met by buying which is sufficient to turn price back, these little reversals will eventually form a line, or zone. Ditto with resistance.

 

A swing high or low represents a point at which traders are no longer able to find trades. Whether that point represents important support or resistance will be seen the next time traders push price in that direction. But everyone knows this point, even if they aren't following a chart. It exists independently of the trader and his lines and charts and indicators and displays. It is the point beyond which price could not go. Hence its importance, both to those who want to see price move higher and those who don't.

 

The first two posts to this thread address these matters, as do others here and there. However, finding S&R in real charts in real time takes more than just a couple of posts. But one must understand the nature of support -- and resistance -- itself before he begins to look for it. Otherwise, he will find what he thinks are S&R in some very peculiar places.

 

Before coming to any conclusions about what “works” or “doesn’t work”, and thus does or does not provide an edge, one ought to keep in mind that a given event -- such as price seemingly finding support or resistance at a trendline (or moving average, candlestick, Pivot Point, Fib level or whatever) -- may be only incidental to what is truly providing that support or resistance.

 

A fundamental misunderstanding of how "indicators" are calculated and what they're supposed to do can lead to all sorts of off-task behavior. We think we see the indicators indicating something, or not, and believe we have made an important discovery. We then devote our efforts to improving the hit rate and the probability of whatever it is we think the indicator is indicating when our efforts ought to be focused on determining whether or not the indicator is actually indicating what we think it's indicating. In most if not all cases, it isn't.

 

Consider the virgin being tossed into the volcano: sometimes it results in a great crop, sometimes it doesn't. Maybe tossing her in earlier or later will change the probability of a healthy crop. Maybe two virgins are better than one. Maybe six. Maybe tall virgins are more effective than short ones. And surely age is important. But does the robustness of the crop really have anything to do with tossing the virgin into the volcano in the first place?

 

The money under the pillow is not evidence of the existence of the tooth fairy, and spring will arrive regardless of whether the virgin is tossed into the volcano or not. (Db)

[Sledge 13]

Put simply, support is the price at which those who have enough money to make a difference are willing to show their support by retarding, halting, and reversing the decline by buying. Resistance is the price at which those who have enough money to make a difference attempt to retard, halt, and reverse a rise by selling. Whether one calls this money professional or big or smart or institutional or crooked or manipulative or (fill in the blank) is irrelevant. If repeated attempts to sell below this support level are met by buying which is sufficient to turn price back, these little reversals will eventually form a line, or zone. Ditto with resistance.

 

A swing high or low represents a point at which traders are no longer able to find trades. Whether that point represents important support or resistance will be seen the next time traders push price in that direction. But everyone knows this point, even if they aren't following a chart. It exists independently of the trader and his lines and charts and indicators and displays. It is the point beyond which price could not go. Hence its importance, both to those who want to see price move higher and those who don't.

 

Db-

Excellent reply, mucho thanks for this. That description helps quite a bit in my quest for clarity. I thank you!

 

Let me ask your opinion on this with the info provided. Am I correct in looking at Swing Highs and Lows as possibly a few different ways- Let's say we are in an uptrend for simplicity sake. We get a swing high and a correction forming. Is it fair to say that the correction is caused by:

1. Temporary inability for higher prices (as you had mentioned) (i.e. no demand temporarily)

2. Profit Taking

3. A Re-Load to build momentum for further upward movement

4. Some of the Above

5. Potentially All of the above?

 

Any way to distinguish which is which utilizing the price action as a guide in determining which is taking place? It may be a moot point.. it may be something to the effect of "we don't care, because we know that one or more of these circumstances are taking shape and we are looking to find a low point to add to our existing long position"

Aaron

[cowpip 10]

Hi Sledge.

 

The answer is largely #5. There are too many people out there with different agenda's to narrow cause and effect down to only one or two of your options. Many will be profit-taking. Many will see a reversal pattern and will outright short into an uptrend. Others may speculate that price will break through the channel and will go long at the top. Still others will be looking at a different time-frame that will give them a reason to react in one way or another according to that time frame. So there are a myriad of causal reasons why price does what it does.

 

The best answer to your question probably rests in numbers: Are there more people trading what YOU are seeing, or are you seeing something that only a minority are trading? When you trade what the majority sees, you will always be on the right side of the trade.

 

And that is why it is so important to examine the playing field from multiple time-frames. When multiple-time frames converge into a single dominant opinion, the odds begin to stack in your favor.

[Sledge 13]

Cowpip:

Very nicely put.. as usual! Thank you!

Aaron

[DbPhoenix 42]

Good answer, cowpip

[firewalker 10]

Here's a good description (imo) of someone looking to take a reversal trade:

 

http://traderfeed.blogspot.com/2008/08/risk-management-in-trading-where-to.html

 

The concept of his trade is also very much Wyckoff (price action combined with volume). What I like most about his analysis, is his approach to exiting the trade if it doesn't work out. It's not fixed, it's not a stop of x points or x%, it's based on the action of the market:

 

"...I stop the trade when my idea is not supported: when the unfolding evidence of the market is not meeting the expectations of my hypothesis."

[kuky969 10]

Hi Db

please I would like ask you please see my chart This is one of my first attempt set SR levels for 5 august session. What do you think? is it correct ??

Thank you

[DbPhoenix 42]

As long as you don't leave out the word "potential", then yes. But you may also want to plot the midpoints of the boxes. This would have come in handy yesterday, for example.

[Sledge 13]

Another Good Slug of Information from Moneybags.com.au:

 

http://www.moneybags.com.au/article.asp?id=344