Trading The Wyckoff Way

[Head2k 10]

Could you please elaborate what you mean by "buying and selling climaxes"?

Those buying and selling surges that cunparis was writing about. A selling surge might be called a potential buying climax. If you have an established uptrend which is speeding up, that means increasing inbalance between supply and demand. There is increasing number of people willing to participate in the up move or/and less people willing to sell (they hold). Volume represents both sides of trade - both buyers and sellers. If volume spikes up on a wide range up bar which closes well off the high it means that this buying frenzy encountered heavy supply. The problem is that there are only little potential buyers left, because almost all of them already bought. So there is very little support for the price. If the supply is big enough and timed well, it swamps the remaining demand and as price has only a little support it can plumet down quite fast. Or at least stop the up move and move sideways.

 

Vice versa for selling climax.

[AgeKay 10]

Volume represents both sides of trade - both buyers and sellers. If volume spikes up on a wide range up bar which closes well off the high it means that this buying frenzy encountered heavy supply. The problem is that there are only little potential buyers left, because almost all of them already bought.

 

This is a contradiction. How can almost all of them have already bought when there was heavy supply.

This and the following text of yours actually sounds very similar to the story I criticized earlier. You're trying to explain what might have happened after the fact, but the fact is you don't know (neither do I or anybody else unless you look at the actual time & sales). It's all just speculation unless you look at the actual trades. Candles/bars are just a summary of price movement that condense trade activity into 5 pieces of information: low, high, open, close and volume. Price could have moved up and down within one candle/bar 100 times (which might be the reason that there is a lot of volume), but it would look exactly the same like another candle/bar that went up straight up.

Also don't forget there can only be a lot of volume when there is both a lot of supply and demand, because if there was not a lot of supply then price would just move up on little volume.

[DbPhoenix 42]

I have a question about volume driving price.

...

 

I just today read this about the SB volume oscillator:

 

# A volume surge that appears as the index is rallying (i.e., occurs during a price advance) indicates that institutions are selling in large quantities. We call such volume spikes “selling surges”;

# A volume surge that appears as the index is declining (i.e., when prices are weakening) indicates that institutions are buying in large quantities. We call such volume spikes “buying surges”;

 

I had thought it was the opposite. That if price goes up on big volume that institutions are buying. But here they are saying the opposite. Could someone elaborate on this?

 

Thanks!

 

I suggest you forget about institutions and smart money and dumb money and herds and sheep and lemmings. None of it has anything to do with the price action that's in front of you.

 

Volume is trading activity. If there's a lot of trading activity, there's a lot of volume. If there's little or no trading activity, there's little or no volume. Therefore, a lot of "volume" means that there is a lot of trading activity. Who is responsible for the volume is irrelevant. Your concern is the balance between supply and demand, or, if you like, selling pressure and buying pressure. If buying pressure is greater, price will rise. If selling pressure is greater, price will fall. That's it. Fretting about whether the volume is "buying volume" or "selling volume" is an unnecessary distraction since the volume is by its nature both, that is, a lot of "selling volume" has to be matched by an equal amount of "buying volume" or else there won't be any "volume" -- trading activity -- at all. You can pay somebody $100/mo to tell you whether the volume is "buying volume" or "selling volume", but if you can tell up from down you can easily determine this for yourself and do something much more interesting with the hundred dollars.

 

As for bars and candles, these are simply a means of illustrating the price action and I see no reason for people to get snippy about them vs T&S, which is also a means of illustrating price action. In Wyckoff's world, what matters is not how one illustrates the action but the action itself, i.e., the pace and extent and duration of each buying and selling wave. If one has no sense of the continuous ebb and flow of these waves, how he illustrates the price action is of no importance whatsoever.

[Head2k 10]

This is a contradiction. How can almost all of them have already bought when there was heavy supply.

This and the following text of yours actually sounds very similar to the story I criticized earlier. You're trying to explain what might have happened after the fact, but the fact is you don't know (neither do I or anybody else unless you look at the actual time & sales). It's all just speculation unless you look at the actual trades. Candles/bars are just a summary of price movement that condense trade activity into 5 pieces of information: low, high, open, close and volume. Price could have moved up and down within one candle/bar 100 times (which might be the reason that there is a lot of volume), but it would look exactly the same like another candle/bar that went up straight up.

Also don't forget there can only be a lot of volume when there is both a lot of supply and demand, because if there was not a lot of supply then price would just move up on little volume.

Maybe I wasnt clear enough. Of course in the climatic moment there is extreme demand. But supply is able to swamp it. THEN there is only little supply left to continue the upward movement or even to support the price, at least for some time.

In real time you can watch the candle to form, so you have an idea of the dynamics of the movement. Of course that I dont know if this potentially climatic struggle is actually really climatic or only a pause (i.e. there is still more demand left) and I dont know if those who bought near the highs will panic and add to the downward momentum, or they decide to hold... But there is a chance.

Yet I am a newbie and I am in the beginning of learning the market dynamics, so I have no doubt that you have a deeper insight. Maybe really all these rationalizations and stories of interpretation one tries to develop are really irrelevant and one should focus only at the facts (or effects). Still you need to interpret facts to be able to take some action...

[Head2k 10]

I suggest that you learn how price discovery/order matching works to understand what drives price changes.

Could you please advise some resources for this?

[Kiwi 16]

You have the right attitude Head2k.

 

Be aware that different markets will:

1. Have good volume effects or none on some or all timescales

2. Have different effects even when they are good.

 

So you are best (IMO) to start with price. Then look at rising, falling, unusually large or small, volume in the situations where you think price was telling you something. And find out if volume helps or hinders your view.

 

It helps to have a theory of how volume works but as db says above, don't overly complicate it. Searching for too much certainty is a great thing in an analyst but can be fatal for a trader. I am a sometimes reader of volume, because I have found it to be deceptive in many circumstances. When it gives good info I use it - but the rest of the time I ignore it as so much noise.

[BlowFish 10]

I definitely think we are ready for a T&S thread. Darth mentioned he had made good progress there. It would have my attention though not sure I could contribute much. Guess I am more of a visual person but hav difficulty with just using the 'tape' (T&S)

[cunparis 10]

Interesting discussion, thanks to everyone participating for helping me to understand how this works.

 

From what I read of the Wyckoff theory, the composite man establishes a position in a stock and then drives the price up, finally dumping the shares on the public. The analogy in Pruden's book is to the fashion industry, where clothes are sold (dumped) to the public at discount stores and the public doesn't know it but the clothes are out of fashion, just as the shares are out of gas and can't go up any more.

 

But as AgeKay points out the institutions are responsible for the majority of the stock volume. So I think, as another poster said, there are smart institutions and dumb institutions. The public can't absorb all the stock.

 

My original question is because the service I referred to calls a volume increase with price increase "selling volume". From my experience with IBD & O'Neil, when there is a big price move on big volume it means institutions are buying and it's positive. This is usually the criteria for entry using O'Neil's method. But this service is saying that such a thing means price is going down, which has been my experience the majority of the time when trading IBD's buy points!!!

 

Could it be that both are correct? That the market volume service is saying price will go down (short-term) and IBD is saying price will go up (long term)? That's the only explanation I can make of it.

 

I find the whole thing a bit confusing. Price goes up 5% on 2x volume. The optimistic person says "there are a lot of people buying". But the pessimist says "There are a lot of people selling". How do we know which side is right?

[BlowFish 10]

Some of the 'models' bandied about are hugely simplistic and not really representative of whats going on. If you are really interested in who trades (market participants) and why (their objectives) I'd recommend you pick up a book on market mircostructure. I like Harris though hear O'Hara is as good (better?).

 

You could of course choose to ignore who trades and why and still trade successfully just by knowing that someone is trading (volume).

 

Half baked ideas (largely spread by marketeers and then re quoted as fundamental truth) about 'who' and 'why' may not hinder your trading but they certainly wont help your understanding of markets. This is fast becoming a pet crusade of mine!

[AgeKay 10]

I think DBPhoenix and BlowFish are right on. Reread their posts a few times until it sinks in. Don't worry about who does what, but instead focus on what happens in regards to volume and price.

 

Could you please advise some resources for this?

 

These topics are all closely related:

 

Market Microstructure: "Trading and Exchange: Market Microstructure for Practioners" (2002) by Larry Harris

 

Price Discovery/order matching: this is basically the process by which the limit order book works / how orders are matched / why prices change. I don't know of a good single resource. I picked up little pieces here and there. Maybe someone else knows a good resource. I recommend just googling those terms. It might also help to just read on the order matching algorithms on the exchanges. Eurex has a good description: http://www.eurexchange.com/trading/market_model/matching_principles_en.html

[DbPhoenix 42]

 

My original question is because the service I referred to calls a volume increase with price increase "selling volume". From my experience with IBD & O'Neil, when there is a big price move on big volume it means institutions are buying and it's positive. This is usually the criteria for entry using O'Neil's method. But this service is saying that such a thing means price is going down, which has been my experience the majority of the time when trading IBD's buy points!!!

 

Could it be that both are correct? That the market volume service is saying price will go down (short-term) and IBD is saying price will go up (long term)? That's the only explanation I can make of it.

 

I find the whole thing a bit confusing. Price goes up 5% on 2x volume. The optimistic person says "there are a lot of people buying". But the pessimist says "There are a lot of people selling". How do we know which side is right?

 

As I said, and as I've said a great many times before, a "lot of people" can't buy unless "a lot of people" are also willing to sell. Unless someone is willing to sell and also someone willing to buy, there can be no transaction. If there is no transaction, there is no volume.

 

Your "service" has come up with some half-baked half-truth in order to suck beginners into spending $100 a month. Forget about who's doing what and focus on price. If you're long and demand is driving price higher, that's all you need worry about. When demand can no longer drive price higher (lots of volume, no price progress), then you need to start looking for the exit, if not heading for it.

Edited June 23, 2009 by DbPhoenix
OT

[Guest forsearch]

 

Market Microstructure: "Trading and Exchange: Market Microstructure for Practioners" (2002) by Larry Harris

 

Here's a preview/draft copy direct from Prof. Harris' website at USC:

 

http://tinyurl.com/6fy28u

 

-fs

[BlowFish 10]

Forsearch great find on the Harris draught!! I would urge everyone to give it a go. It can be 'difficult' but it tends to lead you in gently but quickly piles on information. If you have ever wondered exactly who/what 'composite operators' 'smart money' 'elephants in the room' are this clearly identifies the players and there modus operandi.

Edited June 23, 2009 by DbPhoenix
Ref to del posts

[jonbig04 10]

Sorry about the miss-placed question.

 

I have been thinking about this for a while, and I would like to better understand why S and R occur.

 

I don't mean ultra-specifically, of course everyone has different reasons for why they by and sell. But why does price become S? Why does it become R?

To me S and R are just price levels that, for whatever reason(s), are important to people. What I'm curious about is why S and R form, and why R often turns to S and vice ver

[DbPhoenix 42]

Since on the surface of it your question appears to have been answered in the thread, perhaps you could address a particular post that you believe requires clarification.

[Head2k 10]

I have been thinking of the same stuff for the last few days. I think I am slowly coming to some foggy conclusions. Picture schemes that Mr_Black posted in another threads helped me a lot, together with concept of locked-in traders and Db's book.

[snackly 10]

For example when dealing with equities, there are a number of known shares in the market. To an extent the volume traded can be measured with some relative meaning to the outstanding shares.

 

In futures and options there is no maximum supply, or even an effective maximum supply that there would be consensus on. One could buy as many lots of a future as they wish, no?

 

And doesn't Wyckoff's main principal pertain to the exhaustion of supply at a given price point in order to then force the price up so that smart money can proceed to sell into the bullish run?

 

Maybe I am missing something very obvious, I am new to this methodology.

 

Many thanks.

[Kiwi 16]

You are missing "willingness."

 

When the owners of Share X are not willing to sell at $100 then selling pressure at $100 has dried up. So buyers must raise there prices. If they are not willing to do so then price will stall (low volume) until members of one or other group are willing to move price.

 

So even though there might be hundreds of buyers or sellers, if none are willing to participate at the current price then supply and demand have both dried up. I think that's why the terms supply and demand are often replaced with the more obvious terms, selling pressure and buying pressure.

[Frank 10]

futures are a derviative of an underlying index and futures have an expiration date. at some point of buying, you would theoretically own the future delivery of the entire market. everyone else could short to you the futures -- with a mark-up (the 'ask') and then they could buy the underlying index to be fully-hedged...

 

at some point, there would be no more stock to buy and so they would simply not sell you any more contracts. instead, they just wait until expiration -- as 'they' would no longer be short an expired contract --- and now they simply deliver to you all the stock in the world. You would own all the stock and they would have made the arbitrage profit.

[lote_tree 10]

In futures and options there is no maximum supply, or even an effective maximum supply that there would be consensus on. One could buy as many lots of a future as they wish, no?

 

Firstly, futures and options are derivative instruments that track an underlying asset. E.g. the S&P 500 Index. The E-mini S&P Futures market is really tracking the S&P 500 index. You might see minor divergences from time to time between the futures and cash market but 98% of the time they are running in sync.

 

While theoretically there may not be a maximum supply in futures or options, fundamentally, all price movement is governed by two key ideas:

 

1. The resources available to buyers & sellers to trade at a certain price at a certain moment in time.

2. The willingness for buyers & sellers to trade at a certain price at a certain moment in time.

 

And doesn't Wyckoff's main principal pertain to the exhaustion of supply at a given price point in order to then force the price up so that smart money can proceed to sell into the bullish run?

 

Ok, so when talking about “exhaustion of supply” at a given price point, it’s really referring to a greater willingness of buyers to buy at that given price point. This could be called the accumulation phase when big institutions are buying up most of the limited amount of company stock.

 

Once the accumulation phase is complete the path of least resistance for price is up. This sends the S&P 500 Index up because there are few sellers left in the market due to the limited amount of stock available to sell (“resources available”). So if you were fortunate enough to buy 1 E-mini S&P 500 futures contract while the accumulation phase was in full flow in the cash market, your futures contract should start to go up in price with the index.

[snackly 10]

Firstly, futures and options are derivative instruments that track an underlying asset. E.g. the S&P 500 Index. The E-mini S&P Futures market is really tracking the S&P 500 index. You might see minor divergences from time to time between the futures and cash market but 98% of the time they are running in sync.

 

While theoretically there may not be a maximum supply in futures or options, fundamentally, all price movement is governed by two key ideas:

 

1. The resources available to buyers & sellers to trade at a certain price at a certain moment in time.

2. The willingness for buyers & sellers to trade at a certain price at a certain moment in time.

 

 

 

Ok, so when talking about “exhaustion of supply” at a given price point, it’s really referring to a greater willingness of buyers to buy at that given price point. This could be called the accumulation phase when big institutions are buying up most of the limited amount of company stock.

 

Once the accumulation phase is complete the path of least resistance for price is up. This sends the S&P 500 Index up because there are few sellers left in the market due to the limited amount of stock available to sell (“resources available”). So if you were fortunate enough to buy 1 E-mini S&P 500 futures contract while the accumulation phase was in full flow in the cash market, your futures contract should start to go up in price with the index.

 

So essentially the accumulators or smart money in the derivatives markets are buying the contracts at the low prices from the dumb money. At the point at which they've bought most of that they've effectively deprived the dumb money from selling further and from selling much of anything to each other both at the psychological level and at the material level since they've bought most of the contracts that dumb money had been holding? Hence at that point the price begins to rise as the smart money withholds their inventory?

 

What's to stop dumb money from shorting the contracts after they've sold the ones they held to smart money, further depressing the value? I guess it is just because its so unlikely for the composite dumb to think in that way where as the composite smart knows better?

 

Am I still wrong in thinking that the Wyckoff method or supply and demand have more demonstrable at the material level with equity issues?

 

And btw, I am talking about FX Futures although I suppose it shouldn't really matter.

 

And thanks to all who replied, much appreciated!

Edited September 10, 2008 by DbPhoenix

[snackly 10]

I am wondering about the technical end of this. For example, is it better to have a broker's tape feed that is never latent, such as InteractiveBrokers which gives approx 5 updates per second, or to have a feed like ZenFire which supposedly gives the full stream of ticks but can lead to bandwidth overload and latency?

 

I guess for Wyckoff the pure tick stream of quotes is not terribly important, its the time and sales that constitutes the tape, right? Does anyone know if the time and sales of any one broker is better than the other? Speaking mainly about CME Futures for the sake of argument?

 

Thx.

[sevensa 10]

Snackly

 

Can I kindly suggest to read up and study Wyckoff a little more? I don't mean it in a harsh way, but the questions you are asking about Wyckoff doesn't sound like you had read up on it yet. If you did, my apologies for my assumption, and I would suggest that you read the material again. Wyckoff is not just about reading time and sales.

 

Also, the question about if data speed is important, is not relevant to just Wyckoff. This is relevant to the time frame you are trading. If you are trading off daily bars, the datafeed speed is irrelevant. If you do scalping off 1 second bars, then it probably is. However, your question is not really a Wyckoff question, it is a time frame question.

[sevensa 10]

What's to stop dumb money from shorting the contracts after they've sold the ones they held to smart money, further depressing the value?

 

Nothing. This is why not everyone obtain unlimited wealth with trading and why you have to study price/volume at key points.

 

Am I still wrong in thinking that the Wyckoff method or supply and demand have more demonstrable at the material level with equity issues?

 

Yes.

 

On an side note. If you are not comfortably with any kind of method and don't believe it will "work", then don't try to use it. You need to find something you are comfortable with and works for you. You will waste your time and trading capital if you try to implement a method, you deep down never really trust, even though someone else is wildly successful with it and tell you it will "work" for your market.

[snackly 10]

Nothing. This is why not everyone obtain unlimited wealth with trading and why you have to study price/volume at key points.

 

 

 

Yes.

 

On an side note. If you are not comfortably with any kind of method and don't believe it will "work", then don't try to use it. You need to find something you are comfortable with and works for you. You will waste your time and trading capital if you try to implement a method, you deep down never really trust, even though someone else is wildly successful with it and tell you it will "work" for your market.

 

Right, I'm not at the point where I don't trust it. In fact I am very much buying it. Please don't take my questions as a means to criticize it, I'm just looking to pose the devil's advocate type of question to see how much folks have thought this stuff out.

 

I appreciate the answer.

 

However I should point out that in the equities world, what would stop the dumb money from shorting after giving up all their shares to the accumulating smart money would of course be the lack of outstanding shares in the market. At least on a theoretical level Wyckoff works better in equities it would seem.

 

But it sounds like from the feedback that people feel it works just as well in futures, including FX futures? What's interesting though is that FX Futures should correlate 99% to the spot rate, correct? And the spot rate drives the future. So the accumulation of the FX futures contracts should coincide with the smarter understanding of the current and immediate direction of the spot rate, and therefore the lack of interest from smart money would probably have a profound effect on the ability for dumb retail FX traders to short a major pair and make it go down. It simply couldn't happen due to the imbalance.

 

Am I getting that all right?

Edited September 10, 2008 by DbPhoenix