Trading The Wyckoff Way

[atto 20]

Very nice. Thanks Db for questioning and raising ideas so eloquently.

 

And a question for you: In your experience, how much does news affect the effect of hinges (or rather, probably more appropriately, affect what the hinges represent concerning supply/demand)? That is, generally, do news based market moves often follow the technical price movement predicating them? Example: ES 1m from today, breaking at 3:15 EDT.

[DbPhoenix 42]

The dynamics aren't the same. Price may form a triangle prior to a news event, but it has nothing to do with jockeying for position. Rather traders are simply waiting for the event.

 

But it may make an interesting subject of study for somebody.

[atto 20]

The dynamics aren't the same. Price may form a triangle prior to a news event, but it has nothing to do with jockeying for position. Rather traders are simply waiting for the event.

 

But it may make an interesting subject of study for somebody.

Yeah, that's how I've always treated news based PA movement like this. Since it makes sense for volatility to decrease nearing news (traders are already in positions or are already out), it also makes sense that price might form a triangle. If anything, a break from the triangle might signify how the news is received, but any trade is chasing the reaction.

[atto 20]

10s ES (just now), long:

 

edit: Price pulled back, +.25 ES, waiting for midpoint bounce (if it happens).

 

edit: Bounce (entered possibly late, but wanted to see volume come in. 46.5 fill)

 

edit: -.25 ES. I'll give it one more bounce if it does.]

 

edit: Long 46.25 (same story). Volume seems to be rising during up thrusts, and declining in these pullbacks. Stop is tight.

 

edit: Trade update.. 1/2 position out @ 54 ES. Stop on rest @ 50.

 

edit: ES 1m chart

 

edit: 1/4 out ES @ 58.25.

 

edit: Flat ES @ 55.75.

Edited October 31, 2008 by atto

[atto 20]

I didn't really explain since I was in the trade: My exits were based on climaxes, supply entering the market, and resistance holding. Look at 10:01 EDT on a 10s ES chart, and you'll see the climax. I don't exit until I see a price rejection, which happens shortly after at around 55 ES.

 

The 58.25 exit was after the 3rd failure at 58.75 on declining volume. The final exit was the newly formed congestion area break down.

 

Comments and feedback welcome.

[firewalker 10]

I didn't really explain since I was in the trade: My exits were based on climaxes, supply entering the market, and resistance holding. Look at 10:01 EDT on a 10s ES chart, and you'll see the climax. I don't exit until I see a price rejection, which happens shortly after at around 55 ES.

 

The 58.25 exit was after the 3rd failure at 58.75 on declining volume. The final exit was the newly formed congestion area break down.

 

Comments and feedback welcome.

 

How do you define climactic volume? For me volume wasn't climactic until it hit 976 (with vol 25k on 1min bar). I take it your exit around 958 was in part because it was potential resistance and in part because we failed to take it out after several attempts.

 

Anyhow, after your entry, price came back about 30 minutes later to 947.50-948, which is about where your resistance line shows in the third chart. Did you re-enter there or did you see things differently?

 

Incidentally, your hinge also materialized at a place where it was hugging the demandline on the 15min. That, and the fact that we had a lengthy premarket congestion close to that level was confirmation of a long entry for me. I didn't actually see the hinge the way you did, but it's nice we both saw different things that lead us to take a similar entry.

[atto 20]

I hope discussion on exits isn't too off-topic, but I'll answer your questions since they were good, and we'll try to keep more on topic.

How do you define climactic volume? For me volume wasn't climactic until it hit 976 (with vol 25k on 1min bar). I take it your exit around 958 was in part because it was potential resistance and in part because we failed to take it out after several attempts.

It all depends on what timeframe you're looking at. Yes, your example was a climax, but I would argue it was only a climax on the next bar, when volume was high, but price completely stalled. Regardless, remember that this hinge is primarily on the 10s chart (so a fast chart), and isn't even that obvious on the 1m. Therefore, the traders that influence moves on the 10s are more short term. I do like to use price fractals to my advantage (parlay fast tf entries to longer term trades for bigger gains), but I wasn't convinced on the 1m of a larger bull move, and was largely correct (price didn't break the 58 area for another hour).

 

I look for two distinct and important things in climaxes. First, I want to see a spike in volume (along with a spike in volatility). Then, I want to see a contraction of volatility (i.e., the move stops). I personally trade them by getting a possible climactic signal, and watching price carefully. Generally, I tighten my stops. The first climax I saw on the 10s ES was at 10:01:10 EDT. My stop was at 50 (previous swing high a while back), and I watched for supply to enter the market. Volume (interest) dropped off quickly, so I didn't exit just yet. Buyers attempted to move it back up, and there was another (much smaller) volume spike. Slight higher high, less volume. By now, I'm looking for an exit if it doesn't continue very soon. I moved my stop to 51.25, and buyers tried again (and failed to keep the move going, same story). I scaled my first half out there.

 

You're correct about the second scale-out. Here's exactly what I was looking at (slightly more annotated for clarity):

Anyhow, after your entry, price came back about 30 minutes later to 947.50-948, which is about where your resistance line shows in the third chart. Did you re-enter there or did you see things differently?

I wasn't trading at the time.

Incidentally, your hinge also materialized at a place where it was hugging the demandline on the 15min.

Funny how these things coincidentally happen

[atto 20]

In the Hinges thread, I posted a live trade and elaborated on my exit methodology. To keep that topic on topic and to allow us to continue investigating exits and scale-outs, I thought it would be a good idea to start a new thread. I'll cover my personal exit methodology seen though Wyckoff ideas, as well as the logical rationale behind it. That said, I welcome all feedback and supporting/opposing opinions.

 

My current trading methodology involves position adds and scale-outs. My reasoning has roots in wagering ideologies such as the Kelly criterion. The idea is simple: Bet more when you have greater odds. Relating to trading, you want the most exposure when your edge is greatest; similarly, you want less exposure when your edge is least (and ideally, no exposure when you have no edge). This makes logical sense, but many traders (myself included for a while) failed to see this.

 

Trading is a game of making money, not proving yourself correct. I disagree with the "A good exit is another entry" camp, because I can't say that my edge is always the same. Yes, if you're able to nail moves completely, then keep your all-in / all-out approach. I personally can't, and don't currently know of any trader who can.

 

Let's examine when a trading edge changes. Let's say you enter with a long setup (and many are discussed in this forum), and price moves in your direction but fails to break through a possible resistance area. Couldn't we argue that the new sellers, by confirming resistance, have taken (at least some of) your bullish edge away? This would be a good area to take some position off, because buying pressure is (momentarily) outmatched by selling pressure. I find volume especially important in these areas, because it can help you gauge the interest of the bulls and bears. Price stalled; did: a) sellers sweep in, or b) buyers simply take a break? If you see a rise of volume on the rejection, start looking for the door.

 

What if price did not stall at possible resistance? Then I see no reason to lighten the position. The buyers have been winning, and sellers didn't step in as they did before. In fact, I have position adding setups based on moves like this. Remember, price moves in waves (not bars) and is fractal. The setup you took on a 1m chart could parlay into a 5m setup. Always pay attention to the market on a greater scale.

 

My most reliable and accurate way to exit are climaxes. Here's how I define a climax:

1. A rise in momentium (volatility), along with:
   
2. A rise in volume
   
3. Then, a contraction of momentum / volatility (or, a rejection of price)
   

High volume does not mean there's a climax. In fact, some of the biggest moves are on high volume. It's the rejection / stall you're looking for. High volume gives you a head's up that there's a lot of interest. Once you spend screen time watching climaxes, you can catch them pretty quickly. Frequently, you'll see a quick decay of volume. This generally means that buying pressure has lessened, but sellers have not taken over. Many times, this is the making of a pullback before a continuation. If, however, you see volume gaining on the pullback, you might be looking at a reversal (or a pullback on a larger scale). It's not volume you're interested in directly, but volume's effect on price.

 

You'll also see times when volume does not spike before the exhaustion, but price fails to break through a support/resistance level. Many times, price will try more than once, but new buyers/sellers are simply not interested. This is another good scale out opportunity, because the lack of buying pressure is important. Price could likely continue, but our edge not as much as it was when we had buying pressure on our side.

 

So far, I've talked about exits that are pretty close to the extremes. Unfortunately, not ever price action move ends so cleanly with a climax or S/R confirmation. This is where stop management comes into play. To begin with, I use very small stops initially (so importantly, am willing to re-enter if my entry was not clean). Additionally, there's no reason to take a full stop if price is not confirming your entry premise. This is important. I am not saying to wait for the trade to be proven wrong. Rather, get out if you're not proven right. The Phantom of the Pits has some wise words on this topic.

 

So, we're in a profitable trade, and need to manage stops. My first goal is to make the trade riskless (move the stop to break even). This has many psychological and $ implications. Yes, at times, you can get shaken out for break even, and zoom!.. price shoots off. You must be willing for this to happen, and often, re-enter quickly without chasing a trade. I make the trade riskless as soon as price confirms my entry premise. This often involves a x point move, or a breaking of previous S/R. From there, I manually trail stops as price keeps breaking past S/R levels, or establishes new ones. Example: a bull run, and then congestion. I will set stops under the congestion. The more contracts you trade, the more scale-outs you can have, making your trade longer and longer (if this is wanted).

 

As a rule of thumb, the longer term the trade is, the less tight you need to keep your stops. On trend days, to catch the entire move, you will need to allow for pullbacks. In action, I'm frequently scaling out on pullbacks, and then adding to my position as the trend resumes.

 

This is a work in progress, so please feel free to add to my thoughts. My other posts on exits: Live trade exit discussion, the benefits of scaling out. A couple of you have mentioned to me that you like examples (helps solidify the concept). Please understand that this is simply one example, and does not represent the concept in entirety.

[Head2k 10]

Thank you for this topic. As a beginner building his first strategy, I find exits more challenging than entries. The reason is that while you can limit your entry to one known market situation or setup, once you are in a trade you must deal with whatever the market presents. Which might be much less familiar or obvious. That is also a reason I agree with the idea that the exit does not have to be a good place for entry in the opposite direction. Rather I think of exits as of changes in confidence.

I am looking forward to see this thread developing. Hopefully I will have something to contribute with soon

[Hlm 10]

Nice explanation atto.

 

I find it helpful to know where an example was taken. What instrument, time frame, and date was that taken from? Thanks.

[MidKnight 12]

Great post Atto. As you mention above, price moves in waves not bars, and I totally agree with that. However, volume consistently varies based on time of day. You will find that volume throughout the day is typically a smile. Because of this, I do not like to compare volume so much with prior volume at wave peaks/troughs to assess participation. Instead I prefer to measure the volume based on the degree of normal for that time of day. From there I believe I can get a better assessment of participation for that time of day.

 

I wonder how you assess probability as the trade is under way?

 

With kind regards,

MK

[atto 20]

... once you are in a trade you must deal with whatever the market presents.... That is also a reason I agree with the idea that the exit does not have to be a good place for entry in the opposite direction. Rather I think of exits as of changes in confidence.

Good points. However, if you treat your exits as "exit setups", it gets a whole lot easier. Successful traders have given up the need to catch every move to its fullest extent. Often, I have to settle for a re-break of a previous S/R level for an exit (which means I gave up profits).

 

In chat, Hlm made the point that for his trading methodology, an exit is an entry, just on a smaller timeframe. In a way, I agree. A 1m climax might be a wonderful opportunity to make a counter-trend scalp trade. I don't trade that way, but in a way, my decreasing my position into a less favorable environment, I'm creating a trade in the opposite direction. Good stuff

What instrument, time frame, and date was that taken from? Thanks.

I'd argue that it doesn't matter, because as I said, this isn't a representation of my entire point (possibly not even a good example). It just happens to show what I'm talking about. So just assume I made it up .

... Instead I prefer to measure the volume based on the degree of normal for that time of day.

 

I wonder how you assess probability as the trade is under way?

Interesting idea, never really looked into this. Please share if you have additional insight into this. I'm not huge on comparing volume on troughs and peaks, but it can show interest, which can help determine what the underlying supply and demand dichotomy is looking like.

 

My discussion of edge and probabilities is more qualitative than quantitative. That is, I don't have exact numbers for a setup (and when event x happens, how it affects my edge). Rather, I know what can affect my edge, and adjust my position accordingly. On a big climax (so, for example, very evident on even longer timeframes), I will be apt to scale more of my position out than on a small climax on my 5 or 10 second chart.

 

 

More on Climaxes

Something that's very important here is why climaxes "work". What is it about volume peaking, and momentum contracting makes for a good exit? It's actually very simple, and makes sense (which is important; you want your trading methodology to make sense logically). Climaxes show a fundamental shift in buying pressure vs selling pressure. Either buyers are content, are taking a break, and/or are taking profits OR sellers simply outmatch buyers. Either way, the peak of a climax is a wonderful exit, leaving time for the buyers and sellers to figure out who's going to win this squabble. Volume will tell you which of the two cases it is (in the above example, on climax I have highlighted, volume decreased on the pullback, and re-entered on the resume... this is telling that another push is probably under way).

 

Remember, climaxes frequently occur on very fast timeframes. Even if you trade off a 1m chart, venture into a faster time chart to spot these. It'll help on exit accuracy.

 

Also note: In my example, exits aren't on "bars". Bars are just cute summaries of continuous price data (which is why I'm a fan of a fast time chart; there's no different in "speed", just in horizontal displacement). Try not to get caught up in thinking what individual bars "mean". This became especially apparent a few days ago in chat, when a setup I took on a 10s chart looked completely different on another person's chart, because our bars were formed starting on different seconds. My setup / trade didn't change, but if I was relying on "bars", it would be vastly different.

 

(Cool trivia: Climaxes are often right after a WRB. Two different views of the market; the exact same result.)

[Hlm 10]

In chat, Hlm made the point that for his trading methodology, an exit is an entry, just on a smaller timeframe. In a way, I agree. A 1m climax might be a wonderful opportunity to make a counter-trend scalp trade. I don't trade that way, but in a way, my decreasing my position into a less favorable environment, I'm creating a trade in the opposite direction. Good stuff

Exactly, especially with the following comment...

I'm frequently scaling out on pullbacks, and then adding to my position as the trend resumes.

 

I also like the following comment of yours...

I disagree with the "A good exit is another entry" camp, because I can't say that my edge is always the same. Yes, if you're able to nail moves completely, then keep your all-in / all-out approach. I personally can't, and don't currently know of any trader who can.

I completely agree. Going back to the discussion right above, many times I will scale out even though I don't get an actual signal on the smaller time frame in the opposite direction. One can have a setup (fractal profiling of price) without having a trigger (proper entry placement with required risk/reward). It's all about probability. The risk/reward to % of win ratio (positive expectancy) might not be within my range for the short, but that doesn't mean it's not high enough to hurt the probabilities of my long.

 

I'd argue that it doesn't matter, because as I said, this isn't a representation of my entire point (possibly not even a good example). It just happens to show what I'm talking about. So just assume I made it up .

I completely understand. The only reason I ask is because I like to see how someone's strategy aligns with my own. But without having more data I am unable to compare. Maybe later you can throw up a couple of charts showing actual trades taken with the areas you scaled in and out...if you have time of course.

[atto 20]

I completely understand. The only reason I ask is because I like to see how someone's strategy aligns with my own. But without having more data I am unable to compare. Maybe later you can throw up a couple of charts showing actual trades taken with the areas you scaled in and out...if you have time of course.

Definitely. A good example is a trade I took that I live posted, in the Hinges thread. Link to the trades, and then further down is my exit rationale. As this discussion develops, I don't mind adding other live examples.

[jonbig04 10]

Such great info! Thanks, I will be following along in this thread!

[atto 20]

Here is this morning's trendy price action on a ES 1m, with annotated climaxes (which were the primary exits for my trading today). Inset is a 10s ES to show the fractal nature of climaxes. You can obviously see them on the 1m, but accuracy is greater when you look "deeper". This is the same chart I traded from today, but cleaned up a bit since it's only the exits we're interested in here.

 

Since my actual setups involve addons, I'll just identify places that I scaled out contracts (as well as stop placement).

 

 

Fairly textbook climax at (A), and a partial scaleout. At this point, I moved my stops to right above the top blue line, where buyers had trouble getting through before. At (B), I noted a potential climax that I labled that did not develop (orange circle). This is different from the others in that price stopped, but buying pressure was too insignificant to move prices up. An exit here is not a mistake, just premature (as you can see). Interestingly enough, I had a limit stop a tick above high tick of this area before it kept going. That's mostly luck. A real climax did develop later in (B) at the blue circle. Half stops moved to 2nd blue line, half right above swing high after (A). Climax occurred at ©, so a partial scaleout. Half stops moved to swing low at (B), half at swing high after (B). Finally, there was a climax at (D), so partial scaleout. Stops moved to swing low at C (not in halves due to that last move's size). Things get more interesting after (D), where we made the largest pullback in the move so far. We made a higher low, so I exited half at 72.00 (as this possibly signals a reversal, or at least a weakening in the dominate trend). My final exit was at 74.75, where my final stops were hit.

 

Let me bring up that last stop placement at © again. Notice I moved all my stops to the swing low at © because of the move size. This is primarily because I'm not willing to let ES retrace 9 pts on a pullback (which is if it reversed and kept going up). I'm much happier to go to lunch and re-enter later.

 

Another reminder to not think there's anything special about this example.. it's just an example. I encourage others to post their Wyckoff based exits, or other general ideas regarding this topic.

[Head2k 10]

I wonder where would you exit if you traded one contract. At A?

[atto 20]

I wonder where would you exit if you traded one contract. At A?

Interesting point. Personally, if I were limited to one contract, I would trade 1 real, along with 4 paper. Scale out the first at the first exit you identify, and then keep on trading the paper contracts. I also have a couple position adds in this trade, so you could just keep going in and out at "add setups", but it may be easier to begin with the live/paper combo. (This idea was borrowed from Dbphoenix, if I remember correctly.)

 

The reason I'd do 4 paper is to give you the ability to scale out several times before you're flat. You could do more or less.

[Hlm 10]

Since my actual setups involve addons, I'll just identify places that I scaled out contracts (as well as stop placement).

Please correct me if I am wrong, but if you are adding back in doesn't that change the picture some? Couldn't that be looked at as not so much of a scale out as it is an exit and then reentry on a smaller time frame while having another position short (no scaling) on the larger time frame? Just another way to view it. I just want to keep everyone on the same page. The reason I bring this up is because of Head2k's response (which I just checked and noticed you answered...but I will post this anyways ).

 

Btw, I love how your example images are so clean.

[atto 20]

Please correct me if I am wrong, but if you are adding back in doesn't that change the picture some? Couldn't that be looked at as not so much of a scale out as it is an exit and then reentry on a smaller time frame while having another position short (no scaling) on the larger time frame? Just another way to view it.

Yep, in terms of net positions, it's exactly what you're talking about, and in practice, I'm looking to accomplish just that: taking advantage of longer term moves as well as shorter ones. A difference would be that the "longer term position" size isn't set. For example, the last exit was just 1/4 of a "full size" (a default entry size I use).

Btw, I love how your example images are so clean.

I'll try to also provide some soon that aren't so clean (and you guys are more than welcome to add your own! yes, that's you Mr. lurker). It's easy to cherry pick the ones that "work", so it makes sense to show when it's not as clean as well.

 

edit: This thread assumes readers are pretty comfortable with at least the basics of supply/demand, markets, and potentially auction market theory. If you're not so comfortable with these topics, and are just more interested in learning some sweet ass exit "setups", you'll probably save a lot of time in the long run going here (and the rest of this forum).

Edited November 6, 2008 by atto

[Hlm 10]

I'll try to also provide some soon that aren't so clean (and you guys are more than welcome to add your own! yes, that's you Mr. lurker). It's easy to cherry pick the ones that "work", so it makes sense to show when it's not as clean as well.

Haha, I wasn't talking about the "setups" themselves. I was talking about the visual aspect of the charts being crisp and clean...especially that second chart you posted. I'm just trying to give you a compliment!

[atto 20]

Hahaha..

 

 

Thanks for the great post atto. This may be off-topic, but where is the entry?

ES 91.5, on a second entry attempt. Also, if you notice, A occurs right at the low of the day (made shortly after open), so I was already watching pretty closely in that area. Buyers came in to buy the lows (thus creating the climax.. high volume = high interest on both sides), and failed. And down we went again...

Edited November 6, 2008 by atto

[cowseathay 10]

Thanks for the great post atto. This may be off-topic, but where is the entry?

[jonbig04 10]

Awesome post Atto. Make sense in every way.

[BlowFish 10]

Hi Atto,

 

Great thread, mind you its always nice to see a post about the nuts and bolts of a trade. I know its about exits but just for completeness could you post a brief post with your entry? It gives us some context for the trade management. Also maybe an idea of your initial stop loss criteria? I hope you don't mind me asking.....you clearly have already put a lot of work into the charts you have posted to date.

 

Are there circumstances you will close all of the remaining position? (e.g. This is a really big selling climax and there is a case for minor support here maybe I should stand aside and re-evaluate).

 

Nice trade btw, hope you manage to post a few more. I'd be interesting to see how things pan out when price dosen't stair step in a strong well defined trend, I guess you take your profit on the first leg(s), get stopped on the rest, and look for the next trade