Trading The Wyckoff Way

[DbPhoenix 42]

I notice the topic of upthrusts has not been mentioned. Does Wyckoff place any importance on upthrusts itself or does he mainly look to the follow through/ no follow through?

erie

 

For the most part, W uses the term "thrust" generically -- thrust, upthrust, downthrust -- having the same meaning as that found in any dictionary. A synonym for it might be "poke". This particular kind of movement is made out of a sideways congestion to determine if there is any buying interest (if up) or selling interest (if down). An upward thrust can also be used to trap traders into buying if the ultimate intent is to drive price down. This not only helps to reduce demand, but may also aid the downward movement if the buyer is frighened into throwing his shares back onto the market.

 

A downward thrust is also called a shakeout, and its intent is the reverse, to determine if there is any selling interest and perhaps frighten holders into selling their shares in advance of a move upward. This reduces supply and enables those who are accumulating the shares to accumulate even more.

 

Upward and downward thrusts may also be used to catch the stops of those who are short or long, respectively.

 

W calls particular attention to "terminal" thrusts and "terminal" shakeouts, i.e., those which occur just before a breakout to the upside or downside as part of the preparation for the ultimate move. However, it's next to impossible to determine whether or not these are "terminal" except in hindsight, so the value of knowing what these are and what they mean is to be able to interpret the motives behind the movements in real time if the "breakout" quickly fails.

[HAKUNA 10]

An upward thrust can also be used to trap traders into buying if the ultimate intent is to drive price down. This not only helps to reduce demand, but may also aid the downward movement if the buyer is frighened into throwing his shares back onto the market.

 

A downward thrust is also called a shakeout, and its intent is the reverse, to determine if there is any selling interest and perhaps frighten holders into selling their shares in advance of a move upward. This reduces supply and enables those who are accumulating the shares to accumulate even more.

 

 

Does this mean the following:

1. Upthrust can reduce demand - then prices can fall on low vol.

2. Shakeout can reduce supply - prices can rise on low vol. ie. less effort.

[DbPhoenix 42]

Does this mean the following:

1. Upthrust can reduce demand - then prices can fall on low vol.

2. Shakeout can reduce supply - prices can rise on low vol. ie. less effort.

 

Theoretically. If you understand the accumulation and distribution processes, prices will rise out of a base more easily if they face less supply, or, if you like, less resistance to an upward move. One way of decreasing this supply is to persuade, prompt, trick, motivate holders to unload their shares prior to the upside breakout. The shakeout can accomplish this if the holders are "weak", i.e., they don't understand markets and/or have no guts.

 

Reverse for an upward poke.

 

On the other hand, if you don't understand the accumulation and distribution processes as well as you'd like to, just do a search of the "Wyckoff Forum" using my name and "accumulation".

[HAKUNA 10]

Can we talk about accumulation and distribution in the futures market where there is no float?

There is contraction(ranges) and expansion(trends) on all timeframes intraday ie. 1min, 3min, 5min, 15min, 30min, 60min, how do we assign or define accumulation/distribution terms in any particular timeframe chart.

[DbPhoenix 42]

Can we talk about accumulation and distribution in the futures market where there is no float?

There is contraction(ranges) and expansion(trends) on all timeframes intraday ie. 1min, 3min, 5min, 15min, 30min, 60min, how do we assign or define accumulation/distribution terms in any particular timeframe chart.

 

See my earlier post, above.

[DbPhoenix 42]

Trading the Wyckoff Way

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and

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Riding the Wyckoff Wave:

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354

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Point and Figure Charting:

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Trend:

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and

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Question About Volume Driving Price:

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Retracement vs Reversal:

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24

Db's Cajas Famosas:

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and

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thru 97

145

Hinges:

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Exits and Scale-outs:

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Ask Any Wyckoff-Related Question:

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Volume

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Using the TICK(Q)

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Support and Resistance: Trading in Foresight

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* - Nominated post

Edited February 3, 2013 by DbPhoenix

[darthtrader2.0 10]

Getting back to the title of this thread. I opperate from the standpoint that most traders are not fundamentally undercapitalized, but undercapitalized in comparison with the spread and tick size of the instrument they are trading.

To me to truely quantify a market edge, you would need to have an infinite player game theory model, otherwise you will simply not know how your setup is effecting the other players. Obviously, that model is null, so you have to accept a random element of chance in your setup along with every other player in the game having a random element to what they are doing.

Scaling out is a probabilistic good bet if you can stay in the game cheaply while holding on "luck" wise..If someone makes me a bet that I know will only happen 1 out a million but it cost me nothing to get in/out, i'll put on the bet as much as possible.

From what I see most traders do the opposite of that. They risk far more on the spread/tick size, ignoring the randomn element of trading as far as being able to use many many "tight" wrong bets, just to capture the big move and "be right", "probability wise" with a "bad" bet. A bad bet is still a bad bet, if you get lucky or not.

[BlowFish 10]

Interesting you should bring up edge and probability. It might be worth mentioning,if you want to collect statistics to evaluates performance and you are a scaler it is important (imho) to evaluate each scale as a separate trade.

 

You will inevitably find that the % winners on the first leg will be higher than the second and subsequent legs. Obviously it can be no other way as you can't have the second scale win while the first loses. Also the first leg will have a worse R:R. (First exits are closer then subsequent ones). Hence one of the potential benefits of scaling, you smooth the equity curve (usually at the expense of bottom line profit). A pretty fair trade off. In some cases (usually rare) you might find the % that score drops off so quickly on later legs that the early legs are not only smoother equity but more profitable too. I have found this seems to happen if you are liberal with drawing S/R (i.e. yu include miner areas) and if don't wait for much in the way of confirmation triggering of them.

 

Adequate capitalisation is a function of what risk of ruin you are comfortable with. Sure if you trade instruments that are very volatile and also move in $100 ticks your RoR is likely to be high if you trade the DAX with a $500 account well you don't need maths to tell you what will happen. Personally I just like to be conservative, but these things can be calculated precisely.

[steve46 12]

I rarely mention this anymore, but really one should have gone through a market characterization process prior to deciding on a plan to scale (or not). Nobody seems to want to start "at the beginning"....

 

I find that unless I am paying someone (working in my office) to do this, it doesn't get done. And its too bad, because with enough time into the process traders usually find that it gives them more confidence to hold a position (thus their PnL is more likely to match their projections). Its like trying to get little kids to brush their teeth (lol).

 

All I can say is "learn to use a Monte Carlo engine" and you will never regret the time it took to learn.

 

Learn to characterize a market and you will never again be involved in a "traditional" backtest.

 

and to anticipate the inevitable questions 1.)I use @Risk (Palisade Software) and 2.) A simple Excel spreadsheet. As with all things it ain't about the tools, its how you learn to use them (your skill set).

 

For anyone who take the trouble to actually go out an get the software, you then need some basic background. "Simulation Modeling using @Risk" by Wayne Winston is one way to go...Chapter 16 shows modeling equities, and chapters 17-19 deal with path dependent options, interest rate risk and hedging with futures.

 

So ultimately, scale out or not depends on what you want to accomplish and what compromises you are willing to make. Frankly if I were a newbie or a trader with a small account, I would scale all in on the entry and scale out incrementally in most index futures markets. For any equities markets I would research (characterize) the behavior of the specific issue. Same for currencies although they generally have a greater tendency to trend. Finally if there are any newbie ags traders (soft, meats, grains) I would definitely scale out no question. Energy (scale out), metals (scale out) I believe thats about all I can say from experience.

 

By the way it wouldn't hurt for newbies to get a copy of "Mathematics of Technical Analysis" by Clifford Sherry. It shows a couple of simple ways to characterize price action (market action)....

 

Hope it helps (now go get that Monte Carlo software. It ain't cheap so ask if they still have a student version that you can use for free).....

 

 

Steve

[jonbig04 10]

Man. Whatever happened to Keep It Simple Stupid (KISS)?

[DbPhoenix 42]

Man. Whatever happened to Keep It Simple Stupid (KISS)?

 

That's pretty much what the Wyckoff approach is all about. But if people want to get into infinite player game theory models and Monte Carlo simulations, that's entirely up to them.

[jonbig04 10]

Crazy stuff. Im just a piker, but I think equilibrium is reached in that price action is the most direct representation we have of supply and demand which is fueled by the immutable fear and greed of human beings. Thats why we can make living trading using PA. IMHO.

[steve46 12]

I think diversity of opinion is a good thing. Thats what makes horse races so interesting. In my opinion, the limiting factor as regards Wyckoffs approach is that today's markets have changed, not only in terms of volume levels but as to how that volume is delivered, processed and displayed to the public. In addition, it seems to me, that the tools of the trade have changed as well as the skill levels of participants. Today's markets are much different than Wyckoff could have imagined.

 

As regards the use of MonteCarlo engines, I think its no different than learning to use a circular saw instead of a hand saw. Its readily available and because I can make use of it quickly, I can obtain an advantage over those less skilled.

 

I feel obligated to tell you that these tools exist, in the same way that I would let you know that an elevator can be used instead of taking the stairs. Certainly its up to you to decide which form of transportation serves you best.

 

Good luck

Steve

[Kiwi 16]

Yes. There is a lot of learning in simple monte carlo software. Just take a recent string of 100 wins and losses and use that as fuel for testing your risk of ruin at various bet sizes (as a proportion of your equity). An excellent tool.

[DbPhoenix 42]

I think diversity of opinion is a good thing. Thats what makes horse races so interesting. In my opinion, the limiting factor as regards Wyckoffs approach is that today's markets have changed, not only in terms of volume levels but as to how that volume is delivered, processed and displayed to the public. In addition, it seems to me, that the tools of the trade have changed as well as the skill levels of participants. Today's markets are much different than Wyckoff could have imagined.

 

As regards the use of MonteCarlo engines, I think its no different than learning to use a circular saw instead of a hand saw. Its readily available and because I can make use of it quickly, I can obtain an advantage over those less skilled.

 

I feel obligated to tell you that these tools exist, in the same way that I would let you know that an elevator can be used instead of taking the stairs. Certainly its up to you to decide which form of transportation serves you best.

 

Good luck

Steve

 

I'm aware that these tools exist, and anyone who wants to use them is welcome to do so. But they aren't necessary.

 

As for the market's having changed, it's still demand/supply, cause/effect, effort/result. But not everyone is interested in following this path.

[Kiwi 16]

Db, You're absolutely right.

 

Now I am going to avoid saying But. But how?

 

You don't need Monte Carlo sims. Markets are still demand/supply etc. There is an interesting thing I've noticed, and its that each market is a little different in how those things play out. How the pushes take place. How far a move is likely to move. And Steve's suggestions about characterizing the statistics of your markets give you a chance to refine your strategy and recognize changes over time.

 

IMHO adaptability, like discipline, is a key characteristic of the successful trader. I'm expecting my markets to change as the recession/depression plays out and might just do some extra thinking in this space over the weekend. Have a great break everyone.

[DbPhoenix 42]

Unfortunately, we seem to have strayed off topic quite some time ago and are wandering farther afield. The general topic is Wyckoff. The specific topic is atto's approach to exits and scaling out. If anyone has any questions for atto regarding his posts (the bulk of these will be found in the first three pages), feel free to post them. Off-topic questions, comments, etc, will be moved.

 

Thank you for your efforts in keeping the thread short and sweet.

[steve46 12]

Sure, I understand completely...if you don't mind I would like you to delete my posts in this thread.

 

Thanks,

 

Steve

[bkkumala 10]

nice thread...

 

i'm new here and still reading previous post.

[HAKUNA 10]

See my earlier post, above.

 

o.k if I am reading this right, your focus is more on zones of congestion and breadkouts thereof rather than worrying about accumulation/distribution.

Please correct me if I am wrong.

 

Secondly elsewhere, think it was in your blog which btw is very good info.wise, you talked about Minimizing risk by

1. focusing on liquid markets

2.monitoring the pushmepullyou of buying/selling pressure at relevant s/r levels

3. ENTERING ON SWINGS RATHER THAN BREAKOUTS

4. getting out when the market tells you to.

 

These are great insights, however on the 3rd one, do you mean look for possible entries on a pullback after breakout. I interpret entering on swings to mean that, may be wrong, once again am open to correction.

Elsewhere OTOH you favor taking the trade at optimum points such as support or resistance. A breakout would happen after price receives support and breaks out a previous resistance and vice versa, hence as per (3) the entry would be late.

[DbPhoenix 42]

The insights are Wyckoff's, but I agree with them. As for entering on swings, this is explained in the remainder of the post you're referring to. Entry is in the trough of the swing rather than at the new high. One can also enter on the pullback after a breakout, but if one enters on the secondary reaction -- or test -- after a climax, he's already in prior to the breakout, so he needn't concern himself with the subsequent pullback, which may not occur.

Edited November 17, 2008 by DbPhoenix

[DbPhoenix 42]

Flojo provided a fine answer and I have little to add other than that FW's box is drawn around the springboard that formed after the BO from the climax and various tests in 2002. Since this also coincides with the bottom of the range which I posted earlier, there may be a nice rally around here. However, I see no particular reason why we shouldn't test the long-term trendline at around 7500.

 

Since we're there, here's the trendline referred to above. And since the boxes are at least as important as the trendline (and this is the boxes thread), they are included.

 

[Head2k 10]

Today's hinge on the NQ. In the morning we broke through 1055-1056 zone which I had marked as potential R but then found R at 1065, another important level. From there we started to trend down. From 1025 we sharply recovered and returned into today's value area, finding R at 1055. On the screenshot the yellow line is daily VWAP (the midpoint of VA) and the red and green dashed lines are VAL and VAH, respectively. In the VA we weren't quite sure where to go next and we started to form a hinge around VWAP, which coincided with opening low, too. The hinge was then broken to the upside, suggesting another attack at 1055-56 area. We breached it but weren't able to hold above. Price then dropped below the midpoint of the hinge (VWAP) and then successfuly tested it from below. Then we broke today's VAL, confirming that the downtrend is resumed.

[DbPhoenix 42]

Did you play any part of this?

[Head2k 10]

Did you play any part of this?

No. You know that I am a beginner. I don't trade live. I occasionally paper trade, but since I don't have a sound plan yet, the paper trading serves more as feedback on my ideas and concepts (and to find out how I am stupid and undisciplined... ). Today I was only watching. I already have an idea how to enter a breakout out of a hinge and where to place my initial stop. But that's it so far. In this particular hinge I would enter at the breakout above 1050 which occured at 12:31. My stop would be at 1046.