Trading The Wyckoff Way

[Kiwi 16]

What about the idea of characterizing markets?

 

My approach to trading, which has a lot to do with Wyckoff's methodology is very simple. Except it's not. Why? Because I characterize the markets I trade and then apply what I learn from that process to fine tune my entries, targets and exits.

 

So I trade SPI (aussie futures), STW (taiwanese futures on the singapore exchange) and HSI (Hong Kong futures) and in each case, Wyckoff's methodology can be applied. But each has a slightly different character reflecting the mix of pro/retail and nationalities trading them. Is it still W if you tune entries and exits to the historical behaviour and current trends of a market?

[DbPhoenix 42]

What about the idea of characterizing markets?

 

My approach to trading, which has a lot to do with Wyckoff's methodology is very simple. Except it's not. Why? Because I characterize the markets I trade and then apply what I learn from that process to fine tune my entries, targets and exits.

 

So I trade SPI (aussie futures), STW (taiwanese futures on the singapore exchange) and HSI (Hong Kong futures) and in each case, Wyckoff's methodology can be applied. But each has a slightly different character reflecting the mix of pro/retail and nationalities trading them. Is it still W if you tune entries and exits to the historical behaviour and current trends of a market?

 

How does this relate (a) to Bearbull's opening post and (b) to Wyckoff's work?

[steve46 12]

You are absolutely right DB.

 

I saw the title "identification of trading opportunities" and got caught up in the subject matter. Please delete my posts.

 

Thanks

Steve

[Head2k 10]

The NQ is forming a nice hinge on larger scale, starting on 11/13. Midpoint around 1132. Now we are at the demand line. I am expecting a bounce back to the midpoint.

 

EDIT: Didn't think we would get there so quickly. Tomorrow will be interesting to watch (sadly I can't after 11 am).

Edited December 4, 2008 by Head2k

[DbPhoenix 42]

It may become a hinge eventually, but not yet. The volume's wrong (volume is often erratic during holiday periods).

 

Don't forget why a true hinge forms in the first place and what it's supposed to accomplish. Without those elements, it's just two converging lines which may mean and lead to nothing at all.

[HAKUNA 10]

Why does a hinge form and what does it accomplish?

 

Is it that the disagreement about price between buyers and sellers is narrowing in view to finding acceptable value to both parties, that is when then the demand and supply lines reach an apex with very small range bars and low vol.

Any breakout of this would then suggest initiative reaction by either buyers or sellers.

 

If not, would you elaborate.

[atto 20]

Hinges are a type of springboard, where price coils tighter and tighter (analogy: builds pressure). This is accompanied with a steady drop in volume as the range decreases (ie, less net interest from all parties). A hinge needs lh's and hl's, and should be filled with as much price as possible. The midpoint you'll see a couple of us draw is a sort of "equilibrium" price (think POC, in MP terms).

 

In my experience, over half are trend continuation patterns. However, they're most definitely tradable both ways. A "breaking" is price leaving the supply and demand lines drawn around it. Note, however, that the break isn't always accompanied with a sharp thrust of price reaction; occasionally, it's much more steady. However, the P/V formation is speaking primarily about underlying supply/demand, which does work out in an astute trader's advantage quite often. Additionally, the risk/reward can be quite attractive.

[firewalker 10]

It may become a hinge eventually, but not yet. The volume's wrong (volume is often erratic during holiday periods).

 

Do you approach "holiday periods" differently then other days?

[Head2k 10]

I didn't even notice there are US holidays today until I opened my charting program. Plenty reasons to not trade live yet, in my case

[Bearbull 10]

For those who have genuine interest in judging buying/selling pressures in the market via price/volume relationships would do well to engage in multiple reads of the pdf file on "Analysis of 1930-31 charts" by Wyckoff available in Db's Blog. which BTW is from the original Wyckoff course.

 

This is devoid of any jargon which seems to be in vogue ie. no demand, no supply, hidden upthrusts, end of rising market, markets do not like upbars on high volume, professional/dumb money etc"

 

To illustrate that the principles outlined work in all markets and in all timeframes I have extracted some material from the file and posted it along with price action of the Dax market, on 2min charts for Friday 5th Dec, 2008.

 

Urge folks to take time and scrutinize all the charts along with the text and see for themselves how the various principles play out equally on day charts and 2min charts and their validity after passage of over a hundred years.

 

Incidentally the run into the close lifted the Dax some 200pts, the last chart is not presented for psychedelic effects but to reveal the use of trendlines, support etc as taught by Wyckoff, start with a low, join it the next low preceding the highest high. and so on. The job of the trendlines is to show trend, period, whatever support it exhibits in incidental, the support emerges from what happened to price at these levels as shown in horizontal red lines.

 

Here goes:

 

Wyckoff Principles:

 

A sharp rebound should not surprise us at any time now and it probably is not far away for there has been no rally of any size since August 29th -- about three weeks. Seldom does the market run continuously in one direction for so long without a reversal of some sort.

 

September 21st, the average loses 4 points more, making a low of 94, but recovers 5 points by closing time and this makes it close above the previous day. The volume is 4,400,000 -- again unusually high and almost equal to the day before. This action, combined with the 8 point spread in prices for the day and the slightly higher closing leads us to cover our shorts with a view to putting them out again on a further rally; or, we may prefer to sit tight and depend on our recently reduced stops to keep our trades alive if the expected rally should fail to develop material proportions.

 

On the 22nd, the volume drops off to about 2,000,000 shares; the close is slightly lower and the range has narrowed. The net result of these three sessions is to leave the market practically unchanged at the third day's close. Downward progress seems to have been checked and the small volume on the dip back from the high of the 21st, on Sept. 22nd, implies a lifting of selling pressure. After such agreat decline within three weeks, this is an indication of more rally. This comes on the 23rd, and gives us an opportunity to sell short again while the market is still strong or when we see the rally is failing. Such an indication is given by the way it rallies on the 23rd. On this day, the average recovers to nearly 107, closing at 105½, but the volume falls off to under 3,000,000 shares and we therefore suspect that it is merely due to shorts who all tried to cover at once. Such a rally is too effervescent. It is not likely to last because it removes buying power which formerly existed, and leaves the market without support between the high point of the rally and the previous low.

 

The market acts just that way; on the 24th it loses 8½ points from the previous day's close and ends 3 points above the extreme low of the 21st. The constant volume, compared with the previous day, plus the rapidity with which theaverage yields nearly all of the previous three days' gain, confirms the fleeting character of the rallying power and the lack of important (good quality) demand. We conclude that the market's inability to enlist worthwhile support and its tendency still to seek the lows will probably induce a fresh outpouring of liquidationshould it break the line of support at 95.

 

The situation is still critical on the 26th and 28th when a brief one-day rally (on light volume) and a dip back to 95 bring about a slab-sided, or downward slanting formation, judged by the tops of the 23rd to 28th, which suggests the pressure is downward.

 

Volume decreases to under 1,500,000 on the 26th and 28th, but in view of the market's recent bearish action this looks more like a swing to a dead center preceding new weakness, than diminishing force of supply. (NONE OF THE "NO SUPPLY" JARGON HERE)

Furthermore, the low closing of the 28th leaves the average hanging on the edge of the 95 supporting line. If it cannot rally promptly from here, there will be more decline ahead. Accordingly, should prices break through the low point of September 21st at 94 on increasing volume, we shall again sell more stocks short.

 

We realize that after a big decline we may be taking chances in trying to get what may prove the end of a bear market, but we do not know when the real turn will come so we keep on playing the short side until the market itself tells us we are wrong or that the trend is changing.

 

New lows are the rule until October 5th when the average touches 79, closing within a point of the low and the volume is more than 3,000,000 shares. On the evidence of this alone we find nothing that causes us to cover on this day"

 

 

 

 

Edited December 6, 2008 by DbPhoenix
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[HAKUNA 10]

Great post, certainly opens the eye to other ways,perhaps better, of looking at price, volume. I had the VSA bootcamp CD and course DVD, the explanation in this post seems more detailed and easier to follow IMHO

I would have taken long trade (on the 2nd chart) after price confirmation following No supply and trendbreak, then get stopped out, don't know if I would then have gone short as the bars seem to be closing in the middle. The wholesetup looked like sign of strength in the background as per posts in the vsa threads.

[Bearbull 10]

That is the fundamental divergence of VSA from its original source which is Wyckoff. and over 400 pages in 2 VSA threads without much clarity in sight, folks still engaged in "Find the Bar", "Look, there is hidden upthrust, a failed test, end of rising market etc" and ofcourse "90% of the volume is professional activity":doh:

[Gringo 10]

Hi DB,

 

How can I buy your Price volume book?

[atto 20]

As to whether or not the market is dominated by professional money, of course it is. But, following this approach, it doesn't matter. What matters is whether price rises or falls, not why. One needn't concern himself with who's doing what; only with the results of the effort.

To elaborate, Wyckoff is disinterested in the exact cause for any specific market action, but rather is interested in the action (the fact it occurs in the first place). While most certainly some moves could be attributed to "professional money" or "amateur investors", Wyckoff argues that it doesn't matter. Someone with sufficient capital to move the markets as they did acted, which changed the supply/demand dichotomy.

[atto 20]

Hi DB,

 

How can I buy your Price volume book?

PM him.

 

(...message too short...)

[Bearbull 10]

It really is pointless arguing over professional/dumb money, Wyckoff already mentioned "The composite trader", market itself.

All the information regarding buying and selling pressure can be gleaned from the charts via price/volume relationships, as to who is doing what to whom and why is pure guesswork and largely irrelevant.

It is due to this constant obsession over professional/dumb money that I know some traders personally who find themselves countertrend trading most of the time and then sit there banging their heads yelling "but I was informed that 90% of that volume is professional money" etc.

 

In short, understand what the market is telling you what it wants to do , never mind who is doing it and why.

[Head2k 10]

...And yet rather than make the attempt to work with it on its own terms, newcomers insist on adding this or that indicator, bands, envelopes, pivot points, Fibonacci, chart patterns, moving averages, various formulas and so on. Then they wonder why it doesn't "work".

This is about me, too. I also use one custom coded "indicator" (or, as I prefer to call it, a "visualization tool"). This relates to a question I've been asking myself for quite a long time. Wyckoff is about principles, basic concepts. These principles must be understood by Wyckoff followers, but one cannot trade from principles alone. There are questions such as concrete entry and exit timing. What is your view of supporting tools (beyond Wyckoff methodology) in these areas?

[DbPhoenix 42]

This is about me, too. I also use one custom coded "indicator" (or, as I prefer to call it, a "visualization tool"). This relates to a question I've been asking myself for quite a long time. Wyckoff is about principles, basic concepts. These principles must be understood by Wyckoff followers, but one cannot trade from principles alone. There are questions such as concrete entry and exit timing. What is your view of supporting tools (beyond Wyckoff methodology) in these areas?

 

As I said, if one understands -- practically and not just intellectually -- the dynamics of buying and selling pressure against support and resistance, the entry and exit timing are not nearly as much of an issue. But at some point, that means going to the chat room (or working with somebody in some other way) and doing it. Hindsight posts on message boards are, for the most part, philosophy and theory, even if those posts are tied to charts.

 

Many of those who say they trade intraday do so during coffee breaks and lunch and so forth. I can't imagine anyone being able to understand these principles, much less apply them, by trading so intermittently. In order to understand price action, you have to watch it move. That would seem to be a non sequitur, but otherwise one is just throwing darts.

 

Edit: I should point out here that Wyckoff is by no means all about intraday trading. One can also watch price "move" on EOD charts, and EOD trading is a great, big, wide, wonderful world which most "intraday traders" should probably be focused on anyway.

Edited December 8, 2008 by DbPhoenix

[DbPhoenix 42]

Speaking of oil and of trading "the Wyckoff Way", anyone care to tell the story of the following price action a la the example given in the opening post?

 

 

 

 

In until the end, then out. No additional information outside the pricevolume movement required.

[Head2k 10]

Starting with the second chart.

 

In a half of October we see an uptrend running up into increased supply, i.e a potential buying climax. That is marked by a sharp rise in volume together with price slowing its advance and then turning down. However, volume diminishes quickly on a subsequent reaction. That means the selling pressure has no real follow-through. Absent this follow-through price can lift with only little effort and it takes also little effort to overcome a preliminary resistance marked by the highs of the last rally. It seems like the potential climax was caused merely by profit taking, since the sellers are done and they don't represent any meaningful resistance any more.

 

The reaction in November looks more serious. It finds support at lows of a reaction from the end of October. The first day that hits these lows looks like a potential selling climax. Quite high volume and closes off its lows. This gives us a preliminary support, and if we are in long position we should probably tighten our stops somwhere under it. Then we must watch what happens next - are the sellers done or will the selling pressure be renewed tomorrow?

In next two days price forms a W with the second trough being a successful test.

 

On the top of subsequent rally we see the same setup, just upside down. It is M with second peak showing a lack of interest in upside direction. That is different from the 2 previous tops where price stopped because heavy supply.

 

This lack of demand results in a reaction making a lower swing low. There is no sharp rebound, price spends several days at the same area instead. Buyers steadily absorb all there is to take. Volume continously decreases during tests of 50 area.

 

... I will continue later

[DbPhoenix 42]

 

... I will continue later

 

Thanks for getting the ball rolling.

[Bearbull 10]

Db, you have explained the principles in detail on so many charts on your posts and they are once again all reflected in the oil chart. Folks just have to print the lot out and make a concerted effort to study.

 

Here is the follow up to the first post which was dealt with a congestion during a continuation of a trend, this time Reversal is addressed. Once again material is extracted from the Wyckoff pdf file mentioned before. The buying and selling pressures that Wyckoff observed all those years ago play out on Dax 2min over an 80pt range today. Folks simply have to slog it out ie. to re-read the content over 50times , and then spend quality time on the screen as Db has pointed out to verify all this for themselves. No waiting for somebody to dish out off the shelf setups and hand holding. There is enough material in the wyckoff forum to undertake the task of constructing strategies/tactics etc, also get hold of Vadym Graifer's book.

 

Reversal and Wyckoff Principles:

 

Next day, June 20th, removes all doubts as to the immediate tendency of the average, for the market opens up a point and a half above the previous night's close and on a greatly increased volume makes a rapid advance nearly to 131,

putting the average into new high ground above the previous trading zone. The heavy volume emphasizes the importance of this. (See Par. 2, Footnote Pg. 16.)

 

The gain in the average over the previous day's high is more than 7 points and the close is near the top. If we have been watching the tape during the day, or refer to our Wave Chart at the end of the day, we observe this sudden change and we either buy during the session of June 20th with a close stop or we wait until the price breaks through its former highs and buy around the closing price of that day or the opening of the following session, June 22nd, as the market's behavior to here tells us we may expect a quick mark-up. We are not justified in reestablishing investment positions, however, for as explained in Paragraph 1, Page 19, we do not have the basis for a lasting advance.

.

June 22nd there is a higher opening and a gain of 7 points in the average, most of which is held for the day. The volume runs up to 4,600,000 shares -- the price is gaining in proportion with the rise in volume. A reaction on the 23rd shows that most of the gain of the previous day was lost, but the bullish indication therein is a shrinkage in volume to 2,600,000 shares -- nearly one-half the activity of the day before. That is our warning to sit tight.

 

The 24th recovers the loss; the average advances 8 points for the day and 3½ points above the June 22nd high, or to 141, and the volume is the highest thus far, over 5,000,000 shares. We begin to grow wary of the bull side because that volume in comparison with the trading of previous weeks indicates selling by large interests. (That is, a probable buying climax.) We move our stops up within a point or so of the June 23rd low and await developments. The 25th makes a further gain of 2 points in the average, then the price slumps about 6 points, closing a point from the low, on volume of 4,300,000 shares -- large supply overcoming an excited public demand coming in, as usual, on the top of the rise. This is distinctly bearish.(*) We therefore close out our long trading positions and examine our individual charts for stocks which are in a weak technical position so that we can get short on the next bulge.

 

*Note the shortening of the upthrusts, that is, the tendency of the high points to arch over, from the 24th to the 27th.

 

June 26th shows a range of about 5 points -- a little narrower. Although the closing is near the top, the volume has fallen off to about 3,100,000 shares and the upthrusts are shortening. In the net, these indications are bearish. The outlines of a new trading zone have been tentatively established between 137 and 143. On the 27th, the average bulges over a point, narrows its range to 3½ points and closes with a net gain of about 1½ points on a volume of about 3,800,000 (Saturday's volume doubled). This looks like bidding up to a new high in order to catch shorts, and selling on the way down. We therefore put out some shorts, protecting our commitments with stops 1 3/8 to 2 or 3 points above the high of June 27th.

 

On the 29th, the opening is lower and the price recedes from 144¾ (the previous day) to 140, closing near the low. We now observe that the average has spent four days moving sidewise, making no further progress after a steep rise from the June 2nd low and, following the 5 million share session of June 24th, there has been a steady decrease in volume. In view of our previous deductions, we interpret this to mean that there is a lessening of demand on the top of the rise. We also note that any further lateral movement or reaction would definitely break the upward stride established on the last phase of the advance from June 19th. Hence, we are ready to sell more stocks short if we can get them off on bulges.

 

On the 30th, the average declines nearly 3 points to 137 on volume (2,000,000) about the same as the previous day. The market is still in the 137-143 zone but has now definitely dropped out of the sharp upward angle in which it rose from June 19th to the 27th, showing exhaustion of buying power. Low volume on the two-day dip to the bottom of the range 137-143, however, suggests we may anticipate an effort to rally back toward the high at 144¾. The way the market behaves on the expected rally will probably help to confirm, or it may contradict, our position; so we await developments.

 

July 1st, there is a wider spread in the price, nearly 2 points higher closing, but volume shrinks to 1,700,000: bearish. On the 2nd, the market narrows to a 3 point range for the average and the closing is 1½ points lower on reduced volume --

increased dullness, lower close, and less volume indicate less power on the bull side. On the 3rd, there is another attempt to rally and the average reaches the old 143 supply line at the upper edge of the trading zone, closing about 3 points higher but volume is not measuring up to the standard of previous (late June) rally days. Nothing to be afraid of. (We sell more stocks short on this rally which is the bulge we have been waiting for, placing stops, as before, above the danger point, that is, the high of June 27th.)

 

July 6th, a 2 point range for the average, closing nearly 2 points down on 1,000,000 shares. We read this as an indication that the rally of July 1st to 3rd could not be sustained and that the tendency toward narrow swings, heaviness and dullness is the result of the market's having become saturated with offerings. All bearish. (*)

 

*The average is now on the hinge and on the "springboard" for an important slump.

 

July 7th, a rally at the opening, then a 7½ point break in the average on decisively increasing volume (3,000,000). The market is now out of its former trading zone on the down side and the volume indicates that liquidation is being resumed. Thus the rally from 113 (June 2) to 145 (June 27) has run its course after lifting the average into the lower edges of the old December, 1930 - January, 1931 support area, and we must assume that the next test of the market will be around the levels at which support was rendered (122) on June 19th. If the large interests who bought on June 2nd and 3rd, and who undoubtedly distributed their holdings during the high markets of the last week in June are willing to take them back near or above the previous low levels, it will be an indication of their confidence in the future and a sign that the bear market is over. If there is no such sign, we conclude that the bear market has been resumed and that the June recovery was only an interruption of the main trend. We are on the short side and shall occupy that

position until we see some reason for changing it, either to neutral or the bull side.

 

A 2 point further loss on July 8th, a small rally on a 1,500,000 share volume during the 9th and 10th (as the average hesitates halfway back to the June 19th low), then a dropping off until, on the 15th, the average nearly touches 126 -- a 19 point decline from the top. On this day, prices spread over 4 points from high to low and close slightly above the middle of the 4 point range, on a 2,600,000 volume -- a minor selling climax. There is no follow through on the down side next day; instead, a quick rally and a high closing. Thus we have two indications which might lead to a rally. But that will be a normal occurrence after a decline of 19 points. It should, in fact, amount to 7 or 8 points from the low if it is to be a real rally. Halfway would be about 9½ points. Such a rally occurs from the 17th to the 21st and amounts to 9 points, thus affording another good selling level if we are not satisfied with the size of our short line. (*)

 

*So that you may understand better how to handle your investment funds and may recognize thehazards in carrying stocks up and down through intermediate bull and bear trends -- a procedure that causes so many investors heart-breaking losses -- the following general observations are introduced at this point: The relatively small volume on which the market is now declining tends to lull the public into a spirit of indifference toward the market. But, contrary to popular impression, the low volume accompanying the steady downward drift is of bearish and not bullish import.

Edited December 9, 2008 by DbPhoenix
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[Head2k 10]

... When sellers are exhausted and support still holding, price is ready to start its advance. The rally is quickly checked, but the reaction in the middle of December finds support on highs of the last congestion area and no serious selling interest is shown. Therefore price can easily resume its advance. However, supply comes in at the November highs. Not extraordinary but still enough to reverse the price. Buyers seem to be somewhat reluctant. We are possibly looking at a double top or trading range starting to develop.

 

When price reaches December lows in the end of January the activity increases slightly and price bouces off in a much shorter time than in December. That suggests that sellers are not particularly decisive either. On a subsequent rally buyers fail to step in meaningfully and price soon reverses to retest the December lows. The rally found resistance at the midpoint of the last reaction so I would be especially careful about a possible breakdown. Yet support still can be found at the same place and selling pressure doesnt increase much. The last day of reaction price closes at highs, suggesting a completion of a succesful test. Then price shoots up, forms a 3 days long apex in the midpoint of the range and finally heads north.

 

EDIT:

When reaching 58, a potential resistance, volume increases but price fails to bounce meaningfully. It starts to build a congestion at the highs, volume remains high as buyers are eating through the supply. It takes them several days. Then the resistace breaks and price starts to advance. However, volume remains high. How long can buyers push through? How long can sellers resist?

 

The second week in March volume drops but price doesnt slow down. It was seller who gave up. However, just before half of March price stalls at 65 for 2 days. Volume is quite low compared to the previous week but average for this one. Partly buyers need to take a break, partly supply coming in. Seeing the next day it seems like sellers were waiting for first opportunity to take over. But we find a serious support at the highs of the Nov-Mar trading range. Again, W with second trough being a successful test. After a breakout of the preliminary resistance this former resistance provides support for a selling climax in the beginning of May.

 

Bump: We see a potential climax in the middle of July, marking a possible peak of the large scale distribution starting in May. It is not a typical climax in a sense that it has not a form of sudden slap into an enthusiastic parabolic buying fenzy. It looks more like a sudden 3 days aggressive sell-off which surprises all the poor buyers who established a position since May. It took 3 days to lock out all buyers from 2 months.

No wonder that price just cannot rise more when it approaches to test the lows of this distribution zone again.

Those who didnt take the opportunity to sell at this test and believed that price will recover, mostly didnt do the same mistake again, not allowing price to advance in September. And those slowlier took the last chance in October.

Edited December 9, 2008 by DbPhoenix
Delete duplicate paragraph

[DbPhoenix 42]

For the sake of the folks who are reading this, how long did it take before you could do this sort of analysis?

[Kiwi 16]

I've thanked Steve's post and db's post.

 

Why?

 

DbPhoenix correctly points to the merits of a forum devoted to interpreting Wyckoff's work and how to use it. And I strongly agree with his points, as one who has eliminated element after element from my trading until I am very close to W's form.

 

But, one of the problems with forums is that people who have done the work and developed their trading increasingly get little from them. Unless you take a guru position there is less and less to be gained from the boards (no insult meant: someone who is expounding a particular school of thought for the benefit of those who might want to learn). Steve is one of those guys who offers an extra bit of insight which I appreciate and which keeps me here. I may never add the insights to my trading but contemplation of them is an enjoyable activity. Consideration of their relationship to what I have been doing is potentially a productive one.

 

So, Db and atto (mods here?), perhaps you could start a thread or set of threads appropriately titled to move those posts and discussions that are (poorly?) related to Wyckoff's core material. Although this discussion is "off topic" I for one find the resulting discussion to be more interesting and informative than most other posts here.

 

Kudos to you all