Trading The Wyckoff Way

[DbPhoenix 42]

 

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

 

While it not up to me or firewalker et al to begin a new thread that will contain the "parallel" discussion, yours is the third request that this be done, and two simultaneous discussions are less likely to be of benefit than two which are independently "on-topic".

 

Therefore, I'll transfer Steve's posts to his own thread along with those posts which relate to it. I hope that this will be the last time that this will prove necessary.

[Head2k 10]

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

I suppose it was for me...

 

So I was first interested in trading in February. Until summer I had no idea what to do, tried automated strategies I didnt understand. In summer I started to watch ES and NQ intraday. Now the most important part: I started with strudying Wyckoff in September and became fully devoted to him in October or November.

[Bearbull 10]

Well done Head2K, I am pleased for you, you have clearly benefited from your study.

BTW your English is hell of a lot better than my Czech, have a friend there, the first words I learnt from him were "nasdravia" don't know if I spelt that correctly but he liked his vodka:) few other, " jean dobri, dobri vecher, dobra nots," "Yak shu mash" "pienkna" again probably all spelt wrongly

[BlowFish 10]

I suppose it was for me...

 

So I was first interested in trading in February. Until summer I had no idea what to do, tried automated strategies I didnt understand. In summer I started to watch ES and NQ intraday. Now the most important part: I started with strudying Wyckoff in September and became fully devoted to him in October or November.

 

Just goes to show what is possible when you are diligent and bright Your not a borg are you? :rofl: Reason I ask is I was impressed how quickly you assimilated Jerrys market statistics stuff too.

[firewalker 10]

Nice work Head2k... couple of thoughts:

 

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.

 

1. How do you reconcile (a) a selling climax in the beginning of May with (b) the start of a large scale distribution at the same time?

 

2. You seem to leave out June, which I actually found particularly interesting since price was making wild swings to both sides during that period. Politicians were talking about how speculators were to 'blame' for the violent rise in prices. However, I was thinking: 'big time distribution' (if it were re-accumulation would we see that much volume?) after such a sustained rise.

[Head2k 10]

Just goes to show what is possible when you are diligent and bright Your not a borg are you? :rofl: Reason I ask is I was impressed how quickly you assimilated Jerrys market statistics stuff too.

Borg? Maybe my mother didnt tell me Perhaps I easily understand theory and I like learning.

Unfortunately that cannot save from doing also the dirty work. As Db pointed out on several occasions, to grasp a concept intellectualy isnt enough.

 

Well done Head2K, I am pleased for you, you have clearly benefited from your study.

BTW your English is hell of a lot better than my Czech, have a friend there, the first words I learnt from him were "nasdravia" don't know if I spelt that correctly but he liked his vodka:) few other, " jean dobri, dobri vecher, dobra nots," "Yak shu mash" "pienkna" again probably all spelt wrongly

Thank you. The words are indeed all spelled wrongly, but I can understand them Though my English is probably better than your Czech, there is still a lot room for improvement.

 

Nice work Head2k... couple of thoughts:

 

1. How do you reconcile (a) a selling climax in the beginning of May with (b) the start of a large scale distribution at the same time?

 

2. You seem to leave out June, which I actually found particularly interesting since price was making wild swings to both sides during that period. Politicians were talking about how speculators were to 'blame' for the violent rise in prices. However, I was thinking: 'big time distribution' (if it were re-accumulation would we see that much volume?) after such a sustained rise.

 

In fact I have some troubles with terms "accumulation" and "distribution". Since every trade has 2 sides, when buyers are accumulating the sellers are distributing at the same time, and vice versa. It only makes sense to distinguish these two in terms of "focused intent" accompanying them. So during accumulation one can say that stocks (or whatever) are accumulated with focused intent, but distributed chaotically. And vice versa.

 

1. In the end of April price we saw supply entering the market around 70-71. It could be a start of "distribution". But when price hit 66 (March highs and April congestion) buyers stepped in big time. This reversal is interesting, because it is a very sharp V. When one sees volume accompanying this revesal he could expect some problems or at least furher test(s). Price takes off like a rocket instead. I dont know, maybe "large operators", seeing the extremely bullish mood all around the world, rushed to reach better prices to distribute? And the same scenario repeated a couple of times later. But that are just speculations in hindsight. In real time this V would be too fast for me to react.

 

In fact, during June we maybe witnessed some kind of reaccumulation, that means that while we can see a focused intent accompanying the distribution we can also see some intent to support price on larger scale. While this support could be very well organized by the distributors, we can notice that volume is decreasing (but remains high) during june and price is still holding. And the last dip below 80 in June is in fact a successful test, though volume is rather average than small, marking that sellers are still interested. When I notice that the two prior days showed lessening activity and narrowing spread, I could very well assume that we are done at these levels and ready to depart, probably down. But the test would prove me wrong. Instead of continuing with distribution lower (more aggressively) we move higher. But then again, volume remains high and price stalls. Then it reacts and finds support in the previous congetion, still on the same volume. Price is not rising because sellers are not interested, but because there is still too much demand. But price cannot rise substantialy, because there is still too much supply. A difficult situation. And I would probably wait for it to resolve. Then the solution comes in form of that 3 days long sell-off.

[DbPhoenix 42]

I suppose it was for me...

 

So I was first interested in trading in February. Until summer I had no idea what to do, tried automated strategies I didnt understand. In summer I started to watch ES and NQ intraday. Now the most important part: I started with strudying Wyckoff in September and became fully devoted to him in October or November.

 

I'm impressed, and at least I now have something to go on when people ask how long this takes. I've thought that this stuff would be far easier to understand for those who know little or nothing about the market, much less charts (your ability to read left to right probably has a lot to do with how quickly you've picked this up). Experienced traders know, for example, how easy it is for children to grasp price movement. Unfortunately, those who have the most to unlearn have the most trouble, and are the most likely to give up in frustration. Indicators are so seductive....

 

I'm not going to interfere with this because the comments and suggestions and questions of those who are still working things out will be far more meaningful than whatever I might say at this point. However, you have been particularly interested in the issue of entry and exit, so the following exercise may be useful to you.

 

These aren't the only places where one could enter, just as the areas to which I drew attention on the original charts were not all there was to look at. But they're a start. What are your first reactions and thoughts with regard to each of these points? Which seem least and most risky? Where would you place your stop with each? What to you would be the probability of each of your stops being hit?

 

Don't make too much of this. You won't need a calculator. The central point is that you see selling pressure lessening at some level of support and you want to be prepared for a renewal of buying interest. So where do you enter to take advantage of that move if and when it occurs and where do you place your stop in case you are wrong?

 

As for exits that are not related to stops, that can wait.

 

And last, I'm assuming that all of this is pertinent to what BB had in mind when he initiated the thread. If it isn't, I'm sure he'll let me know.

 

[Head2k 10]

Thank you for the excercise. I will just write a short message before I take it.

I need to add something regarding your impression and the time it takes to get to the point where I am now.

 

1. I forgot to mention that I studied MP and auction theory in Spring, though at that times I assumed a wrong attitude towards it (I was looking for a holy grail ). But I think it helps me with my understanding, too. In Summer I studied Trading With Market Statistics threads by jperl here, which made me think of MP and auction theory on more general level.

2. In Summer I left my job because I decided I would become a full time trader. So I do not study charts 1 hour a day before going to sleep.

 

As for now I think I have an entry which suits me. I focus on springboards (though my definition might not be 100% consistent with yours). But it's not been long since I found I can recognize them in real time, so there is still a lot work to do. But I love the tight stop they allow and how quickly they let me know whether I am right or wrong. My exits (apart from initial stop) are tragedy so far Usually can't hold to profitable trade.

 

So far for introduction, I will take your excercise in my next post.

[DbPhoenix 42]

MP is to me entirely consistent with Wyckoff, though by "MP" I'm referring to the essential concepts of auction market theory, not the books and software and jargon and so forth. As with any other approach, one can get so distracted by extraneous factors that he fails to see what is in front of him. But if one "gets" MP, I should think that Wyckoff would be much clearer.

Edited September 9, 2015 by DbPhoenix

[Head2k 10]

The first dot (mid Nov)

I see a 3-days W in the red rectangle. 1st day Climax, 2nd day technical rally, 3rd day test. Although close on the climax day is well off the lows I wouldn't try to enter there, I find it too risky. For the sake of excercise, if I entered on that climax, it would be at close and I would place my stop something like half a point under its low.

But my preferred entry would be the test. The technical rally looks nice, low volume suggests no serious selling interest. That means sellers don't take advantage of better price to sell heavily. Then the test is exemplary. So my entry would be at close of it. Now I know Wyckoff says to place stop under the climax low, so I would probably do it. But in my casual intraday experience I often have problems with

1. When do I recognize the test to be successful?

2. When I find the test successful, isn't it already too late for entry? Am I entering at a good price, isn't my stop too wide? What are the probabilities that this is THE final test? And if it isn't, how much it will cost me to find out I was wrong (if the next test fails)?

I am not experienced enough to compare waves in real time, not paying enough attention to behavior before the test itself. Too eager to enter at a good price, not allowing the test to prove itself, or OTOH, waiting too long for test to prove only to see price departing without me.

I guess there are two main reasons of my doubts:

Lack of experience in seeing shifts of S/D in real time

Lack of systematical testing

 

The dots in Dec

As we arrive just above 50 where we can expect potential support price stops without any fireworks. But the attempt to reverse is quickly checked the third day in Dec. Since then price is congesting, slightly condensing and volume is decreasing. It looks like less and less traders are willing to trade at this level and a quick departure can be anticipated. Sort of a springboard forming. In this case I would definitely prefer to look inside the daily candles and find the entry point on a smaller time frame. However, given the daily chart only, I would probably enter at a breakout of high of the bar right below the dot and I would place my stop below its close, which appears to be in the middle of the congestion area.

The second dot marks the same situation, so my entry and stop would be the same, too. Only now we gapped up over my entry so maybe it would be wiser to wait for a test and then enter at a re-break of the given high.

Stop below midpoint is fairly aggressive in these cases but I think it is a logical place to put it at. Since I am entering on a springboard I want price to spring away. If it tests the lower half again then I was wrong, or at least my entry was premature. Which in fact is the same.

 

The dot in January

This one is problematic. It is a 3-day W, sort of. But in real time I probably wouldn't know if to consider the third bar to be a test or just a continuation of a technical rally (Maybe it would help to drop the time frame). Then another test comes at the bar right after the red rectangle, but that is already too far away from what I would consider a good price. Hence I wouldn't probably enter at all.

 

Now I am going to watch NQ live, and I will finish the exercise later.

[atto 20]

Thank you Db for picking this thread back up.

These aren't the only places where one could enter, just as the areas to which I drew attention on the original charts were not all there was to look at. But they're a start. What are your first reactions and thoughts with regard to each of these points? Which seem least and most risky? Where would you place your stop with each? What to you would be the probability of each of your stops being hit?

I'd argue the best entry (real time, mind you) is the long in Jan '08 (4th dot). Reasons: Test of support after a hh, with volume entering on the low end of the range (peaking at the low). Place initial hard stops 48-49 (so risking about $2 max, using the widest stop). Probability of stop being hit is moderate: we're working with support, increased buying pressure, and "value"/"liquidity" up above (it's not virgin).

 

A couple of the others are decent entries, which I'll leave to others to analyze.

 

Worst entries:

• Nov '07 (1st dot). Besides an entrance of volume, there's not a whole lot going for the trade. A massive surge of selling interest entered the markets at the highs right before, so you're buying into possible resistance as is. Stop placement: Difficult, $49ish?
  
• Early Dec, '08 (2nd dot). Just made a ll, and approaching virgin possible support (which wasn't even that big of a pullback). Volume entering isn't super convincing, and price has hung out at the bottom of this range for a few days. Stop placement: Difficult, nothing direct from PA; I'd keep it tight at $54. Chance of hitting is high.
  
• Mid Dec, '08 (3rd dot). No real idea why you'd enter besides the tiny increase of buying pressure right before. Stop placement is awful (you'd be looking at under 50's, most likely). Chance of hitting is low/moderate, but about the same as the trades much closer to 50.
  
• Late Feb, '08 (6th dot). The only thing you have going for you is the breakout (which wasn't horrid: price kept at the top for a couple days without rejecting, which means sellers didn't sweep in). imho, this is one of those "missed a trade, late entry is better than no entry!" Stop placement: Difficult, nothing logical from PA; I'd put it right below that congestion right before R ($56). Chance of hitting: Moderate.
  

[cowseathay 10]

Here's my rendition of Db's support and resistance boxes on the NQ. I think that if NQ can get above the midpoint of the congestion from 11/6 to 11/11 (around 1250-1260) then it could go up to 1280.

[Bearbull 10]

Db, this is just great, the intent was to encourage those with genuine interest in learning Wyckoff, to read and re-read posts on this forum and in your blog (wyckoff pdf file including) and then spend quality time on the screen identifying buying and selling pressure and how the patterns are created via this, as per the principles observed and explained 100yrs back. It is certainly heartening to know Head2K has clearly benefited from all this.

Hence the title Trading the Wyckoff Way, to get into the nitty-gritty, where to enter, how to manage the trade, where to exit etc.

 

Keep it going, thanks to everybody.

[Head2k 10]

Reading atto's post I realize I was right when I wrote I should pay more attention to the action preceding the test. I seem to focus too much on the test itself but atto takes in consideration what happened at the top of previous rally, how far it was, whether the area of potential support was tested before, etc.

 

So I will at least finsh the entries that atto left out. Starting with early Feb.

After the last test price rose only to find resistance in midpoint on quite strong vol. However, when it approaches the potential support volume decreases, suggesting that the selling pressure is weakening. I guess I might enter at the close of the day making the swing low, as it closes at its high. Stop would be under the lows of this bar.

As of my current state of development I probably wouldnt have the balls to enter there. Instead I would enter at a breakout of 55.5, after a low volume test of midpoint of the entire range. I would place my stop under the lows and anticipate an upside breakout.

 

Mid March

Thats a W with the second trough being a low volume test. Possible entry at close of the test bar, stop under its low.

 

March / April

Same as the previous setup. This time this whole setup occurs as a second trough of W on a larger scale, and volume is lower than when we tested the support the last time. Also, as atto might say, the support is not a virgin any more. These factors might increase probability of success.

 

Mid April

A breakout of the upside. I dont like them, because I do not consider this a good price. If I would enter it would be at a rebreak and placed my stop somewhere at 64.5.

 

Beginning of May

Too fast for me, no test. I would probably just witness price leaving without me.

Edited December 9, 2008 by Head2k

[DbPhoenix 42]

Okay, picking up where we left off, what about these entries?

 

And if you're thinking nobody in his right mind would take these, think again.

 

[Head2k 10]

Okay, picking up where we left off, what about these entries?

 

And if you're thinking nobody in his right mind would take these, think again.

I dont think I wouldnt take at least some of them, at least if I were consistent with my other entries posted earlier.

 

The first dot:

During the test on the first day of June I might think that we just finished a test of a congestion area from the second week in May. Maybe there are a few thing that could warn me.

1. Volume decreased, but it still suggested a significant selling interest.

2. Since you drew such a nice trend channel on the chart, I might think that entering here I would want the trend to speed up. Maybe it would be better to wait for a better price.

 

The second dot:

Basically the same as the first dot. And The test looks more like a shakeout. Seeing the two prior days I would be suspicious.

 

The third dot:

As I wrote in my hindsight analysis, during this period the activity is heavy to the upside, heavy to the downside, heavy everywhere and I wouldnt be probably able to "read" it. Hence I would be probably saved from this entry by my lack of understanding of whats happening. (If I was smart enough to admit it )

 

The fourth dot:

We find support at April highs. We took out several potential supports before, broke demand line, made a lower low. The bounce is not marked by a potential climax, instead we see a soft landing. It is not new demand entering but supply weakening. The entire down move from the top could be viewed as a "technical reaction" and an upside test can be anticipated. The June congestion overhead represents potentially very srtong resistance. Not wise to enter long imho.

 

The fifth dot:

Now we can safely assume we are in a downtrend. In the middle of August we find support at March highs and May lows and a supply line is broken. Again a soft landing. When price gaps up and volume kicks it the spread tightens. If this was an attempt to break away it didnt succeed much. Looks like sellers took advantage of higher price to dump their contracts on the market. Seeing where this happens only enforces this view. I dont see much reasons to enter at the support since substantial new demand didnt present itself. And if I entered there then the next day should warn me to tighten my stop.

 

The sixth dot:

After the day with the highest volume and narrow spread the next day is a sell-off. Then price stalls on low volume. Are sellers done? Maybe, for now. But the activity prior to this "test" is not of that kind I would like to see. If the preceding rally reversed on low activity, I might consider entry. But given the aggressive sell-off I would wait for more confirmation to enter long. And I wouldnt get it, because what we see next is a successful test of resistance.

 

The seventh dot:

This looks more promising. Sharp decline finding support at the midpoint of the "blue box", demand coming in. I would probably enter if I had where to do so. However, before any test occurs price takes off. If I shoud view this as a technical rally I would like to see price reversing on lack of demand. Then I could wait for a test to enter. But what happens here? Volume remais high and then price stops under a potential resistance and fails to bounce back. Instead it congests and volume is drying up. Now it can breaks in either direction. Buyers might eat the resistance or give up. The latter is the case. The next two days volume is clearly on the down side, suggesting that this is not a test I would like to see.

 

The last dot:

Since half of October volume gets to its usual levels. The period of hystery is over. Hard to say where we find support since we dont have enough history here. Anyway, a soft landing here, hard to say if it will develop to reversal or correction. Trend line safe, the only line that would get broken is an aggressive supply line launched from September highs. Given the fact that we havent seen a substantial correction since then, I dont know what should tell me that I should expect a trend reversal right here.

[steve46 12]

Head2k

 

I took a quick look at the chart and have to agree with you on the first, second and third dot. I would add the following

 

on the first dot....the proposed entry is late in the move...the low vol tells me that it is probably not the end of the move....but like you, I would need to wait, not only for better prices, but I would want to be nearer to a clear exit (I can say more if there is interest). As I read the chart, my stoploss would have to be bigger than I would like so I would stay off this one.

 

Second dot....same thing again. Late in the move..and agree that it seems like a possible shakeout.

 

For the third dot...I see increased volatility as traders anticipate the climax and position for the reversal. Typically I would stay off this and wait for better prices on the short side. Again I would like to be nearer to an exit so that if I am wrong the damage is minimized.

 

You have a good feel for it Head2k. Your instincts are to keep from getting in at the wrong time....that will help you in the long run. The main thing I would suggest if you don't already have it down, is to look for entries where if you are wrong, you see it right away...

 

Best of luck to you

 

Steve

[Head2k 10]

Head2k

 

I took a quick look at the chart and have to agree with you on the first, second and third dot. I would add the following

 

on the first dot....the proposed entry is late in the move...the low vol tells me that it is probably not the end of the move....but like you, I would need to wait, not only for better prices, but I would want to be nearer to a clear exit (I can say more if there is interest). As I read the chart, my stoploss would have to be bigger than I would like so I would stay off this one.

 

Second dot....same thing again. Late in the move..and agree that it seems like a possible shakeout.

 

For the third dot...I see increased volatility as traders anticipate the climax and position for the reversal. Typically I would stay off this and wait for better prices on the short side. Again I would like to be nearer to an exit so that if I am wrong the damage is minimized.

 

You have a good feel for it Head2k. Your instincts are to keep from getting in at the wrong time....that will help you in the long run. The main thing I would suggest if you don't already have it down, is to look for entries where if you are wrong, you see it right away...

 

Best of luck to you

 

Steve

I think I understand what you mean when you say you wanted to be nearer to an exit.

As for the instincts part... I wish it were instincts. In this case it is hindsight reasoning and in real time I need to learn it on continuous basis.

As for looking for entries, I have two objectives: a very tight stop and exactly what you say - I want to know whether I am right or wrong very quickly. I have low risk tolerance and I am quite impatient, so both is a must

[DbPhoenix 42]

As for the instincts part... I wish it were instincts. In this case it is hindsight reasoning and in real time I need to learn it on continuous basis.

 

You're correct that it's not about instincts but about reasoning, and Wyckoff is a particularly good mentor for this type of reasoning. Granted it's "hindsight" reasoning, but that's how one learns what to look for. The principles are simple and they are few. That makes recognizing these behaviors in real time much easier, as you may have noticed in the chat room this morning.

 

Again, one might wonder why anyone in his right mind would go long at any of these spots, but people do. All the time. Some of you might have done so, but you needn't confess to it.

 

But this is the sort of thing people do in real time when they have no compass to guide them. Stupid things. And if you understand Wyckoff thoroughly, none of you will be doing these stupid things anymore.

 

So, let's each of us play devil's advocate. Let's assume that we are beginners with their heads up their bums and we want in on this multi-generational rise. Wouldn't each of these green dots represent an opportunity to get into, or back into, this never-ending escalation? Explain.

Edited December 14, 2008 by DbPhoenix

[DbPhoenix 42]

The Trading the Wyckoff Way thread was closed yesterday for reasons which needn't concern us here. However, those who are interested in continuing the discussion are welcome and encouraged to do so here.

[atto 20]

A note I wanted to make about entries is that not only are you maximizing return, you're minimizing risk. Often I'm much more certain about price's direction than in some of my actual entries, but there's no great way to manage risk. My favorite entry from the bull run in Oil is my favorite largely because of this.

 

I took the liberty to add some extra annotations to your chart, Db.

 

 

My favorite entry is late Sept '08 (short) at about $70-71. Reasons: We're already in a downtrend (lh, ll), and are testing old support (now possible resistance) on the upside. Note that this area was also important as far back as March. This is the first test locally of this resistance, but check out volume: there's a lot of new interest, suggesting sellers feel these prices are high enough to begin again. Price peaked above res, but was (fairly quickly) rejected. Initial hard stops at $73-74ish. Move to b/e a couple days later after the breakdown.

 

There's a few counter-trend possibilities as well, but unless you want to fight the trend, they would probably work as good scale-outs. The one that sticks out to me is Mid-Sept '08 (7th dot). It attracts a good deal of volume and climaxes right at the demand line.

Edited December 10, 2008 by atto

[DbPhoenix 42]

Lovely job, but keep in mind that we're talking only about longs for the time being, that is, the "entries" that I've tagged are for the long side. Again, one might wonder why anyone in his right mind would go long at any of these spots, but people do. All the time. Some of you might have done so, but you needn't confess to it.

 

But this is the sort of thing people do in real time when they have no compass to guide them. Stupid things. And if you understand Wyckoff thoroughly, none of you will be doing these stupid things anymore.

 

So, let's each of us play devil's advocate. Let's assume that we are beginners with their heads up their asses and we want in on this multi-generational rise. Wouldn't each of these green dots represent an opportunity to get into, or back into, this never-ending escalation? Explain.

[atto 20]

Whoops, I didn't get the long only memo.

 

Reasons to go long:

• 1st dot: On demand line and possible support, and finds volume. Not a bad long.
  
• 2nd dot: Congestion above support, decent volume.
  
• 3rd dot: ... (struggling to come up with good reasons beyond: Hey! It's an awesome uptrend!)
  
• 4th dot: Price finds previous support and stalls.
  
• 5th dot: same
  
• 6th dot: ... (it's holding the north end of the range??)
  
• 7th dot: Lands on supply line and finds significant volume (as I said before, a good exit)
  
• 8th dot: Same, minus the great demand.
  

[DbPhoenix 42]

Whoops, I didn't get the long only memo.

 

For future reference, green is long, red is short.....

[atto 20]

While not specifically related to Wyckoff or Db, I found a neat game that's fun and allows you to practice on EOD charts, if you're so interested.

 

http://chartgame.com/

 

Basically, you start with $10k and try to beat buy and hold. The chart is from an actual (liquid) stock, from an unknown time period (using daily bars). Db has mentioned before that beginners who do not have the available time to watch price live might benefit more from EOD trading. This is one of the best EOD simulators I've seen, and is darn easy to use (and fun!). I especially like it because fills are perfectly reasonable / accurate (it's buying/selling on open), and you have ample time to do your own analysis (like "real" EOD analysis).

 

I thought those of you who trade paper might find this interesting and insightful.