Trading The Wyckoff Way

[Gringo 10]

Hi Db,

 

If you see S/R on say daily bar interval do you zoom to smaller bar intervals to pin point exactly where the struggle took place for greater accuracy?

[DbPhoenix 42]

Hi Db,

 

If you see S/R on say daily bar interval do you zoom to smaller bar intervals to pin point exactly where the struggle took place for greater accuracy?

 

I used the first two for Thursday and Friday. The third will be used on Tuesday. A reminder that all these lines were/are drawn in advance.

 

 

 

 

 

 

 

[MRW 10]

Reading the Waves Sticky really struck a chord with me this morning.

 

I use multiple timeframes to get perspective on price/volume action (call this what you will, it's just multiple timeframes). After reading about the Wyckoff concept of Waves, the following blinding glimpse of the obvious struck me:

 

A bar that closes lower on a longer timeframe will be a wave down on a shorter timeframe.

A bar that closes higher on a longer timeframe will be a wave up on a shorter timeframe.

 

For example, I'm comparing today's price/volume action in the SPY on the 5 minute and 30 minute charts. THe higher close on the 30 minute bar from 10:00-10:30 EST, is the wave up on the 5 minute chart for the same time period.

 

So...it would then seem that if you are selling a bar with a higher close on low relative volume on, say the 30 minute chart, you are also selling a low-volume rally on a 5 minute chart. This is but one example - there are, of course, others - buying low volume bars with a lower close being the same as buying a low volume decline, etc etc.

 

Now all I have to do is be aware of the market trend overall, the stock trend overall, the action over the last few days and weeks, and on and on and on...

 

Ok, ok, the market, for me, is slow today and I have too much time on my hands...like I said, a blinding glimpse of the obvious...

Edited January 20, 2009 by MRW

[DbPhoenix 42]

Those Aha! moments are worth waiting for.

Edited January 20, 2009 by DbPhoenix

[DbPhoenix 42]

The following may confuse you or may be helpful. You tell me

 

The short pink line to the right of this chart is at the level I was watching for this morning:

 

 

This next chart is the same "timeframe" but a smaller bar interval. The pink line covers the same span:

 

 

The next is again the same "timeframe", but a still smaller bar interval:

 

 

The point of interest, in other words, is the same in all three charts. The only difference is the bar interval (in this case, Constant Volume Bars rather than "time" bars).

 

As you say, larger waves are comprised of smaller waves. And they are all moving simultaneously in the same timeframe.

[MRW 10]

Actually, this makes complete sense - thanks, DB!

 

What I'm trying to do is distill all this price/volume or supply/demand, if you will, into a "big picture" view. It seems so often people get hung up on the bark of a particular tree and miss the forest. I know I'm guilty of this on more occassions than I'd like.

 

I'm new to the idea of Constant Volume Bars, though I've heard it mentioned a bit. I believe it means that the volume is the same for each bar, but the price activity will vary - thus, we can see what price has done on this constant amount of volume, and consequently, compare relative price activity (ranges, open, close, etc.) per unit volume on multiple bars. Does this sound about right?

 

If you've time, it would be most interesting to hear a bit more about these - uses, pros, cons, etc., or perhaps there's a useful thread to refer to so you don't have to cover a lot basics. Always appreciate the chance to learn more!

Edited January 21, 2009 by MRW

[DbPhoenix 42]

If you understand that price and its movement is independent of however we choose to display it, then you pretty much have it. To me, this is a given, but, as I discovered yesterday, there are those to whom the concept of the continuous flow of price makes no sense. They will see the market very differently. (Coincidentally, those who do not grasp the continuous nature of price flow often also consider displays in smaller bar intervals to be "noise", i.e., meaningless, random, irrelevant.)

 

Whether one displays price in time bars, tick bars, range bars, constant volume bars, point & figure, dots, lines, histograms or musical notes is of no concern to price. As long as something is being traded, it's going to do what it's going to do, even if one chooses not to "print" it at all. Finding reasonable and objective explanations of each of these options can be problematic since those who provide the explanations often feel as though whichever option they've selected provides the answer they've been looking for, and if only everyone chose the same option, everything would be clear and everyone's problems would be over. Would that it were so easy.

 

The beginning of the twentieth century was an exciting time for technical analysis, and two means of displaying price rose to the surface: vertical charts (displaying price as a vertical bar with a high, low, close, and sometimes an open) and point & figure. Vertical bars moved laterally in time, a new bar for each succeeding day. Point & figure notations did not move in time; no new notations were made until there was a change in price. This saved a hell of a lot of graph paper. It also enabled some people better to detect bases, support, resistance, and so forth. P&F even developed its own set of patterns.

 

As for the price/volume supply/demand "thing" and its relationship to the price display, one must remember that the more obvious the movement, the more people there are who will see it. Therefore, if one trades EOD using daily bars, he's going to have an awful lot of company. Everybody sees that. Everybody. But if he's trading 5-second bars, not so much. Therefore, he's more likely to take quick profits because the trading crowd he hangs around with is generally not in this for the long haul. However, if he locates a point where all these waves intersect, such as I have shown you above, he can use that 5-second chart to enter a position and have the combined forces of everyone who's looking at a daily chart and hourly and 15m and so forth behind him, providing the confidence he may need to give the trade a little bit of room, a little bit of time to "ripen", rather than be shaken out of what will be a very profitable trade by a momentary twitch that plays only a small part in the grander scheme of things.

Edited September 9, 2015 by DbPhoenix

[BlowFish 10]

MRW, firstly congratulations on your epiphany. There are probably more realisations that will come from it.

 

DB quite eloquently points out that price does its own thing irrespective of any structure we place on top of it. However to monitor price it can be helpful to sample it rather than look at it as a 'stream'. Doing this with respect to time or volume or range gives us some reference points to work from. Really that's what charts are, samplings.

Edited September 9, 2015 by DbPhoenix

[MRW 10]

Thank you all for your comments!

 

It would appear that my epiphany continues as I am just utterly fascinated by looking at the market's action - price, volume, time, extent of moves and their opposing counterparts - in terms of waves!

 

Today's bilnding glimpse of the obvious is that what these represent is fluctuations in Supply and Demand. My trading platform is set so that I can see a ticker for any symbols I like. This gives me the bids, offers, and trades, but also shows things like "low offer," "drops bid," "lifts offer, " etc. What this means to me now is the ongoing struggle between the supply and demand sides of the market. This is, of course, the shortest time period possible, but this applies, too, to ever-longer periods of time.

 

I'm also slowly realizing that these waves are much more about areas where market activity is changing (or not), and that concern over exact entry or exit points is misplaced. One seeks to enter or exit in a given area where the struggle between supply and demand appears to be changing or has just recently changed. After that, it's about monitoring the market on an ongoing basis to try and detect when change is again taking place.

 

I'd like to publically thank DB for his patience and help in a number of PM's which have helped confirm my tentative guesses and observations.

 

This must all seem a bit amusing to those of you further down the road, LOL!

[DbPhoenix 42]

 

This must all seem a bit amusing to those of you further down the road, LOL!

 

See The Journey......

[Gringo 10]

Hi,

 

I am looking at AAPL for a possible short when/if Market (QQQQ) or Nasdaq hit R and bounce downwards.

 

Weekly chart has clarified quite a lot of things about why the prices are bouncing here.

 

Daily is somewhat confusing for me. I see lower highs and drew a demand line as well. I am taking lower highs to be a sign of weakness and am perceiving (guessing) price to not reach the R around 98 area. This to me is implying that 90 - 98 range as the place to initiate shorts and more specifically 95 to be the point to look for as a daily box has resistance around there. 90 is the midpoint from the weekly chart and could provide resistance as well.

 

What is worrying for shorting is that there appears to be a potential climax (selling exhaustion perhaps) around 85 in Oct 08 and subsequent tests of that level have been on lower and lower volume. This may imply lack of selling pressure.

 

It is possible that AAPL or market or both may just keep going up but my aim is to to develop an understanding for self-sufficiency.

 

After writing all this down I am not even sure anymore if shorting is a good idea.

 

 

Please add your insight as to how to approach this.

 

Thank you.

 

Gringo

Edited January 23, 2009 by Gringo

[DbPhoenix 42]

You guys are learning this stuff so quickly. And thank you for posting to the EOD thread.

 

Before jumping into a stock, though, remember, that Wyckoff counseled the trader to look first at the market, then at the group, then at the stock. Nowadays, we can look at several markets (such as the Nasdaq and NDX) as well as a variety of sectors and groups before arriving at our final destination.

 

So, let's go from the macro to the micro, though we'll skip the market part. Everybody has the market chart imprinted on their brains.

 

First, technology:

 

 

Then Technology Hardware & Equipment:

 

 

Then Computer Hardware:

 

 

And, finally, Apple:

 

 

 

Notice how badly Technology and Technology Hardware suck. But by the time you get to Computer Hardware, it doesn't suck so bad. In fact, it's just below the '06 swing low. Apple is doing considerably better, not only above the '06 swing low, but holding at the '07 swing low. This is not to say that Apple can't or shouldn't be shorted. You've located just the spot where one could do so if that's what he wanted to do.

 

But keep in mind that Apple has shown considerably more strength than the groups or the sector of which it is a part, and shorting strength is not necessarily the best option.

 

Also compare its performance and chart position to other players in the group, like Hewlett or Dell (I haven't kept up with this, so I don't know who the major players are currently). Is it doing better, worse, or about the same?

 

If you do decide to short, the best place would be a failure of a test of the 95-100 area. You could also short a failure of the bottom of the box at 78 or so. But if you select that option, you've got an awful lot of support just below to look forward to, and some sort of scaling-out plan would be in order.

 

Understand that I'm not trying to discourage you from shorting. But it may not be clear sailing, and you need to come up with detailed contingency plans ahead of time so that you'll be prepared for whatever comes your way.

[Gringo 10]

Hi,

 

HPQ has moved up % wise quite a bit more than AAPL from recent bottoms after selloff and hence is showing more relative strength. DELL is sitting on support and is relatively weaker and the weakest of the three. I am not comfortable opening a position on a break out yet and prefer reversal at S/R and therefore am not comfortable shorting DELL which seems to be sitting at some support. Either a test or retracement after BO is the only scenario for me so far. Perhaps in time I'll develop the skill to get BO entries.

 

This leaves AAPL to be play with (note: It could be my own bias somehow finding reasons to just stick with AAPL and disregarding other important information).

 

Nasdaq and indexes are moving in such a congested areas right now that perhaps it is wiser to observe at the moment which direction the market pick.

 

The volume on AAPL consolidation has been steadily decreasing which may mean either accumulation or distribution in this area and perhaps buyers and sellers approaching closer to an agreement about price level. Lower highs and fact that more time has been spent at the bottom of range is somewhat indicative of distribution but it's not all clear. Had the market made a run up and started to exhaust buying pressure I would have felt more comfortable placing shorts but due to fact that indexes have recently come down might suggest some selling pressure has already been used up probability of up may be somewhat higher even though Nasdaq is under quite an R at 1500 but there hasn't been a follow through downwards either which may indicate reduction in selling pressure.

 

I am still observing and have become more cautious. Without Wyckoff's way of seeing supply and demand I would already have shorted AAPL around 90 and hoped for the best. Now I am atleast balancing the pros and cons while comfortably sitting outside and not terrified that I am missing the only chance in the world to short.

 

Thanks to those who have held my hand and helped me re-learn to walk again. The baby steps are coming along and some bumps and missteps are to be expected.

 

AAPL is having trouble at the Midpoint which is 90. EPS came out yeseterday so had a jump which on weekely looks like quite a rebound from test.

 

And I was thinking EOD will require lesser thinking.

 

 

Gringo

Edited January 23, 2009 by Gringo

[MRW 10]

And I was thinking EOD will require lesser thinking.

 

[ATTACH]9217[/ATTACH]

 

Gringo

 

My limited experience leads me to the observation that longer time periods such as EOD would give you more time to think, but wouldn't change the process or work involved.

 

Just a thought...

[Gringo 10]

Hi Db,

 

Your sector analysis and the article from Wyckoff inspired me to chose one of the weakest sector for shorting purposes and some analysis of JPM is below.

 

Please note GS and JPM are both behaving quite similarly.

 

XLF monthly clearly is in a downtrend but does seem to test montly low on lower volume. Note that the month hasn't come to an end yet.

 

 

 

The final box represent lack of upside strength but break above the box may imply some caution/halt on the short side. Break below the box may be a bonanza for shorts. Note also the inability of XLF Daily to rebound after this recent decline indicating a serious lack of demand.

 

 

Most JPM analysis is done on the chart itself for easier view.

 

Edited January 25, 2009 by Gringo

[MRW 10]

Just looking for some feedback on the way others deal with this sort of thing.

 

Before the U.S. opening, I have always looked at the way the overseas markets performed, news headlines, fair value on the S&P, and noted any economic reports to come out that day. Then during the day, I have an audio news service that brings headlines from Reuters, Bloomberg, etc - this is mostly crap and comments from politicians, CEO's etc.

 

This has not been so I can trade based upon any of this, but rather because I thought it might be useful to see what others were looking at and possibly reacting to. The only way I deal with this is to be flat before things like Fed announcements, big econ numbers, etc, as the volatility sometimes gets irrationally wild on these.

 

I know Wyckoff has written about learning to trade without the news, so since I don't use this to trade from anyway, I've "shielded" myself from all this starting today - sort of a little experiment.

 

Just wondering what DB and others might say about the way they deal with this sort of thing.

 

Thanks!

[DbPhoenix 42]

Just looking for some feedback on the way others deal with this sort of thing.

 

Before the U.S. opening, I have always looked at the way the overseas markets performed, news headlines, fair value on the S&P, and noted any economic reports to come out that day. Then during the day, I have an audio news service that brings headlines from Reuters, Bloomberg, etc - this is mostly crap and comments from politicians, CEO's etc.

 

This has not been so I can trade based upon any of this, but rather because I thought it might be useful to see what others were looking at and possibly reacting to. The only way I deal with this is to be flat before things like Fed announcements, big econ numbers, etc, as the volatility sometimes gets irrationally wild on these.

 

I know Wyckoff has written about learning to trade without the news, so since I don't use this to trade from anyway, I've "shielded" myself from all this starting today - sort of a little experiment.

 

Just wondering what DB and others might say about the way they deal with this sort of thing.

 

Thanks!

 

As you say, Wyckoff suggests (to put it mildly) that the trader ignore all of it: news, tips, reports, rumors, and so on. Given the internet and the instant executions of today, one may want to avoid trading the Fed announcement and the 10:00 reports if he is not already in his trade beforehand. But everything else is in the chart.

 

If the subject interests you, it has been discussed exhaustively elsewhere.

[Gringo 10]

It's around 2 mins before close and JPM looks like it has weakned based on the close not getting too high and price again coming down and stalling after 25 area.

 

Seems like a resonable opportunity to short as market rejected major resistance and XLF also couldn't get out of the most recent box and reversed after all the gains today.

Edited January 26, 2009 by Gringo

[DbPhoenix 42]

It's around 2 mins before close and JPM looks like it has weakned based on the close not getting too high and price again coming down and stalling after 25 area.

 

Seems like a resonable opportunity to short as market rejected major resistance and XLF also couldn't get out of the most recent box and reversed after all the gains today.

 

Where do you plan to short, i.e., what price?

[MRW 10]

Thanks, DB! Appreciate the link, too!

[Gringo 10]

24.5 is price for short. In hindsight 25.10 area after 1min last swing low was broken was a better choice.

 

24-25 area or higher was the range for me to inituate shorts based on condition that market weakned. Priced reached the midpiont of box around 25.75 and it wasn't a bad place to initate a position but at that time the stock was running up and I didn't have the courage with market above key S/R levels (ie. Nasdaq above 1500 & SP500 above 850) to iniate anything on short side. I guess it takes practice to see weakenss in real time. It's only when market couldn't continue upwards close to the end of the day that I had confidence that short is viable.

 

BAC and C both reversed 8-10% and became -ve. Strangely BAC and C were the weakest stocks in the group but I was scared to short them as they didn't even move up when all else moved last week and being close to their Support made them less desirable to me. And these two gapped up big at the open.

 

One mistake I did make was that I didn't pay attention to the % moves. I am used to stocks around 100 value and 25 dollar stock every 1 dollar is 4%! Mentally I didn't consider 24 or 25 to be too far off but % wise they are quite off.

 

Another strange thing that happend was that after doing all the analysis I wanted to do something or get some kind of reward after putting all the work in and once I realized my eagerness to do something I went for a break and possibly missed better entry areas. That advise from the Zen and Poker book about not feeling you deserve something ust because you've been behaving and following rules was experienced by me in real time.

 

 

I guess that's how one learns.

[Gringo 10]

I am finding EOD to be quite painful. Due to my seeing 1min charts most of the time i can tell when market's in an uptrend or downtrend and it becomes difficult to continue to stay in a position when short term trend is going against my position. Still I have controlled myself and my exit based on daily analysis and stop not being hit.

 

Probably better entry or more fine tuning is required it seems. Or perhaps I may have to set up my stops and not continuously observe the market. New questions are popping up fast.

[DbPhoenix 42]

I am finding EOD to be quite painful. Due to my seeing 1min charts most of the time i can tell when market's in an uptrend or downtrend and it becomes difficult to continue to stay in a position when short term trend is going against my position. Still I have controlled myself and my exit based on daily analysis and stop not being hit.

 

Probably better entry or more fine tuning is required it seems. Or perhaps I may have to set up my stops and not continuously observe the market. New questions are popping up fast.

 

It can be a nail-biter, if for no other reason than price seems to move so glacially. But for the vast majority of beginning traders who are trying to trade intraday, price moves much too fast

 

In any case, there are a few things that you implied in your analysis that bear closer examination since they involve weaving together a number of threads. You've addressed S/R and strength/weakness and even risk, but let's look at all of this a little closer.

 

Regarding the "box", or trading range, you'll note that price had been bouncing around primarily between 24.5 and 26.5. This provided a midpoint of 25.5 (you called the range 24 to 27 in your original chart, but the midpoint would remain the same, and what's a quarter-point or so?).

 

 

 

 

 

 

As I've said more than once (a lot more), all of what's been done up to now can be done in advance. Sometimes way in advance. Here, all you had to do was sit back, relax, and watch what traders did when price approached that midpoint. Trading activity declines, the range narrows, and you've got yourself a springboard. Granted it's not much, and it's worth only a point and a half or so, but it tells you that you're looking in the right place.

 

Now what happens? Buying pressure comes back in, but so does selling pressure (trading activity increases). Buying pressure, however, is greater, able to push price higher even when increasing selling pressure (detected by increasing trading activity) is brought to bear. And where does all this stop? And what happens to trading activity? Traders now have to decide whether they're going to follow your script or somebody else's. But you made the right choices, though you entered a bit low, and you're in a good position. You're not required to make the right call. You're required only to be prepared and be in the right place at the right time. If the world blows up in the meantime, that's out of your hands.

 

When I say you entered a bit low, the better entry, as you noted in hindsight, was nearer 25. A sell stop just below the bar I arrowed would have been just the ticket (actually, a sell stop limit, unless you want to relinquish control of the price you pay). At least that's what Wyckoff would have suggested, partly because that's where weakness would reveal itself soonest and partly because your risk would be much less than shorting the bottom of the day's bar.

 

Fortunately, none of this is in hindsight. You made your plans and you executed them, and you laid it all out ahead of time. Kudos. Granted it's difficult to appreciate the push and pull on a static chart, particulary when one limits himself to bars. But perhaps a "dot" chart can give some sense of this movement. The conclusions are the same, but perhaps the display can provide an "Aha" moment for someone who has not yet stepped through the looking glass of real-time trading.

 

 

 

 

 

As for that springboard, let's give that little sucker a closer look in context:

 

 

 

What's "noise" to some is music to others.

 

Now you have to decide what you're going to do if JPM decides it's going to go up instead of down. What are your plans? What "scenarios" can you plot?

 

 

 

[Gringo 10]

JPM above 26.5 is exit for me. Even 26 is quite unacceptable. I may exit half at 26.10 to keep my head straight.

 

Today the price didn't go above opening high and the day high was lower than previous day's high. Still the close was higher and volume was really low. Supply is holding back it seems.

 

FED meeting tomorrow is a dangerous day. Historically I have almost always gotten whacked atleast day trading on this day and generally am not eager to trade. Still it used to be plan-less trading and although I had a pretty reasonable plan I am finding out it wasn't precise enough. Next time I'll have to have detailed points and exactly how I would behave when that price level is reached.

 

If price doesn't fall even after the FED meeting say in a day or two then I may consider scaling out of position anyways as this is about time JPM fell on account of to it reaching the larger resistance zone. Too much delay could mean danger and I am not ready to gamble.

 

Another reason of weaker entry is perhaps the unavailability of chat room. Usually I am in sych with the general trend but the loss of secondary (could be primary!) confirmation suddenly left me on my own and the plan to initiate short when future traders in room were planning to initiate short positions couldn't materialize. It's only now I am becoming aware of my dependence on chat buddies.

 

This writing down business leaves no place to hide!

Edited January 28, 2009 by Gringo

[DbPhoenix 42]

JPM above 26.5 is exit for me. Even 26 is quite unacceptable. I may exit half at 26.10 to keep my head straight.

 

Today the price didn't go above opening high and the day high was lower than previous day's high. Still the close was higher and volume was really low. Supply is holding back it seems.

 

FED meeting tomorrow is a dangerous day. Historically I have almost always gotten whacked atleast day trading on this day and generally am not eager to trade. Still it used to be plan-less trading and although I had a pretty reasonable plan I am finding out it wasn't precise enough. Next time I'll have to have detailed points and exactly how I would behave when that price level is reached.

 

If price doesn't fall even after the FED meeting say in a day or two then I may consider scaling out of position anyways as this is about time JPM fell on account of to it reaching the larger resistance zone. Too much delay could mean danger and I am not ready to gamble.

 

The exit stop should be placed at the same time as the entry. If you have not already done so, I suggest you place that stop as soon as the market opens.

 

As for exit strategies that go beyond a simple stop, these should be planned in advance of the entry. Otherwise, one can come up with ill-considered reasons for scaling-out, much less exiting. The market doesn't rise or fall simply because we've entered. If you cannot or don't want to assume the "time risk", you are entitled to account for it in your plan.