Trading The Wyckoff Way

[Gringo 10]

It's over. Morning blast (gap) up was enough to hit all kinds of stops.

 

I am trying to figure out what I did wrong and could have done better. Maybe I could have waited for markets to run up and then shorted when it stalled rather than after a recent decline?

 

Back to the drawing board.

Edited January 28, 2009 by Gringo

[DbPhoenix 42]

It's over. Morning blast up was enough to hit all kinds of stops .

 

Did you get your stop order in?

[Gringo 10]

Stop was bypassed as the stock gapped up at open above 27. This gapping business also needs some attention now.

[DbPhoenix 42]

Stop was bypassed as the stock gapped up at open above 27. This gapping business also needs some attention now.

 

What do you mean "bypassed"? What type of stop order did you place?

[Gringo 10]

By 'bypassed' I mean the fill wasn't good as the stock opened above the price I had set for stop where the stop order became market order. As the stock opened 27+ I got a fill very early but not exactly at my stop price but higher. I didn't use limit price as getting out was the main idea.

 

As you mentioned in a earlier post I am going to probably attempt to use limit orders for initiating a position.

[DbPhoenix 42]

By 'bypassed' I mean the fill wasn't good as the stock opened above the price I had set for stop where the stop order became market order. As the stock opened 27+ I got a fill very early but not exactly at my stop price but higher. I didn't use limit price as getting out was the main idea.

 

As you mentioned in a earlier post I am going to probably attempt to use limit orders for initiating a position.

 

Correct. Do NOT use any kind of limit price on a protective stop.

 

So what now? You're looking at R at 27 and 28. Get back on the horse, even if it's only sim.

[Gringo 10]

Again attmpt it?

 

I thought the plan failed.

 

What I don't understand is why I am feeling upset.

 

I think I'll start looking again.

[DbPhoenix 42]

Again attmpt it?

 

I thought the plan failed.

 

What I don't understand is why I am feeling upset.

 

I think I'll start looking again.

 

It's okay to be disappointed. But those are the breaks. As long as your ego wasn't on the line, you ought to be able to re-examine the situation.

 

As you noted with your boxes, there's further R ahead, at 27 and 28. Currently, it's finding R at 27.5. And that's quite a gap to be filled. If it gets filled. And gaps that occur under these circumstances tend to be.

 

But if this is unfamiliar territory to you, come up with as many scenarios as you can, then sim the trade. You aren't going to learn much by just walking away from it, especially if you consider yourself to be a loser.

[Gringo 10]

Beam me up Scotty! I am back...

[DbPhoenix 42]

Try creating your scenarios with If...Then statements.

 

For example, if price does this, then I short here and place my protective stop there.

 

Or if I want to short and price does this, then the trade is invalidated and I stand aside.

 

Or if I short and the trade goes in my direction, then I will move my stop closer to the price in the following manner: (1) (2) (3)

[Gringo 10]

JPM:

27.18 is short. Stop loss 28

Take 1/3 profit 25.5

 

I am looking towards 20 as the possible ultimate target.

 

I thought 27.5 area was resonable R.

 

Anyway, the gods seem to like down tomorrow. My agent checked with Zeus.

Edited January 28, 2009 by Gringo

[DbPhoenix 42]

Trading around Fed meetings is always dicey. And if you're stopped out again, then you're likely out of synch with the market, in which case the best course is to back off and look for indications of what you should do next rather than return to the same well a third time.

 

This thread needn't become a journal, but feel free to share the process you're going through.

[DbPhoenix 42]

Given the questions raised here and in the chat room, I've excerpted portions of what Wyckoff has to say about stops. These are from his original course. If some of this sounds familiar, remember that Wyckoff was among the first to address these issues.

 

 

STOP ORDERS (Sect. 23M)

 

(Excerpt)

 

 

The first rule in successful trading and investing is: Cut losses short.

 

First, never make a commitment for investment or speculation purposes until you have decided, in advance, where the danger point exists in that stock. Second, calculate the possibilities for profit if the stock should confirm your judgment by moving in your favor. Third, determine whether the indicated probable profit outbalances the indicated risk by at least three to one. Fourth, place a stop order (under the danger point on a long commitment and above it on a short sale) the moment your buying or selling order is consummated.

 

Should you have a stock under observation and believe it affords a logical buying or selling opportunity, have patience to wait until it works into a position where it meets the first three conditions above named before you make your purchase, (or sale if you contemplate selling it short). Or, if these conditions cannot be met, look around for another opportunity where they do exist. In other words, test the validity of any proposed commitment by noting, in advance, where your stop order must be placed so that you will always be operating with the odds at least 3 (or more) to 1 in your favor. It pays to wait for these opportunities.

 

--------------------

 

You decide in advance that you will risk just so much on your judgment that a commitment will be profitable, and you are out automatically when you are wrong. With good judgment, you are not likely to be wrong three times in a row. But assume this does happen and you are using stops which cut your losses to an average of 2 points on each trade. You still have capital intact to take the fourth position on which you will need to make only 8 points to come out ahead of the game. But if, on your first trade you let a loss run to 10 points or more because you failed to use a stop order, it may take only the one venture to tie up your account and put you out of business; or at best, you will be a long time getting back on your feet.

 

--------------------

 

Stop orders are used:

(1) To limit risk

(2) To reduce risk

(3) To insure profits

(4) To begin new trades at prices above the present market.

Stop orders are used to limit risk, as already explained, by placing a stop order immediately, as soon as a commitment is made.

 

Stop orders are used to reduce risk when the action of the stock enables you to move the stop closer to the market price than it was originally. If you have an opportunity to do this without jeopardizing your trade, it should be done. It is better to risk 1 point than 2 or 3, but do not be too hasty in moving the stop up or down. Watch for the support and resistance points to develop so that you can use these as guides when placing or changing your stop orders.

 

Of course when you can move your stop order to cover cost or selling price and commissions, there is no risk; your expectancy is then 100% of the indicated profit.

 

Stop orders cannot always be executed exactly at the stop price. Bear this in mind: A stop order is an order to buy or sell at the market when the stop price is reached. So never blame your broker if he cannot get you out exactly at the price at which you have placed your stop.

 

Stop orders are used to insure profits. One can never tell when a contrary move in the market will wipe out a paper profit. Rarely should a profit of even 3 points be allowed to run into a loss. This applies to investment, as well as to trading commitments.

 

An initial move of 10 points in your favor, if it started from the point of accumulation or distribution, will usually be followed by a contrary movement of 3 to 5 points. You must allow for that contrary movement in judging where to place your stop. The greater the initial move, the greater the expected rally or reaction. Even though you expect a probable move of 20 points in your favor, make sure that you nail some of the 10 points you have on paper. The move may have been just a flash in the pan. A rise from 60 to 70 is no guarantee that the next move will not be down to 50.

 

Stop orders may be used to begin new trades above [and] below the present market. However, it is best that you do not undertake to employ stop orders for this purpose unless you have had a great deal of experience and know exactly what you are about. Otherwise, there is a danger you will be whipsawed.

 

A buy stop would be used to begin a new trade on the long side above the present market.

 

A sell stop would be used to begin a new trade on the short side below the present market.

 

A buying stop is used under conditions where you have reasons to believe that the fulfillment of a required rally indication would be likely to initiate a further rise or the beginning of an important advance with no further material reaction; and where it appears that unless you catch the initial move immediately on the day the required indication appears, you might miss it or be compelled to pay a higher price by waiting. These conditions may prevail: (1) when a stock is near the end of a period of accumulation or absorption and seems ready to step on the springboard, (2) When a stock is on the hinge, that is, at a dead center. (3) When a stock has been in a trading range and it appears that if it can overcome previous resistance it will go into a definite mark up.

 

The disadvantage of this procedure is that since your risk begins the moment a new trade is made for you, you must place a new stop order immediately to protect your purchase, just as you place a fire insurance policy on a house when you buy it.

 

A selling stop is the reverse of a buy stop and is used to begin a new trade on the short side when you have reason to believe that a reaction to a certain price would be likely to signal the beginning of a further down swing or the beginning of a large decline, with no further material rally.

 

The advantage of a selling stop is the same as in the case of a buying stop. You use it under conditions where you believe that the indicated down move is not likely to start unless and until a certain price is reached. And, when that price is reached, you figure that the decline will continue rapidly so that it is better to act on what is the equivalent of an automatic selling order than to risk a chance that you might miss catching the beginning of the move, or risk having the price slide rapidly away from you if you should wait for the required indication to be fulfilled.

 

The disadvantage of such a stop is the same as in the case of the buy stop.

 

--------------------

 

Arbitrary stops of 2, 3 or more points should be used only when the tape or the chart does not show a support or resistance level, or a support or resistance point, nor otherwise give an indication as to where your stop might be logically placed.

 

The number of points you will risk in placing a stop should also be governed by the type of operation you are engaged in. Thus, in short swing trading operations where you may be trying for the 3 to 5 point moves, your initial stop must be placed much closer to the danger points and should be moved to reduce risk more quickly than in the case of commitments made for the intermediate swings of 10 to 20 or more points. The difference is that in the case of short swing trades, you are trying for smaller indicated profits and a more rapid turnover of capital; hence to keep the proper limitation of risk you must crowd your stops closer than in the case of long swing operations where you wish to allow for normal corrective rallies and reactions, or changes of stride, without being kicked out of your position on minor reversals of an established trend. All of which sums up into saying: In handling stops, be influenced by the purpose for which you made your commitment originally and adjust your stops thereafter in accordance with the subsequent behavior of the stock and the market as a whole.

 

Always keep in mind that: Stop orders should NEVER be changed so that your risk is increased. All changes should be made for the purpose of reducing risk or eliminating risk or making sure of part of your paper profits.

 

--------------------

 

After a stock has moved well away from the point at which you took a long or a short position, you must remember that the further it moves, the nearer it is coming to the reactionary or rallying point, or the turning point for a swing in the opposite direction. The more it goes in your favor and the more it approaches the point (objective) where, you estimate, it should rally or react or turn completely, the closer your stop should be to the market price.

 

If you calculate that there should be a 15 point move in your favor, do not hold out for the last point. If you are 10 or 12 points to the good on paper, crowd the stop order right behind the price when you see indications of hesitation. The more the stock hesitates and seems ready to reverse, the closer your stop should be.

 

--------------------

 

Of course, even the very best judgment in making commitments and the best logic in handling stops cannot prevent having them caught at awkward places. In such instances, that is, where you see you have been stopped out prematurely, it pays to re-establish your original position if you find that the action of your stock subsequently justifies going right back into it. But you must set your stop on the re-established commitment just as if it were an entirely new position and without regard to the price at which you previously went in or were stopped out.

 

There are three reasons for the too frequent catching of stops:

(1) Starting trades too soon. This may be the result of impatience - hence poor timing or failure to wait for

reasonably conclusive indications - or failure to observe the principles set forth in paragraphs [1 and 2, top of the page].

 

(2) Bucking the trend.

 

(3) Improperly placing and adjusting your stops.

If you find your stops are being caught frequently, go over your trades carefully to determine whether the fault may be attributed to any or all of the above causes. Then review the instructions herein and all preceding references to stop orders so you may discover your errors and thus avoid repeating the same mistakes in the future.

 

Should it appear that your commitments are started right and your stops are reasonably well placed, then the frequent catching of stops should be taken as a warning that you are not operating in harmony with the trend of the market. Then, if you persist in selling stocks short in a rising market you are bound to expose your stops to the danger of being touched off on bulges. Conversely, if you repeatedly buy on what you believe to be reactions only to discover that your stops are consistently caught, this should be taken as an indication that you are operating on the wrong side of the market - the trend is down and those presumed “reactions” in reality are waves of liquidation. Such errors of judgment sometimes lead students to abandon the use of stops. Nothing could be more dangerous.

Edited October 7, 2009 by DbPhoenix

[MRW 10]

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?

 

 

 

 

DB, I notice the charts you posted have different time periods.

 

Do you think that a support/resistance level or mid-point is more significant as it appears on a longer time period, say, daily vs 15 minute?

Did Wyckoff address this at all?

 

My real-time experience would suggest that returning to a level set hours ago is more significant that returning to one set 5 minutes ago, but I'd be interested in your thoughts on this.

 

Thanks!

[DbPhoenix 42]

DB, I notice the charts you posted have different time periods.

 

Do you think that a support/resistance level or mid-point is more significant as it appears on a longer time period, say, daily vs 15 minute?

Did Wyckoff address this at all?

 

My real-time experience would suggest that returning to a level set hours ago is more significant that returning to one set 5 minutes ago, but I'd be interested in your thoughts on this.

 

Thanks!

 

The time period is the same. Only the bar interval is different.

 

As for support and resistance, they occur where traders have bought and sold. The more traders who buy at a certain level, the more support one can expect. The more who have sold at a certain level, the more resistance. Since more people can buy at a certain level in a day or a week or a month than in a few seconds, the R represented by the day's/week's/month's trades will be greater. Therefore, one looks for that point or level at which R in the 5s chart matches up with the R in longer bar intervals, as here.

[MRW 10]

The time period is the same. Only the bar interval is different.

 

As for support and resistance, they occur where traders have bought and sold. The more traders who buy at a certain level, the more support one can expect. The more who have sold at a certain level, the more resistance. Since more people can buy at a certain level in a day or a week or a month than in a few seconds, the R represented by the day's/week's/month's trades will be greater. Therefore, one looks for that point or level at which R in the 5s chart matches up with the R in longer bar intervals, as here.

 

Ok, forgive me for being a bit slow, but here's what I understand you to be saying:

 

The interval or timeframe for each bar is different. So one bar represents a different period of time than another - say, 5 seconds per bar vs 1 hour per bar.

The idea is to look for a point where a shorter interval bar is reaching support/resistance/midpoint that appears on a chart with a longer interval bar. Thus, we might look for these points where a chart with 1 minute bars matches a chart with, say, 30 minute bars.

 

Is this correct?

 

Thank you again!

[DbPhoenix 42]

The bars are merely a means of illustration. Whether one uses a 1m bar or a 15m bar or a 60m bar is not important. What is important is the point or level at which buyers are finding R and sellers are finding S. In this case, that's 25.5+/-. Instead of hourly bars in the first chart, I could have used ten days' of 1m bars. The hourly chart and the 1m chart are, in fact, the same except for the fact that the hourly chart includes five extra days.

 

Remember that it's not about bars. Bars are used simply because that's what people are used to. Rather it's about the balance between buying pressure and selling pressure against support and resistance. The support and resistance can be fairly important, i.e., visible even to those who trade only daily charts, or it can be much less so, i.e., visible only to those who trade 1-tick charts. The sort of support/resistance on which one focuses will depend on whether he's going for a few ticks or 20 or 30 (or more) points.

 

There are loads of examples in the Cajas thread.

[MRW 10]

Thank you, DB!

 

I'm still learning to break myself of the bar emphasis.

 

Didn't mean to hijack your thread, Gringo - sorry.

[DbPhoenix 42]

FWIW, I would just as soon use line charts. But this would mess a lot of people up since there are no closes and no intervals. Shifting one's focus to the continuous flow of price is a big adjustment for most people. But the end result -- as long as one does not attach cosmic significance to the bar to begin with -- is the same.

 

 

[MRW 10]

Ok, with apologies again to Gringo, DB, would these line charts be then just a line of closing price for, say, a 5 or 30 or whatever time period?

Or would these be like a tick chart with every trade shown?

Perhaps something like the dot/scatter chart you had up?

 

Come to think of it, this is probably an unimportnt question to ask - all that would matter, as you've just said, is the flow of prices, so the chart could be constructed any way you'd like.

 

Having said that, it would be nice to see an example if you'd like to post one!

[Head2k 10]

Db posted line charts on more occasions, I believe this is the last one. You might want to check also some preceding and subsequent posts in that thread for some context.

 

Use midpont or closing price of each bar to construct the line. The bar interval doesn't matter, but it should be small enough so there are not only 10 or 20 bars on the chart. Remember that this is merely an exercise which should help you change the way you think, so don't bother with questions such as whether 5 or 30 or whatever. The interval should be just somewhat proportional to the period you watch.

 

And by the way. This is not Gringo's thread so I believe there is no need for apologies for hijacking, but on the other hand, it is a specific EOD thread, and general questions should be more likely placed here. Assuming you have already read at least the stickies in the Wyckoff forum.

Edited January 30, 2009 by Head2k

[BlowFish 10]

I am not sure of whether this will help MRW (I guess it depends on your background) but a chart is just a method of displaying a sampling of the price data. So by selecting an hourly line on close chart for example you are sampling the continuous price data once per hour and displaying that value. Everything else is discarded. Choosing how you sample the data might allow you to see certain things with greater ease.

[Gringo 10]

Hi MRW,

 

Feel free to post whatever and whenever you like. We're all here to get better. Heak2k is right it's our thread here and not personally mine.

[DbPhoenix 42]

Ok, with apologies again to Gringo, DB, would these line charts be then just a line of closing price for, say, a 5 or 30 or whatever time period?

Or would these be like a tick chart with every trade shown?

Perhaps something like the dot/scatter chart you had up?

 

Come to think of it, this is probably an unimportnt question to ask - all that would matter, as you've just said, is the flow of prices, so the chart could be constructed any way you'd like.

 

Having said that, it would be nice to see an example if you'd like to post one!

 

A line chart is suggested only because the usual charting sites don't offer tick charts. And even some charting programs don't offer the tick option unless you pay extra for it. But a line chart does nothing except connect the price points with a line. If you've never seen a tick chart, I'll be happy to post one, but since none of this really has anything to do with EOD trading, I'd rather this particular arc be discussed in another thread.

 

Wycoff, of course, did not maintain intraday bar charts. How could he? But then maintaining intraday bar charts is a relatively new phenomenon. Unless he was scalping, he'd find his spot on daily charts, then monitor the intraday action in order to get as close as possible to the point where the stock was "ready" to move and where risk would be minimized (this is something of an oversimplification, but all of this is addressed elsewhere in the Forum), but he wouldn't be using charts; he'd be using P&F, or just keeping track in his head.

 

(As a sidenote, this is not to say that there's anything inherently superior to using P&F -- or Level II or T&S -- intraday rather than charts, rather that maintaining intraday charts manually in real time is an impossibiliity. Granted there are LII and T&S people who maintain that their approach is more "pure" than charts, but if you want pure, try keeping track of support and resistance on the back of an envelope, which is what many traders did back then.)

 

In other words, he'd know, as in the case of JPM, that 25.5 was important. If he was going to take his position intraday, he'd then watch what traders did when price approached that level. He'd note where price was straining to advance. He'd watch the volume to see where the balance between buying pressure and selling pressure lay, in effect maintaining a P&F chart in his head. He'd then take his position just under that point where price kept hitting what atto calls "a wall". The idea of waiting for the clock to tick over 5 minutes or 15 minutes before he opened his position would have seemed ludicrous to him, much less wait an hour. What would be the purpose? There is, after all, no "close" during the day, rather a continuous flow of trading activity and price movement.

 

So why didn't Wyckoff use line charts rather than bar charts for his daily record-keeping? They certainly would have been simpler and faster. But there is a lot of information contained within that daily bar. If you're listening to the market's story, each bar will tell you something of the balance of power between buyers and sellers and how hard each of them tried to advance price or pull it back (contrary to what has been posted elsewhere, it won't tell you anything about activity; the volume bar is responsible for that; it does tell you something, however, about power and desire, albeit only within that particular interval; string those intervals together and you have a continuing story). Wyckoff, however, understood the inescapable fact of continuous price flow. When he looked at a bar, he saw not a bar as a finished product but the waves and currents and eddies of buying and selling pressure that created the bar. If you want to be fanciful, it was not a stick of dead wood with a bump on it here and there but rather a "flash" stick. The bar, for him, was nothing more than a summary of what buyers and sellers did to create it, nor did it have any particular importance beyond its place in the continuous flow of trading activity and price movement. As long as one is sensitive to this flow and in synch with it, he can apply W's approach to his trading without using bars at all, or even charts.

 

Since intraday bar charts have been around for a generation, those who are less than middle-aged may have difficulty seeing price movement in any other way. Line charts are merely a bridge to the realm of continuous price movement. Your charting program may provide several options -- line on close or open or high or low or a high/low average or a high/low/close average or whatever -- but which you choose is largely irrelevant, including the interval on which the line is based: tick, minute, hour, and so forth. To attach too much importance to how the line is plotted is to generate the same mystique and pseudo-importance that is attached to the bar.

 

It's not about jogging from side to side for five minutes or fifteen minutes or an hour then jumping ahead and running side to side for another five or fifteen minutes or hour. It's about putting one foot in front of the other, again and again, maybe forward, maybe angling this way or that, maybe turning around and returning to the starting point, but always moving, always one foot in front of the other, sometimes slower, sometimes faster, but always moving.

[MRW 10]

Thank you once again, DB - and thanks to you all as well, Head2k, BlowFish, and Gringo!