Trading The Wyckoff Way

[firewalker 10]

First of all, thanks atto for providing so much insight in your trading approach. It's been a pleasure to talk with you in the chatroom exchanging live trades. So everything I say here is only to illustrate that there are different ways to skin a cat. I'm not saying this or that method is better, we all need to trade the way we see fit.

 

The second thing I'd like to say is well done on getting your short entry near the HOD. I was actually long (potential support in the area 981-983 and we still had the rising demandline on the 15min, one that I already refered to earlier in this thread). So this is the context:

 

 

My long was scaled out when we failed to make a new high at 988 and another scale out and the rest breakeven. The red dot shows where I shorted and zoom in to the 5minute to see clearer:

 

 

Here is this morning's trendy price action on a ES 1m, with annotated climaxes (which were the primary exits for my trading today).

 

The problem with volume climaxes is that there are a lot of them. I (try to) wait for a climax near some important support level before scaling out. I've learnt that the midpoint of a range can also create a retracement, and - depending on how far we moved already - it's one I don't always want to sit through so I scale out.

 

I agree that climaxes often lead to small swings in the opposite direction, but - and I realize many will disagree - I prefer to have a chance of catching the 'big swing' from time to time, by waiting for a reaction at a more important pricelevel.

 

In this particular example, it means stepping back the the sub 1min TF and having your eye on the next potential support (which I had around 961-963).

 

It does not mean you need to give back all of your profits. Stop placement is shown on the chart below:

 

My first exit was when price accelerated on the way down and climaxed. Although volume is not on this chart, you can see that momentum was higher and the spread was widening. The second scale out point was a bit further down the road.

 

 

I'm much happier to go to lunch and re-enter later.

 

And that's where I guess it comes down to styles, personalities,... I prefer to ride my trade out till EOD with whatever part of my position I have left. The way I see it, looking for a new entry means putting on new risk, and the potential of giving back profits made earlier.

 

Let's zoom back to the 15-min chart:

 

 

We broke the demandline and that's why the odds were a bigger move was coming. Thinking of trading behaviour, you were very early with shorting, I was a bit later (waiting for the break), but all those trading higher timeframes were even much later. Hence my belief that sellers would propel price further down, at least until the next support level. And as it turned out, we even went further down another 10 points in the last thirty minutes.

[steve46 12]

Entries and exits are a matter of getting "in synch" with market action. In order to do that one has to understand that the larger market is "moved" by institutions and players trading size. On an intraday (short term) basis, participants target specific price points and they think in terms of 10, 20, 30 and 40 pt "moves" or "pieces". On the longer term, institutional participants and a much larger pool of players (including retail investors) are looking for moves based on tax consequences (long term vs. short term capital gains if US based). These longer term players enter at points that they define as having "value" ("value" meaning having potential to increase in value over a time frame that extends from months to years) If you understand this, you can see where you fit in the larger financial picture of the markets.

 

Risk management is often left out of the equation when it comes to entries. In truth, entries are affected by local volatility and noise levels. Short term participants usually find that they have to maintain larger stop losses in order to maintain a presence long enough for their edge to kick in. Generally speaking, the majority of retail traders fail in their efforts because they A. do not have an edge, or B. have an account that is insufficiently funded to last through drawdowns, and/or C. Do not keep a realistic stop loss in place.

 

Entry Skills

 

Retail traders often complain about choppy market conditions. Based on observation one can see that markets move from trend to chop in a cyclic fashion. Those cycles can be seen on a weekly and monthly basis if one is observant. One basic difference between retail and profesionals is their choice of entry. Retail tends to trade "in the middle" of price moves hoping to get a small piece of the action, while professionals look to identify the origins and end points of price moves (trading from the "outside...in".....) Without a context to refer to, this is difficult to see, however one can get a glimpse of it using Market Profile for instance. In that context one can see participants move into and out of the market at specific areas thought to have fair or unfair "value". The auction premise (the idea that value is determined by the auction process) seems to be one way of determining these price points no matter what market a participant chooses.

 

Understanding why participants enter and exit markets, a short term trader has only to learn some basic recognition skills. For example

 

When markets open out of value (below value for instance), the tendency is for participants to move the market up to test the low end of a previous value area. At the S&P pit, locals take in the opening orders from retail and depending on the volume, they try to move the market to a test point. If no "paper" (size) comes in to move the market past that point (this is called a "peekaboo"), they assume no demand is present and the market moves back down. As volume dries up, institutional "paper" participants, funds, banks, hedgers and others jump on (enter) to mark it down. To see this one can look at time/price displays, MarketDelta displays, Market Squawk, and of course you can "see" this as it develops on the charts. If you maintain a Market Profile chart with previous value areas marked you can see price test that area and either continue up ("take out" that price point) or fail and fall back. As with all things, there is a rythym to this movement and with screen time one can see it first and learn to anticipate the proper entry point.

 

I'll stop at this point and see if there is interest in further comment.

[Kiwi 16]

<<< >>> Short term participants usually find that they have to maintain larger stop losses in order to maintain a presence long enough for their edge to kick in. Generally speaking, the majority of retail traders fail in their efforts because they A. do not have an edge, or B. have an account that is insufficiently funded to last through drawdowns, and/or C. Do not keep a realistic stop loss in place.

 

An excellent thread, and I'd ask you to carry on Steve.

 

I had only one real issue with atto's excellent original post and it was his mention of the phantom of the pits "if the trade isn't proving right, get out" approach.

 

I get the impression that people take such wisdom without thought about how their own methodology is working out and it combines with Steve's point above to cause struggling traders to exit from trades before their edge has asserted itself. My own method takes advantage of big boy volatility to get good entries but I have found that any attempt to tighten stops, trail stops, or demand that the trade works out before its time has come reduces my expectancy.

 

So, my contribution to the thread would be to amplify Steve's point and suggest that "general wisdom" must always be adapted to the method you choose to extract money from the markets.

 

 

PS. I would add a 4th to Steve's list: many retail traders fail because they are unable to do in real time what they plan to do while the market is closed.

[DbPhoenix 42]

On the other hand, giving the trade "room" can prompt the injection of hope into the equation, which is rarely to the benefit of the balance sheet.

 

Much of this can be avoided if the trader carefully defines just what it is he means by "right". If he then doesn't see it, he'll know better what to do and when to do it.

[steve46 12]

Well as regards DBs thoughtful comment, I agree. So I would add that it is likely that new, inexperienced or struggling traders will not possess the maturity or judgement necessary to know when a trade is "over".......

 

That is why I suggest scaling out as outlined in post 48 of my thread "Ideas for Struggling Traders"....One of the virtues of that method is that you don't have to know whether the trade is finished or has more room to run. You simply scale out at fixed intervals (mechanically), always leaving some bullets just in case it runs on....Assuming a daytrade horizon, one certainly does have to make a decision at some point, but that point can be at the very end of the day if necessary. Of course the best way to determine this is to test or characterize your markets, but I leave that up to each individual's discretion. That simplified outline shows a scale out plan for 12 contracts in the ES market, but it could be adapted in a number of ways.

 

As regards Kiwi's thoughtful comment I agree again. Over the years I have done numerous tests of trailing stop systems. All of them have a cost associated with use, and that cost is always the long term profitability of the system. Over that time, what has seems to be true is that one has to try to catch as many "outliers" (unusually profitable trades) as possible to overcome both expenses and unforseen negative scenarios. Now if one is participating in the equities markets (US Markets), I think it can be said that the best way catch these outlier trades is to maintain a residual presence in your market of choice for a long a possible during RTHs. On the other hand in mean reverting markets (US indices for example) one would need some way of identifying trend days early in the session and THEN it would seem prudent to maintain a residual presence there. For most other sessions, what would work best is to develop a way to estimate "maximum favorable excursion" and try to capture that movement on a consistent basis. As always, success in these endeavors comes to those who have sufficient skills to test and/or experience.

 

Finally it is true that all the planning in the world amounts to naught if one cannot execute. Apparently this is a real problem for many struggling traders. Interestingly in professional offices where traders are working with OPM this isn't often a problem (at least I have not observed it to be a problem), but when you add inexperience and let people trade their own money, boom they become "scared" traders, and as the saying goes "scared money never wins"....

 

Steve

Edited November 7, 2008 by steve46

[DbPhoenix 42]

Well as regards DBs thoughtful comment, I agree. So I would add that it is likely that new, inexperienced or struggling traders will not possess the maturity or judgement necessary to know when a trade is "over".......

 

That is why I suggest scaling out as outlined in post 48 of my thread "Ideas for Struggling Traders"....One of the virtues of that method is that you don't have to know whether the trade is finished or has more room to run. You simply scale out at fixed intervals (mechanically), always leaving some bullets just in case it runs on....

 

I should point out, however, that the Wyckoff approach is not mechanical but rather is practiced by those who are able to -- and want to -- judge the relative strength and weakness of buying and selling waves and when and where they are strengthening or exhausting themselves. Atto is doing an excellent job of demonstrating how to apply this discretionary approach to a scaling-out strategy.

[atto 20]

First, let me thank those of you who have contributed your ideas towards exits. I don't favor "mechanical" stops (scale outs at different predesignated levels), because this doesn't adapt for different market conditions. Determining the strength of waves (as Db said) allows you to take advantage of trendy and congesting environments. However, it's not nearly as easy as taking stops at 10, 20, 30 pts, etc, so this may have something to do with trading maturity. I treat my exits very importantly, so took the time to make a trading plan for exactly what I look for.

I had only one real issue with atto's excellent original post and it was his mention of the phantom of the pits "if the trade isn't proving right, get out" approach.

Yes, good point Kiwi. I am much more willing to exit, sideline, and re-enter than give a move "more room". I'm of the belief that my greatest edge is right at my entry, so my stops are typically pretty small. Given, my specific strategy is designed around this fact. Depending on the volatility environment, this is generally around 1.5 ES. However, I don't hit my stop very often because I generally exit before it gets there. I do admit that having such a small stop involves being able to gauge buying/selling interest very quickly on a fast chart (I use a 3-10s chart), and I'm very willing to re-enter if I have to. I do admit that this strategy

... could you post a brief post with your entry?

... Are there circumstances you will close all of the remaining position? (e.g. This is a really big selling climax and there is a case for minor support here maybe I should stand aside and re-evaluate).

Picture attached. As an aside, I do not take all breakouts like this, and this met other criteria (example: the bull failure at the double top).

 

Yes, at times, I will close an entire position at a significant climax at s/r. However, this is generally based on other factors, especially on higher timeframes.

Edited September 9, 2015 by DbPhoenix

[BlowFish 10]

Nicely written post Steve, though I am not sure I completely agree with all the points you have made. Firstly there are many more types of participant with many more motives than the ones that you have mentioned. I always hype Harris 'Trading and Exchanges: Market Microstructure for Practitioners' for those wishing to know more. I hear O' Hara is good too. I am not sure you need to understand why these participants enter and leave the market just see that they are. If you do want to know why and how, the book makes a fascinating read. I should warn it can be a bit 'difficult' because of the sheer amount of information it contains. Of course you are not going to be able to provide a complete thesis on market micro structure in a single forum post Steve:)

 

Markets flow tick to tick but according to our objectives it helps to 'sample' them at appropriate intervals. This is what a chart really is a sampling of the data. Personally I think 'noise' is rare (you could advance a hard to rebut argument that it is actually non-existent) however depending on what your objectives are and how you sample the market you might view some flutterings as noise. Of course to another participants this 'noise' is there bread and butter. Which is I think one of the points you made.

 

I am not sure whether markets are fractal in nature or not but they certainly appear to exhibit some fractal qualities. What is interesting and of real practical use is the interplay of different time frames. Can the weekly keep going up if a monthly high is being put in? Obviously not. What is really useful though is as that monthly high is put in you will likely see chop in a lower time frame as the month high is distributed. More interesting is that drill down a bit further (in time) and you will see lovely trend runs down then up over and over.

 

A lot of successful retail traders (most?) seem to trade in a broadly similar way they sample coarsely to find areas to trade. This might be literally zooming out a chart or looking at a higher tame frame and drawing S/R or using MP or even some indicators like a MA (by averaging x periods you are taking a coarser sample). They then zoom in and trade in these areas using price action or another trigger.

 

I guess the real question is how complicated do we need to make all this. Generally speaking the simpler the better, it needn't be hard to draw a few lines on a chart and then trade from them. Really the difficulties are ones of human nature, patience, discipline, emotional responses etc.

 

P.S. I think you could have warranted your own thread on this Steve goes beyond entrances and exits

[BlowFish 10]

 

snip

 

As regards Kiwi's thoughtful comment I agree again. Over the years I have done numerous tests of trailing stop systems. All of them have a cost associated with use, and that cost is always the long term profitability of the system.

 

snip

 

Finally it is true that all the planning in the world amounts to naught if one cannot execute. Apparently this is a real problem for many struggling traders. Interestingly in professional offices where traders are working with OPM this isn't often a problem (at least I have not observed it to be a problem), but when you add inexperience and let people trade their own money, boom they become "scared" traders, and as the saying goes "scared money never wins"....

 

Steve

 

I wonder if using stops based on market structure fair any better? I always like how Tim Morge manages his trades (though there is nothing new or revolutionary there).

 

Higher % winners with lower RR tends to produce smoother equity curves and lower risk of ruin. Those first contracts off will exhibit this characteristic. If running some sort of trailing stop smooths the curve I'd personally go with that rather than the higher return.

 

My hunch is that exiting too early is a more common malaise. I guess scaling out can help on this, it gives the feeling of playing with the banks money though strictly speaking this is not true.

 

That last paragraph really sums it up though I am sure DB would say that the main reason people have trouble executing is inadequate planning. "failing to plan is planning to fail" to trot out another popular adage. I wonder if people purposely (maybe at some deep inner level) leave loopholes in their plans to give themselves an 'out'?

[steve46 12]

Generally speaking I like to pay myself first (or as soon as possible) when trading. For me, that is the main "attraction" of scaling out mechanically.

 

Its true that I ocasionally override my system and hold scaling out at different intervals, but I never fail to get paid (something, even a little bit).

 

The other side of this is simply my experience. Once I added the extra "bullets" and got used to leaving them in the market to catch the outlier trades, my end of year balance sheet started to show improvement.

 

I believe that more or better planning is probably not the remedy for those who have problems staying in a trade. For some reason, some folks have emotional issues that prevent or at the very least, make it more difficult for them to endure the tension of not knowing whether price will move in their favor. I have seen this repeatedly, watching as they fidget and tick watch and ask (me) whether they should get out now (lol)....

 

One thing that may help traders who are experiencing this problem, is to be more involved in their research of a trade setup. For obvious reasons, if one knows in great detail what to expect from a trade, what the average profit should be, what the average loss should be and the percentage success (over a significant sample size), it may reduce the stress level enough for them to stop tick watching and let the trade run its course.

 

Just a couple of thoughts

 

Steve

Edited November 7, 2008 by steve46

[jonbig04 10]

I believe atto is absolutely right in that mechanical targets ideally will never be as profitable as PA based exits. However that is assuming that you are disciplined enough and proficient enough at reading PA to make them that much more profitable. So as a piker, I have mechanical targets because I simply cannot read PA well enough yet and since my targets are set multiples of my stop I maintain a very favorable R/R which I think will always net me a favorable amount of points at the end of the week, albeit never as much as I could have with well placed PA based exits.

[atto 20]

Possible developing hinge on 6E (Euro Futures). This same formation is on DX (US Dollar Index).

 

The hinge is visible on the daily. This is a 4hr chart.

 

Edited November 8, 2008 by atto

[SunTrader 10]

I wouldn't exactly call them climaxes since the trend continued lower and then lower still.

 

And as for the original example where there was a pullback on lower volume before it went to the eventual high and then broke lower - lower volume on a pullback can also represent lack of sellers if the trend continues much higher. Only if there is a top soon after can it be determined that it was more a lack of buyers that caused volume totals to be dropping.

 

Other confirming factors are needed then.

[atto 20]

I wouldn't exactly call them climaxes since the trend continued lower and then lower still.

That would simply be semantics then. Since we don't know if the trend will continue, they are very good scale out places (since, as you see, there frequently is a pullback after). It defeats the purpose to notice a "potential climax", and wait for the trend to completely change before exiting (waiting for "reversal confirmation"). As I said earlier, my strategy involves position adds, so I do account for continuing trends.

And as for the original example where there was a pullback on lower volume before it went to the eventual high and then broke lower - lower volume on a pullback can also represent lack of sellers if the trend continues much higher. Only if there is a top soon after can it be determined that it was more a lack of buyers that caused volume totals to be dropping.

Sure, it's actually a mixture of both. Neither party was particularly interested, but this is what I was referring to: my edge is decreased with significant lack of enthusiasm of buyers. This doesn't necessarily mean there will be a top, just like climaxes don't mean a top/bottom.

[DbPhoenix 42]

A Wyckoff trader will find it helpful to distinguish between "climaxes" and "climactic action". Climactic action may, of course, result in a climax, but one can't know whether or not there is in fact a climax until it's been tested, and by then the trade may be gone, depending on where the trader prefers to enter.

 

Second, watching the bars form in real time, or via playback using 1x real time, is very different from reviewing a static chart. Developing a sensitivity for climactic action is much easier when watching price move. Without that, one can easily form judgements based on insufficient experience.

 

Third, if there is a "lack" of sellers, price will rise, not fall. If there is a "lack" of buyers, price will fall, not rise. If one waits for "confirming signals", the trade is most likely gone. One of the chief advantages of trading using Wyckoff's approach is that one needn't bother with a lot of confirmation.

Edited November 8, 2008 by DbPhoenix

[DbPhoenix 42]

A Wyckoff trader will find it helpful to distinguish between "climaxes" and "climactic action". Climactic action may, of course, result in a climax, but one can't know whether or not there is in fact a climax until it's been tested, and by then the trade may be gone, depending on where the trader prefers to enter.

 

Second, watching the bars form in real time, or via playback using 1x real time, is very different from reviewing a static chart. Developing a sensitivity for climactic action is much easier when watching price move. Without that, one can easily form judgements based on insufficient experience.

 

Third, if there is a "lack" of sellers, price will rise, not fall. If there is a "lack" of buyers, price will fall, not rise. If one waits for "confirming signals", the trade is most likely gone. One of the chief advantages of trading using Wyckoff's approach is that one needn't bother with a lot of confirmation.

[jaygo 10]

heres a hinge on the eur/usd, quite a large one. Price seems to be struggling at that mid point so we may see a break downwards soon. i wont trade the breakout as that usually end up being stopped out. So ill play this by shorting when price retracts to that support line or mid point.

[HAKUNA 10]

A Wyckoff trader will find it helpful to distinguish between "climaxes" and "climactic action". Climactic action may, of course, result in a climax, but one can't know whether or not there is in fact a climax until it's been tested, and by then the trade may be gone, depending on where the trader prefers to enter.

 

Second, watching the bars form in real time, or via playback using 1x real time, is very different from reviewing a static chart. Developing a sensitivity for climactic action is much easier when watching price move. Without that, one can easily form judgements based on insufficient experience.

 

Third, if there is a "lack" of sellers, price will rise, not fall. If there is a "lack" of buyers, price will fall, not rise. If one waits for "confirming signals", the trade is most likely gone. One of the chief advantages of trading using Wyckoff's approach is that one needn't bother with a lot of confirmation.

 

1. I am in the learning process so you will have to excuse me. You say that the climatic action has to be tested but I have seen a number of times price spike on high vol and then test that level on low vol, but the trend does not just reverse

 

2. would you care to expand on what is meant by developing a sensitivity for climatic action

 

3. lack of sellers and lack of buyers I thought were price moves to test selling climax and buying climax respectively, are you saying that a trader should enter immediately on this and not wait for any confirmation, afterall if it is a valid test, surely the ideal point of entry may have gone, but there should be enough momentum for further move, so how can the trade be over.

 

please excuse if I show lack of knowledge on Wyckoff but what I have read is very logical and would like to learn more from experienced Wyckoff operators.

[Head2k 10]

1. I am in the learning process so you will have to excuse me. You say that the climatic action has to be tested but I have seen a number of times price spike on high vol and then test that level on low vol, but the trend does not just reverse.

I will try to answer this point. Climactic action tells you that there was heavy activity or pressure which hit a wall (or simply ran out of steam as the "panic" buying or selling has finished). FOR THE TIME BEING. Successful test then shows that the former pressure has not renewed when price got to the levels of former panic. So the test tells you there is no more interest in continuation. FOR THE TIME BEING. For price to reverse this is not enough. To reverse, you need an interest in the opposite direction. If this interest doesn't show up, price simply cannot reverse, and eventually it will test the area of the climax again.

Now that market participants saw that there was no effort made (or confidence) to drive price in the direction of reversal, they might reassess their interest in continuation. Or not

[HAKUNA 10]

I will try to answer this point. Climactic action tells you that there was heavy activity or pressure which hit a wall (or simply ran out of steam as the "panic" buying or selling has finished). FOR THE TIME BEING. Successful test then shows that the former pressure has not renewed when price got to the levels of former panic. So the test tells you there is no more interest in continuation. FOR THE TIME BEING. For price to reverse this is not enough. To reverse, you need an interest in the opposite direction. If this interest doesn't show up, price simply cannot reverse, and eventually it will test the area of the climax again.

Now that market participants saw that there was no effort made (or confidence) to drive price in the direction of reversal, they might reassess their interest in continuation. Or not

 

Thank you for this explanation, find this confusing, Dbphoenix says to wait for confirmation then the trade is gone, but then from what you explain, that is what has to be done.

Perhaps Dbphoenix or yourself would take trouble to show it up on charts, once again I apologise as am not advanced enough to see it in my mind. without looking at charts.

[Head2k 10]

Thank you for this explanation, find this confusing, Dbphoenix says to wait for confirmation then the trade is gone, but then from what you explain, that is what has to be done.

Perhaps Dbphoenix or yourself would take trouble to show it up on charts, once again I apologise as am not advanced enough to see it in my mind. without looking at charts.

Please keep in mind that I am a beginner in Wyckoff approach and in trading generaly, so what DbPhoenix says has much greater value than what I say.

Without doubt if you enter on a test you have a better price than if you enter after confirmation (possible breakout of some sort in the opposite direction). It also allows you to maintain a tighter stop. But as atto points out in this thread, then you should use Rule 1 from Phantom of the Pits. That is, get out if the trade does not develop in accordance with your expectations (if the interest in the reversal direction does not kick in). Simply if you want better price and tighter stop you must be more flexible.

 

EDIT: Or to say it even more clearly: You can either wait for confirmation to enter, or you can enter and then look for confirmation to stay in the trade.

Edited November 9, 2008 by Head2k

[Head2k 10]

There is a chart to what I said. You have a successful test but buyers are reluctant then, which leads to retest. If you bought the first test maybe you would like to get out when you notice the action marked with the two arrows. Or elsewhere, it is up to you.

And still keep in mind that I am a beginner and these are just general annotations I made right now, looking at Friday afternoon NQ action with hindsight.

[Bearbull 10]

Looks like you are learning fast Head2K:

Is this charting on amibroker package, if so what is the datafeed.

[Bearbull 10]

Hakuna,

Noticed you have gone through some of the stuff on VSA as well, have to be wary of some of the concepts taught there especially ones dealing with price spikes on high vol, end of rising market, professional money etc. otherwise you will find yourself countertrending.

As for you questions which are directed to Db, Head2k has some interesting observations, however I am sure Db is well placed to address that in detail.

[Head2k 10]

Looks like you are learning fast Head2K:

Is this charting on amibroker package, if so what is the datafeed.

It is AmiBroker with DTN IQfeed. If you are interested in it we can have a conversation about it via PM.

As for you questions which are directed to Db, Head2k has some interesting observations, however I am sure Db is well placed to address that in detail.

I hope Db or anybody else does not mind when I try to answer questions directed to him. If it is a problem please just let me know. I do it because I shape my own thoughts better when I write about them and I can also recieve some feedback to what I think. But if somebody finds it inappropriate (I kind of feel it is, at least a bit) I will hold back and let Db or somebody else with more experience answer.