Trading The Wyckoff Way

[innovation1520887469 10]

I would like to identify instances where the shrewd application of W's principles of market interpretation can be practically applied for profit. Specifically I am looking to reduce price risk to its sensible limit by getting in to a trade as early as possible and by identifying instances where prior price and volume action indicate high probabilities of a specific outcome, reduce the information risk side of the equation when compared to a current price action only standpoint.

 

I can't find the exact quote but I seem to remember that W said something like: Whatever happens in the market is a result of what has gone before.

 

I am not looking for certainties but factors that when present will load up the likelihood of movement in one direction over a movement in the opposite or indeed no useful movement at all.

 

Things I am currently looking at in my testing/trading are:

 

• Hinges
  
• Climax - Test
  
• Rejection at previously established S or R
  
• Penetration of previously established S or R
  
• Breakouts from consolidation after testing interest
  

 

I am still working through trying to understand the possible buying and selling dynamics at work in these situations and any PAV 'tells' that might favour one direction to the other. I will have a stab at hinges here as I have spent more time on those.

 

Btw I understand that where these things occur in the context of other things will have a bearing on likely outcomes but for the sake of discussion lets assume that the context is neutral.

 

Hinges

 

The dynamics of a hinge, as I understand are that buyers and sellers disagreement on 'value' reduces over time until a point is reached where there is so few trades occurring that one side or other takes the initiative and exerts pressure on the other side trying to move price to a level that they now view as 'value' in the hope of profiting from their effort.

 

Say buyers take the initiative as in my chart, then the sellers try to oppose the momentum created by the buyers as they believe 'value' to lie below the current price level. The buyers exert more effort/pressure than the sellers and price rises. Once price rises above the supply line of the hinge some of the original sellers may become buyers (cutting losses, changing bias, accepting the outcome of the struggle) adding fuel to the buyers fire.

The mid point of the hinge acts as S/R as that is the point at which the struggle began and so the point which the buyers will want to defend, assuming the same level of commitment that initiated the move in the first place.

 

Moves that happen on low volume which would indicate (assuming a long move) that there are few sellers (low selling pressure) or that all market participant roughly agree on where true 'value' lies (up). As everyone agrees (has the same bias) few trades occur and price moves easily with very little effort (volume). This type of move can be easily reversed just because there have been few trades conducted during it, there are few participants with any vested interest in it being sustained.

 

How can any of this be of practical value?

 

Well, I am still relatively new to all this but have noticed that moves that result in break out of a hinge sometimes begin on the opposite side (demand or supply) to the resulting break out. The potential to enter prior to the actual breakout which would be a low info risk, high price risk trade would mean that you would have a low price risk (as your SL could be just under LSL) and potentially low info risk trade (assuming this occurs with any reliability).

Has anyone noticed this behaviour or is it a sacrificing virgins to volcano, coincidental, sort of thing? Any views, observations or comments on increased probability of price moving one way or other out of a hinge would be most welcome. In fact I would like to know if anyone looks to previous volume as an indicator of future events or only as a confirmation of current action.

 

Oh and I found this excerpt from Sect 14M - Volume Studies

 

"Some people regard a stock (or the market) in this (springboard) position only when it breaks through an old line of resistance or support into a higher or lower field. I claim that the beginning of the springboard move is at the bottom of a range of accumulation, or in the upper levels of a range of distribution."

 

If this is in the wrong place feel free to move it, I thought about posting to the Hinges thread but as hinges are only part of the posts subject I thought here was the best place.

 

 

 

Edited December 30, 2012 by DbPhoenix

[DbPhoenix 42]

I don't know that this belongs here either, but I don't know where else to put it, so here is as good a place as any.

 

Are you saying that you had no idea which way price was going to go before it broke out of the hinge?

[innovation1520887469 10]

Are you saying that you had no idea which way price was going to go before it broke out of the hinge?

 

In this instance I had an idea that price would break out to the long side based on the increase in volume after the last bounce off of the demand line (not including prior PA). I guess I wanted to know if this was a valid/reliable indication of breakout direction or coincidental.

 

I also wanted to see if my current understanding of the dynamics of the creation of the hinge are accurate.

[DbPhoenix 42]

In this instance I had an idea that price would break out to the long side based on the increase in volume after the last bounce off of the demand line (not including prior PA). I guess I wanted to know if this was a valid/reliable indication of breakout direction or coincidental.

 

In and of itself, not so much. But there's a lot more here.

 

I also wanted to see if my current understanding of the dynamics of the creation of the hinge are accurate.

Yes.

 

Since you're using Volume At Price, what does the VAP tell you in your chart?

 

 

[DbPhoenix 42]

Just some observations - it seemed like this was the place to post them perhaps.

 

It would seem, based upon my learning curve so far, that one of the most important things in trading is the way one thinks about the market. For example, does a price move mean something to you about supply/demand pressures or is price movement a function, say, of your mathematical model?

 

It would also seem that a progression in learning might go from first getting one's thoughts in order, to practicing seeing the way various supply/ demand pressures work themselves, to practice one's observations by taking small, low-risk raes, to gradually working up in size as judgement becomes better.

 

The first step then being to know what you're looking for/at, then gainig experience spotting these things, then working out some guidelines for actually trading them.

 

Sorry for the somewhat rambling, semi-coherent thought process here - I'm just starting to get this straight (assuming I'm not way off base), I think.

 

Would love to hear the thoughts of others!

 

It isn’t so much what one thinks as what one believes. One who believes the market is random will trade it one way; one who believes that it’s non-random will trade it another. One who believes that it’s a vast, manipulative conspiracy out to trick him will trade it differently from one who does not. One who believes that the keys to the kingdom lie in a bar chart, or a T&S display, or “the book” will trade differently from one who does not. One reason why so many of the "discussions" on message boards fragment so easily is that everyone is operating on different belief systems.

 

This is largely what Douglas is all about, that our behavior stems from our values which in turn stem from our beliefs. In that context, he proposes what he calls the "five fundamental truths":

 

1. Anything can happen.

2. You don’t need to know what is going to happen next in order to make money.

3. There is a random distribution between wins and losses for any given set of variables that define an edge.

4. An edge is nothing more than an indication of a higher probability of one thing happening over another.

5. Every moment in the market is unique.

#2, for example, may or may not be realistic or practical depending on one’s beliefs. If one believes that he must know what will happen next in order to make money, then his focus shifts toward being right, and a focus on being right invites all the ego issues which so many beginners talk about. On the other hand, if he believes that he doesn’t need to know what’s going to happen next in order to make money, a great weight is lifted.

 

But regardless of the set of beliefs with which one begins his study, at some point the strategy will either be profitable or it will not. If it is not, then whatever one believes is immaterial. The most fervently-held belief will not turn a loss into a profit.

 

Therefore, if one is able to apply the scientific method to his study, he may be able to begin doing fairly well rather quickly and "psychology" may play only a small part, if any. But if he drags along a lot of baggage, he may never achieve any success at all.

[Tannism 10]

3. There is a random distribution between wins and losses for any given set of variables that define an edge.

4. An edge is nothing more than an indication of a higher probability of one thing happening over another.

 

 

Is he saying that the edge is the probability the trader through skills, beliefs, baggage, experiences, etc. brings to the moment in time?

[innovation1520887469 10]

Since you're using Volume At Price, what does the VAP tell you in your chart?

 

 

 

It tells me that price is above a short term level of support established between 09:40 and 10 ish (the lower red box), this was tested successfully around 10:20.

 

Price then failed to make a new high and returned to the demand line and potentially stronger area of S/R (middle red box).

 

The top red box probably had a different VAP histogram associated with it prior to price leaving the hinge, so I don't know how useful it is.

 

You say there is a lot more here, please elaborate...

 

Cheers

[Shamal 11]

Db,

is this the case where at 'A' price attempts to penetrate with high vol showing buying intent, and then at that moment supply is able to push it back to the demand line.

 

But when price approaches the demand line, the vol is less i.e less selling interest, plus a higher bottom and then when volume does come in prices are able rise, suggesting the breakout should be to upside.

 

Going by what I have read here and in Vadym's book although I could be wrong.

[DbPhoenix 42]

It tells me that price is above a short term level of support established between 09:40 and 10 ish (the lower red box), this was tested successfully around 10:20.

 

Price then failed to make a new high and returned to the demand line and potentially stronger area of S/R (middle red box).

 

The top red box probably had a different VAP histogram associated with it prior to price leaving the hinge, so I don't know how useful it is.

 

You say there is a lot more here, please elaborate...

 

Cheers

 

Not exactly. Remember that these bars did not exist in the form you've plotted until at least 11:15. Therefore, they aren't going to tell you much about S/R until it's too late to do anything about it. If you're going to use VAP in real time, then you have to attend to whatever message they send you in real time and then respond to it -- if any response is called for -- in real time.

 

So, in real time, you would see these VAP bars being formed. Without regarding them as "boxes" or as formal S/R of any kind, what would they be telling you by 1015 by forming at certain price levels in front of your very eyes? What would they be telling you by 1020?

 

Keep in mind that you have two goals: to determine which direction the breakout, if any, will take, and to find that level at which you can enter ahead of the breakout.

[innovation1520887469 10]

Not exactly. Remember that these bars did not exist in the form you've plotted until at least 11:15. Therefore, they aren't going to tell you much about S/R until it's too late to do anything about it. If you're going to use VAP in real time, then you have to attend to whatever message they send you in real time and then respond to it -- if any response is called for -- in real time.

 

So, in real time, you would see these VAP bars being formed. Without regarding them as "boxes" or as formal S/R of any kind, what would they be telling you by 1015 by forming at certain price levels in front of your very eyes? What would they be telling you by 1020?

 

Keep in mind that you have two goals: to determine which direction the breakout, if any, will take, and to find that level at which you can enter ahead of the breakout.

 

I have been trying to figure out how to respond to this but can only say I have no idea how to use VAP in RT. I have only used it on historical PA to show where price might find S or R on any move back though that range.

 

If I were to say that price was establishing a new area of value then I would be talking about something I know little about and probably wrong with it

 

The two goals you mention are indeed what I wish to achieve but am currently at a loss as to how to proceed.

 

Thanks

[DbPhoenix 42]

I have been trying to figure out how to respond to this but can only say I have no idea how to use VAP in RT. I have only used it on historical PA to show where price might find S or R on any move back though that range.

 

If I were to say that price was establishing a new area of value then I would be talking about something I know little about and probably wrong with it

 

The two goals you mention are indeed what I wish to achieve but am currently at a loss as to how to proceed.

 

Thanks

 

Volume is trading activity. The more trading activity at a given price or price level, the more likely that level will act as support or resistance at some point in the future. And given how important support and resistance are to reversals, retracements, and breakouts, paying attention to volume at price is worth the doing, particularly if one has trouble seeing these relationships with vertical bars or with vertical bars only.

 

Therefore, look at where these horizontal VAP bars are pointing. What is happening at those levels that may or will be important to you later in the chart?

 

 

[MRW 10]

When reading the Market Technique excerpt from the Wyckoff Course that DB posted, Wyckoff talked about rallies and reactions as indicators. Wyckoff said:

 

"...when a stock declines 10 points, a normal rally would be approximately one-half, or about 5 points. A smaller rally would indicate technical weakness and a rally greater than one-half would indicate technical strength."

 

It occured to me that this one-half might apply to price movement in a trend, and that the stronger the trend, the less the retracement. It also occured to me that one could put retracements on a sort of "scale" by putting a 100% retracement into the category of a sideways move on one end of the scale, and the less the retracement, the stronger the trend right up to the point of vertical moves illustrating buying/selling climaxes on the other end of the scale.

 

Probably a blinding glimpse of the obvious, but it seemed like a revelation of sorts when the idea popped into my head.

[gassah 10]

It also occured to me that one could put retracements on a sort of "scale" by putting a 100% retracement into the category of a sideways move on one end of the scale

 

Barros places the cutoff at 78.6%. At 78.6% the likelihood of a sideways movement supposedly increases by a large amount.

 

nic

[innovation1520887469 10]

Volume is trading activity. The more trading activity at a given price or price level, the more likely that level will act as support or resistance at some point in the future. And given how important support and resistance are to reversals, retracements, and breakouts, paying attention to volume at price is worth the doing, particularly if one has trouble seeing these relationships with vertical bars or with vertical bars only.

 

I understand that areas where a lot of trades occur will offer resistance to the progress of price as traders have vested interests within these areas and will try to protect those interests where possible.

 

Therefore, look at where these horizontal VAP bars are pointing. What is happening at those levels that may or will be important to you later in the chart?

 

 

 

I thought that in your previous post you were asking me how to interpret VAP in realtime as they were being formed and how this would indicate the eventual BO direction and a safe entry point.

 

The horizontal grey lines are where price is being turned around, they are acting as R or S.

 

I can't see how this helps form an opinion on the culmination of the hinge as the test of R is successful which indicates weakness followed by a higher low or failure to test support which indicates strength.

 

Perhaps I am looking at this all from the wrong perspective, I am not being purposely obtuse

[DbPhoenix 42]

The horizontal grey lines are where price is being turned around, they are acting as R or S.

 

And the first blue line shows where price is finding S as it works its way back and forth across the trading range that it's forming along the gray line. The second blue line shows where price is finding S above the VAP.

 

Now look at what's happening with price with regard to the vertical price bars as price approaches, flirts with the gray lines, then reverses away. What does volume tell you about the level of activity in each of these events? What does price tell you about the relative strength of buying pressure and selling pressure?

 

Remember to read the chart from left to right, not right to left.

 

 

Edited February 5, 2009 by DbPhoenix

[MRW 10]

Thanks for the reply, Nic - just curious, who is Barros?

 

I wasn't trying to quantify this, just saying that one way to sort of organize my thoughts was to think of 100% retracement as sideways price action and things less than 100% to be increasingly indicative of a trend, perhaps.

 

How did Barros come up with 78.6%, I wonder?

[OAC 10]

How did Barros come up with 78.6%, I wonder?

 

Gassah would have to answer that.

But I want to add that a retracement of over 78.6% will often end up to be a 127% retracement , since it is greater than 100%, it is also called 127% expansion.

 

1.27 is the reciprical of 0.786

or 0.786 x 1.27 = 1

[gassah 10]

 

who is Barros?

 

He's a hedge fund manager with an excellent long-term track record. His major influences are Wyckoff and Pete Steidlmayer (Market Profile).

 

http://www.tradingsuccess.com/about.html

 

How did Barros come up with 78.6%, I wonder?

 

He has a strong background in swing and trading range behavior and has done a lot of research in market movements, including Elliot Wave and Fibonacci.

 

nic

[MRW 10]

Thank you, OAC and Nic!

[innovation1520887469 10]

And the first blue line shows where price is finding S as it works its way back and forth across the trading range that it's forming along the gray line. The second blue line shows where price is finding S above the VAP.

 

Now look at what's happening with price with regard to the vertical price bars as price approaches, flirts with the gray lines, then reverses away. What does volume tell you about the level of activity in each of these events? What does price tell you about the relative strength of buying pressure and selling pressure?

 

Remember to read the chart from left to right, not right to left.

 

 

 

Not sure if this is what you are trying to get me to do but it might highlight where I am having difficulties:

 

09:22 - very little interest buy buyers or sellers - a move either way is imminent.

 

09:33 - Sellers take the initiative and are committed but buyers are putting up a fight and sellers are not getting it all their own way as the volume is very high, especially compared to the recent past.

 

09:34 - 09:35 - Buyers are over come by sellers or rather buyers withdraw as vol decreases.

 

09:36 - Sellers are done and buyers are able to recover on low vol

 

Until 09:37 where sellers exert themselves as price nears the lowest grey line. Sellers however loose interest and so too do buyers.

 

Then 09:40 buyers take advantage of the sellers lack of commitment and get the drop on them. Sellers presumably (can't tell on historical chart) stepped in as price went above the level that was important to them (lower grey line).

 

Now sellers are not as sure of themselves as they were having already given up a fair bit of ground, nor are the buyers exerting themselves after the effort taken to stop the fall. This continues until 10:03 where buyers manage to exit the range established over the last 10 or so minutes with very little effort/opposition.

 

Sellers try to bring price back into the range but are unable and more buyers join in.

 

When price nears the upper grey line sellers start to offer some resistance to the buyers but only to get price down a few ticks where both sides seem to pause for a re think.

 

Buyers again get the drop on the sellers and have another stab at getting back above the level that the sellers are defending but the sellers soon wake up and stop prices upward progress. A second attempt is made by buyers which is also repelled, followed by a brief pause before the sellers take price back down to the lower grey line under fairly stiff opposition from buyers. That is until price reaches the previous area of consolidation between 09:40 - 10:03 where vol tapers off (dunno why, sellers and buyers done?)

 

Price then rises on very little vol except one attempt to push back by sellers that was nipped in the bud by the buyers (10:31). Price continues upward until the upper grey line where there is a vol spike as price is rejected. Price moves down with very little effort ( buyers loose commitment?) until it reaches the last area where sellers attempted to move down. No increase in vol this time (means sellers are not interested?) price rises still under low vol and then vol almost disapears until sellers try to move down and buyers step in to stop them.

 

Price then moves up to the upper grey line on increasing vol and breaks out.

[OAC 10]

But I want to add that a retracement of over 78.6% will often end up to be a 127% retracement , since it is greater than 100%, it is also called 127% expansion.

 

1.27 is the reciprical of 0.786

or 0.786 x 1.27 = 1

 

Here is an illustration of this working on the 1 minute Euro chart this morning.

I want to point this out because this may be relevant to Barros's work.

 

As you can see the red line is 78.6% retracement or AB is 78.6% retracement of XA. It bounced off the red line then came back down and broke it the second time, and it subsequently went to point D which is the 127% expansion as indicated by the yellow line.

 

Edited February 6, 2009 by OAC

[OAC 10]

Just to let you know that was no accident or hindsight analysis.

Here is the same Euro 1 minute chart one hour later.

This time at point B, market did not quite reach red line or 78.6% retrace line. It pulled back to point C then rally back to the red line. Stalled there. Once broken through, it shot up to the yellow line.

Anyway I have a lot more stuff I won't show. I will just point. You will have to do the work yourself.

 

 

[MRW 10]

THanks, OAC - interesting!

[MRW 10]

Another thought, if you'd like to comment, DB, or anyone else...this applies to U.S. equities (and the SPY and ETF's), which is all I trade right now.

 

It seems as if these waves can easliy cross time periods such that the beginning of a wave at, say, 2 PM, might run until the close and then continue with the next days open and morning (or longer).

 

I'm also noticing that areas or levels of support and resistance can be from prior days or even weeks.

 

I guess the point is that the daily close means less then people might think; it's just an arbitrary line in the sand that we draw, not necessarily one the market draws.

 

Thoughts?

[Flojomojo 10]

It seems as if these waves can easliy cross time periods such that the beginning of a wave at, say, 2 PM, might run until the close and then continue with the next days open and morning (or longer).

 

This nicely supports the "movie" view of the market. If the majority of market participants don't change their view of the current market involvement, why should there be a "break" of the wave? Just like a large herd of animals can't/won't change direction instantly, the large market herd will rarely change their view over night, eventually leading to the formation of a (over night) V-top or bottom on the chart. Usually there are prior signs of a potential change building up as the movie passes by.

 

I'm also noticing that areas or levels of support and resistance can be from prior days or even weeks.

 

The Cajas Famosas Thread is a great place to dive deeper into this thought.

 

Regards & always open for corrections,

Flojo