Trading The Wyckoff Way

[jim2000 10]

Thanks for the words of wisdom.

 

It's funny how once one becomes more experienced as a trader one can read a post such as this and really understand it and say hey, now I get it! Now I understand! Almost every single word is important.

 

It only took hundreds of trades of not setting stops, and hundreds of times realizing what could have been. I am lucky to still have an account.

 

You truly do a great service to the trading community. Thank You.

[DbPhoenix 42]

Though various observers may quibble over the characterizations of motives of buyers and sellers, you're in the correct groove. And while all this may seem extraordinarily complex, what may take pages to explain in text may take less than a minute of mental analysis, sometimes only seconds.

 

But to get from A to Z, one must first go through B, C, etc. Granted you may be learning far more about playing hinges than you wanted to know, and you're free to stop at any time and let others take it from here, if anyone is interested in doing so. But there is a process to go through if one is to understand what is happening and how to profit from it. I could in one post explain what's going on in this hinge and how to enter at just the right time and trade the correct direction, and you'd learn exactly how to play this hinge. But so what? You can't play this hinge. It's gone. And there'll never be another quite like it. You can, however, get behind the hinge and learn why price is doing what it's doing. Knowing that, you can then play any hinge you find.

 

So, having wrung volume dry, let's put that aside for the time being and look at price alone. First, let's trace the progress of the balance of buying and selling pressures as they are manifested by the trades that traders are completing, i.e., the prices paid, converting the bars to waves:

 

 

 

 

 

Once these have been plotted, we can eliminate the bars entirely (or one could have used a line chart in the first place):

 

 

 

 

 

 

 

What conclusions -- or at least tentative conclusions -- can you now draw from these movements regarding the ebb and flow of buying and selling pressures? Again, if you're done with it, anyone else is welcome to jump in.

 

 

 

[Head2k 10]

Not quite sure if this is what was expected, but here is my attempt. I hope you can still see price behind all that mess I've drawn there.

[DbPhoenix 42]

Very nice.

 

We aren't going to go over this wave by wave. But even if one is using only demand lines, there are messages being sent. You have answered this to some extent, coming at it from a different direction. But what new, if anything, does the behavior of price, at or near these lines, tell you, keeping in mind that you're not even sure you have a hinge until around 1030?

 

 

 

 

 

What about these points in particular?

 

 

 

[Head2k 10]

Looking at sloping demand and supply lines I would notice that the angle of the demand line is more acute. Bulls seem to be more aggressive than bears. The first thing that would draw my attention would be the quick rejection below the lsl and the congestion after it. That would tell me that 1.3030 is somewhat important, since price was sharply rejected below and bulls then absorbed all there was to sell during that congestion after. Yet price didn't make a new high, so I would be curious if 1.3030 holds again. The first red arrow marks this test. Not only the level holds, but price is not even able to get to the bottom of the congestion and the rejection is again quite sharp. Price bounces above that congestion zone and then tests it from above (not the second arrow but the shallow pullback before). This whole action confirms the importance of 1.3030 and suggests strength. Yet another failure to make a new high. At this point I would probably notice the hinge. Price than falls again but it finds support on the top of that congestion again (and now also at demand line). It bounces slightly and tests downside again, finding support even higher. This contraction of price action would suggest that the hinge is probably coming to its end. And having observed the importance of 1.3030 and the manner of lifting of levels where bulls engage (and having the advantage of hindsight ) I would bet on the bulls. From the test marked by the last arrow price advances rapidly, showing bulls' conviction. That confirms the analysis made before and suggests the upside breakout.

[DbPhoenix 42]

So going back to the Wyckoff quoted in the original post ("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."), where might one enter, and what would be the risks involved in each possibility?

[Head2k 10]

1. The most aggressive entry (IMHO). Given the data available on this chart I wouldn't use this entry. But if 1.3030 was a former S/R level and not only a swing point, nr.1 would be a perfect entry because of its distance from support. Stop loss could be placed either below 1.3015, or even below 1.3030 (but that's a bit risky).

 

2. Provides more confirmation. I wait for a result of that congestion. But then I am entering in the middle between support and supply line and stop must be the same as in case of nr.1. And what is even worse, I can't hope to move the stop to BE until the supply line is broken. And again, unless 1.3030 is former S/R level I don't see a justification for this entry.

 

3. Even more confirmation. Entry after a successfull test of 1.3030. Nr. 3 could be as well right on the break above the congestion. This entry is probably better than nr.2, because now the support is confirmed and stop can be safely placed right below the congestion. And even the entry price is the same as in case of nr.2, the risk is smaller.

 

4. Entry in anticipation of breakout. Given the successfull tests of the top of that congestion, a contraction of price action and the higher supporting point of the last test, I could enter here. But I probably shouldn't, because it is too high and before the actual breakout. So if the breakout fails, at least for the time being, I am left holding the bag. And where should I place my stop? One option is below 1.3045, which is a midpoint of the hinge and also a top of that congestion. Another option is to put it below 1.3030 again. In the former case there is higher probability of being stopped if the breakout fails (since the stop is only below midpoint and not below support), and in the latter case the stop is quite wide.

 

5. Breakout above supply line and the last swing high. The most confirmation and the worst price. In this case I would place my stop below the midpoint of the hinge, that is below 1.3045. Again a wider stop, but maybe justified by probability of the desired outcome.

 

6. Retracement after breakout. Same price, same stop, a bit more confirmation.

 

7. Re-break. So much confirmation that it implies a very wide stop. Too late entry IMHO.

 

There is probably more opportunities to enter, but these are the ones I would be thinking about.

[DbPhoenix 42]

Thanks to you both. Anyone who takes the time to make his way thru this 20-post arc will learn a great deal.

[innovation1520887469 10]

Db: Thank you for your time and effort in helping me and others understand the thought process and salient events to watch out for in the formation and culmination of a hinge, you are a credit to TL.

 

Head2k: cheers for stepping up, I was preparing a reply but you have said it all and more

 

... I could in one post explain what's going on in this hinge and how to enter at just the right time and trade the correct direction, and you'd learn exactly how to play this hinge. But so what? You can't play this hinge. It's gone. And there'll never be another quite like it. You can, however, get behind the hinge and learn why price is doing what it's doing. Knowing that, you can then play any hinge you find.

 

Could you make that post? Whenever I have learnt any complex subject I have started with the specific/special case and then ultimately moved on to the general case.

 

Even if you think it would serve no purpose it might just trigger some light bulb in someone's head that results in several loose threads being tied together into a firmer braid.

 

Thanks again

 

If I have any other questions/misunderstandings (specifically with the Sect 14M Vol Studies) shall I post them here?

[DbPhoenix 42]

Could you make that post?

 

The two of you already made it.

 

If I have any other questions/misunderstandings (specifically with the Sect 14M Vol Studies) shall I post them here?

I suggest using the Volume thread for that. Edited February 9, 2009 by DbPhoenix

[imahippi 10]

Db

I've just started watching the Nasdaq tick along side my Q's chart.

I usually watch the 1 min chart and sort of switch between 5, 15 and daily when I am in a trade.

 

When you post tick numbers are you getting that from a 1min chart? If yes , which number is it? The close #?

Sorry but I would like to get to know how to use it and don't really understand how you come to the #'s on the daily charts in your blog.

 

To make sure I understand your use of it:

At points of interest you watch the tick number to see if there is a divergence. So if there are two pokes down to a similar level for example, you would look to see if the tick info reflected less force or momentum on the second which would hint that perhaps the down move was easing.

 

thank you for your time

[DbPhoenix 42]

Though I may have unintentionally slipped, I've tried to limit my discussion of the TICKQ to my blog and to the chat room. Even though Wyckoff was always mindful of market breadth, he didn't follow the TICKQ because it wasn't available to him. Therefore, any discussion of it here would be way off topic. Way.

 

If you're interested in this sort of divergence, I suggest you hang out in the chat room since explaining something that moves is easier if one is watching it move.

Edited May 3, 2009 by DbPhoenix

[imahippi 10]

Thank you and I will try the chat again.

Jay

[MRW 10]

DB, while reading Wyckoff's Determining the Trend of the Market by the Daily Vertical Chart, he mentions putting a ruler between price points to gauge the rate of price ascent, and compare it with other rises.

 

I know you've written about supply/deamnd lines extensively, but did Wyckoff make any other direct refences to constructing and/or using trendlines?

 

Probably due to a lack of experience on my part, I've been leery of trendlines as they seem to be a sort of "artifact" created by the chart at times, and not as substantial as support and resistance areas/levels.

 

Perhaps there's a thread elsewhere that addresses this?

 

Thanks once again!

[lewtz1520887470 10]

My take on it is you can use them as a warning sign. Typically the break of the first bar shouldn't indicate that there is a reversal, but that price is at least slowing its trajectory. However, once you break the second one, there is a heightened chance of reversal that is occurring or will occur. However, like I said, it's just an interpretation. Here's a chart for demonstration:

[firewalker 10]

@ MRW, @ Lewtz:

 

This post might also interest you:

http://www.traderslaboratory.com/forums/55747-post60.html

 

It's about supply/demand lines.

[rigel 10]

Where can I buy the original course on Wyckoff which I am told is somewhat different from the SMI version

[erierambler 10]

On the NYSE today, Feb.17th,2009 was a 90% down day

 

erie

[Guest da-net]

I am new to understanding Wyckoff. I have read the "Daytrader's Bible" twice, listened to a couple "Tag" presentations by Hank Pruden, read the 19 pages of this thread and from the perspective I've gained thus far from a purist point of view, I believe that Head2K is wrong in his analysis of the chart and entry points [Ed Note: see here and here].

 

I have annotated the chart with Wyckoff's terminology, and if a trader takes the price levels @ "Preliminay Demand" and "Selling Climax"; subtracts the later from the former then divides by "50%" "Wyckoff's only retracement level" that I've read thus far. That trader should expect a reaction to occur @ that level providing a "Secondary Test". If this held the trader could then enter a long position with a stop below the "Selling Climax".

 

When the trader has this Stop calculation, he then multiplies it by a factor of 3 "Wyckoff Profit target" I've read. With these thoughts the trader would have had a stop of 25 and a profit target of 75.

Edited February 19, 2009 by DbPhoenix
Referenced posts moved.

[DbPhoenix 42]

I am new to understanding Wyckoff. I have read the "Daytrader's Bible" twice, listened to a couple "Tag" presentations by Hank Pruden, read the 19 pages of this thread and from the perspective I've gained thus far from a purist point of view, I believe that Head2K is wrong in his analysis of the chart and entry points.

 

I have annotated the chart with Wyckoff's terminology, and if a trader takes the price levels @ "Preliminay Demand" and "Selling Climax"; subtracts the later from the former then divides by "50%" "Wyckoff's only retracement level" that I've read thus far. That trader should expect a reaction to occur @ that level providing a "Secondary Test". If this held the trader could then enter a long position with a stop below the "Selling Climax".

 

When the trader has this Stop calculation, he then multiplies it by a factor of 3 "Wyckoff Profit target" I've read. With these thoughts the trader would have had a stop of 25 and a profit target of 75.

 

While it's always possible that we're wrong in our analyses, I'm unfamiliar with some of what you propose here.

 

What is "preliminary demand"?

 

What is "Wyckoff's only retracement level"?

 

Why would one expect a reaction to occur there?

 

Why have you designated the secondary test so late?

 

Why multiply by a factor of three?

 

Why use a vertical chart to do so?

 

Why determine a profit target (I'm assuming that you would exit at the target)?

[Guest da-net]

I have attempted to search for the answers to the questions you pose from all the things I've read thus far. I have assembled the info into a pdf that contains the answers incl documentation where available. Hopefully I have not violated the "fair use doctrine" of these materials.

Questions by DBPhoenix.pdf

Edited February 19, 2009 by da-net

[DbPhoenix 42]

I have attempted to search for the answers to the questions you pose from all the things I've read thus far. I have assembled the info into a pdf that contains the answers incl documentation where available. Hopefully I have not violated the "fair use doctrine" of these materials.

 

While I appreciate the effort, you've combined a variety of not necessarily compatible elements into a stew that may not be the best first course.

 

First, "preliminary demand" is not a Wyckoff term. As you point out, it came later. And even if it were a W term, demand would not show along the supply line.

 

Second, W suggested that a retracement of less than 50% suggested strength (in an uptrend) and of more than 50%, weakness. However, this does not necessarily apply to intraday trading (nor necessarily to interday trading, either). Just this past week, we have seen 100% retracements turn on a dime and go right back to where they started, then make yet another trip. This particular nugget is insufficient for plotting a trading strategy.

 

Third, "secondary test" is not a W term. I believe you mean "secondary reaction". This occurs after the technical rally, which occurs after the selling climax. Therefore, the secondary reaction is the first pullback after the selling climax at around 0945, not a half hour later. Additionally, you're mixing his approach to daytrading with his approach to interday trading. He relied on P&F for the former and took quick profits. And though he may have traded differently had vertical intraday charts been available, we can't assume that. On the other hand, we can apply the principles he used for vertical charts to intraday trading since we do have them available. If we didn't, we'd all be using P&F charts and we'd all be scalping.

 

Fourth, he suggested that the distance to the potential profit be at least three times the distance to the stop, but he also incorporated the notion that the probability of the profit actually being reached should be considerably higher than the probability of the stop being tripped. This carries with it far more importance than simply calculating a r:r ratio and initiating the trade.

 

Fifth, the "targets" that W proposed were determined by P&F charts, not vertical charts. But he also reminded the trader that the profit potential depended entirely on what the trader wanted out of the trade; there was no self-limiting cap on what he could expect.

 

It would take many dozens of posts to sort out what Wyckoff said or wrote from what others say he said or wrote. There is a great deal out there that is "based on" Wyckoff but which has little relation to the contents of his original course. Much of it is just plain lazy, saying, for example, that Wyckoff moved to Phoenix in the 30s (after his death, presumably) to open the Stock Market Institute. Much of it is also manufactured, for one reason or another.

 

I suggest, therefore, that you listen to Wyckoff's original voice. You will get to know him in a way that is not possible via a translator, even if that translator is me. The core of his approach lies in the stickies at the top of this forum. Elaborations can be found elsewhere in the forum in other threads.

 

I also suggest that you reread the 20-post arc preceding and relating to the chart which Head analyzed. This isn't about lines and points and calculations and patterns. It's about traders trading. Once you understand what traders are doing to push price higher or pull it lower, you'll become a better Wyckoff trader than most.

Edited September 15, 2015 by DbPhoenix

[Gringo 10]

Hi,

 

The below is how I see things:

 

1) Market continueing to hover around the support at 28 is somewhat showing weakness. Not enough demand to decisively move prices up.

 

2) Volume appears to have somewhat increased or equivalent in Feb as compared to mid Jan when prices came close to support (volume isn't helping much here IMHO). There is a need of drop in volume to give me stronger conviction in going long.

 

3) The fact that prices have dropped this past week may have caused some exhaustion (perhaps temporary) in supply so going long may be somewhat easier even if it's a technical rebound. But technical rebound doesn't really take that long so this rebound due to supply exhaustion may be wishful thinking.

 

In case there is another trip to 27.7 - 28 range with significant drop in volume then the below could be applied.

 

Possible Long:

Buy point: 28 or a bit lower based on smaller bar interval and support that day.

Stop loss: 27.68 (below today's low - low of day could be lower as post is intra-day)

Take 1st half profit: 28.8 (grey line)

Take 2nd half profit: 31.6 (pink line)

 

Possible Short:

Not before S is decisevely broken and re-tested.

 

Edited February 26, 2009 by Gringo

[imahippi 10]

Hi Gringo

I am long at 27.96 with a stop just below the Jan low of 27.74 for a total risk of 22 points plus commission.

I entered the trade as it looked like a good bounce---not so sure with the close going back down quite decisively.

I went short earlier today after price broke through the premarket high ; made a new high and then fell right through the premarket low. I went short off the 5 min Q chart @ 8:00 at 28.82. Like a novice I jumped out scared at 11:20 when a cool head could have kept me in all day!!

I found it peculiar that price just could not hold all day even with a fair bit of larger volume up bars.

[Tannism 10]

I don't know exactly where to put this, but since understanding it is key to trading "the Wyckoff Way", here is as good a place as any.

 

[When we take a close look at the classical period that began with William Hamilton's [/i]The Stock Market Barometer in 1922 and ended with William Dunnigan's One-Way Formula for Trading in Stocks and Commodities in 1957, there is one common thread that links just about every technical work produced in that period. That single thread was that their analytical methodology dealt directly with the reality of physical price, volume, and time. .................. We find that Divergent/Convergent lines have a basis and often work beautifully, but on the whole fantasy lines should be seen for what they are. That most fantasy lines of today were known to the great market masters and generally ignored by them speaks volumes.

 

--Donald Mack

DB-

I don't understand what he means by Divergent/Covergent Lines. Do you think where he writes Divergent/Covergent lines he is referring to any of these notions: Baskerville, the Rhea Dow theory confirmations, something like Mamis' Market Action Indicators, a stock rising say on falling volume, fantasy lines like the MACD curling, something like the IBD RS-line or something else entirely?

 

Thanks,

Tannis