Trading The Wyckoff Way

[DbPhoenix 42]

You may be in the "building the car" stage, but it is not necessarily the Wyckoff model. The apparent emphasis on bar by bar analysis in some of the material will mislead those who go no deeper and motivate them to study bars, looking for volume bars of given heights and price bars of given widths and mixing all of that with the positions of closes in order to find guidance for subsequent trades, even to the extent of developing mechanical systems, even software.

 

Wyckoff's approach, however, is based on (a) continuous price movement that (b) moves in waves that are determined by © imbalances in supply and demand, or buying pressure and selling pressure. The statements that he makes with regard to bars are not the result of studying bars but of twenty years of following the tape. The charts, or "graphs", he used were merely summaries of everything he learned through watching the tape. Anyone who attempts to develop an understanding of the continuity of price movement and its wave structure without actually looking at it is going to be at a disadvantage when compared to the individual who watches price move tick by tick and who watches volume ebb and flow along with those price movements.

 

Building the Wyckoff car, then, is not a matter of assembling volume bars of varying heights with price bars of varying widths and welding them with closes in varying positions. One might come up with something that holds together, but it wouldn't go anywhere (this helps to account for the thousands of posts which can be made with regard to this sort of variant with the net result that participants still don't understand it and still can't make it "work"). Building this particular car requires a familiarity with and an understanding of the continuous movement of price. Unless and until the individual develops this understanding, the Wyckoff approach will likely be very frustrating.

[Soultrader 12]

Textbook S&R setup on the ES this morning.

[DbPhoenix 42]

Gringo and wj pegged two quick trades almost to the tick this morning, the long off the test of support at 44 and the short off resistance at 55. Price then dropped to the support level of the previous range established on the 14th and 15th. If the downmove continues, next stop will likely be 30.

 

My thanks to them for their participation.

[wjrusnak 10]

It can be noted that I did get that trade at open (LONG 45.50 exit 51.50) and also another at 42.50 that went break-even. Nothing better than a profitable morning

[DbPhoenix 42]

I posted the first two-thirds of this chart somewhere, but I don't remember where. Given the importance of context, however, I've tacked on the last third and included an overview of the longer-term (see inset). This may help put the preceding posts in context. Or not. Either way, it's here for whoever wants to play with it.

 

 

[DbPhoenix 42]

It can be noted that I did get that trade at open (LONG 45.50 exit 51.50) and also another at 42.50 that went break-even. Nothing better than a profitable morning

 

Was the TQ of any help, or have you not been able to get that working yet?

[Gringo 10]

Was the TQ of any help, or have you not been able to get that working yet?

 

Yes, wjr was mentioning TD in chat! It was of course when trading slowed down. I am not sure if he used it actively for entry decision making.

[wjrusnak 10]

There was a TD for both entries. Yes, I used it.

[DbPhoenix 42]

There was a TD for both entries. Yes, I used it.

 

I take it you didn't use it to go for the short at 53 (it also provided a signal to exit the long). Either way, glad you had a good day.

[wjrusnak 10]

I am not that quick yet. The move happened so fast that I was just worrying about moving my stop up to a reasonable location. I lost track of price and what the TickQ was doing. Had I taken that short... I would be a hero

[Head2k 10]

As for the climax and possible retest, does the technical rally "have to" breach the previous swing high? I know it doesn't have to but was that something that Wyckoff was looking for?

Considering that Wyckoff analyzed price waves and stride, I guess he noted whether price broke a trend line and/or the last swing high. But I am not sure whether he stressed it in the course.

It is only up to you whether you require the last swing high to be broken before you start looking for an entry. Or you can define different triggers, entry points and management for cases when it is broken and when it is not.

Break of a trend line and break of a swing point are different levels of confirmation. Break of a trend line tells you for sure only that the trend is slowing down. Either starting to reverse or merely having a break or pausing before resuming. Break of the last swing high gives more indication on further direction.

 

But it's all about how aggressive you want to be, what triggers your entry and where you place it, whether, when and where you reduce your stop or bail out, etc. And that's what you need to test.

[DbPhoenix 42]

The technical rally has nothing to do with swing highs. It may not be anywhere near one. The "technical rally" is so called because it is made up of at least some -- and probably a great deal -- of short-covering. It is not "good buying", i.e., purchases that are likely to be held. Because of this, and because at least some of the buying is done by ignoramuses, the rally won't hold, which is the reason for the test. If selling is done, the downtrend will not continue. If it isn't done, then it will.

 

Therefore, the most aggressive and most profitable entry is the trough of the climax low. The next most aggressive and next most profitable is the trough of the test. The least aggressive and least profitable of the three entries is the move beyond the swing high between the climax low and the test low.

[DaKine 10]

I apologize if this is the wrong place to ask this question but I'd like to know if shorts at 1 and 2 are valid trades...

 

1. Short the breakdown out of the current range on the retest.

 

2. Short at R 54s, this particular trade had a nice TD. Or does the fact that we tested the bottom of the range and rejected it have you off this particular trade?

 

Thanks

 

[DbPhoenix 42]

I apologize if this is the wrong place to ask this question but I'd like to know if shorts at 1 and 2 are valid trades...

 

1. Short the breakdown out of the current range on the retest.

 

2. Short at R 54s, this particular trade had a nice TD. Or does the fact that we tested the bottom of the range and rejected it have you off this particular trade?

 

Thanks

 

 

Generally speaking, if they yield a profit, they're valid. As to whether or not they're a good idea, that's a different question.

 

If you don't enter where you're supposed to, then anything else is going to be second best. Or worse. So when you see what you think is a trading opportunity, like 1, ask yourself where you should have entered. You should have entered at 54+/-. Can you get as good an opportunity by waiting for ten points and entering at what may be the end of the run, particularly since your entry would be at or near what had been and might still be support? Probably not. I suggest, then, acknowledging that you should have entered earlier, didn't, and wait for as good an opportunity or better.

 

As for 2, my answer is much the same. If you were long, was there enough of a divergence at that level to persuade you to exit that long and enter a short, or would you prefer to use a tight follow-stop behind your long and let the market tell you whether to stay in or get out? Given the stride and the fact that sellers were barely visible, much less aggressive, was there anything in the action itself -- aside from the price level -- that said "short"? Did the 3+ minutes of stalling at 54 say "test", or did they say "springboard"? If the answer to any of this is "I don't know", then stand aside, focus on the price movement, the activity, the volume, and apply whatever you learn to the next opportunity.

 

Edit: I should also point out that, during earnings season, price will launch itself from unanticipated places and culminate in unanticipated places, so whatever you learn from trading during these periods will not necessarily apply to the ordinary day to day. If price seems unusually skittish, you may want to satisfy yourself with scalping or just wait until it's all over and begin again after earnings are more or less in.

Edited October 23, 2009 by DbPhoenix

[wjrusnak 10]

Tomorrow we're basically looking at the same levels. 1760 merged with 1758 to form that zone of support, but this is right in the middle. Tomorrow one would look for shorts between 1772 and 1775, maybe even that fluke of a push to 1780 will hold. Long may be the right direction for tomorrow, but if we remain in this area, entry will be sloppy, thus I may be sitting on my hands. The point is: do the buyers have what it takes to break these new highs, or even to get to the new highs?

 

 

PS. Didn't realize I used a 60m, but it's good to switch things up once in a while After all, levels are levels.

[DaKine 10]

Levels for tomorrow...

 

If we don't get an ON test of R @ 72 - 75 I may take a shot at a long at 59 where buyers held price into the close.

 

If an opportunity presents itself at 72-75 R I will take a short there being aware of the possibility of new Hs.

 

A long at 54s maybe a possibility.

 

Long 40-43s may also be a possibility but another test of that area will make me tread lightly.

 

What clues if any does the break of the demand line give us and does the fact that we are at the midpoint on the daily channel lead us to expect a choppy range bound market?

 

Your comment and critiques are welcome, this thread has been a great help to me thanks to all those involved...

 

[DbPhoenix 42]

 

What clues if any does the break of the demand line give us and does the fact that we are at the midpoint on the daily channel lead us to expect a choppy range bound market?

 

A catch phrase that's often tossed around message boards urges the trader to trade what he sees, not what he thinks. It neglects to point out, however, that what the trader sees will depend on what he chooses to look at. And the clues one gets often depend on what it is that he's looking at.

 

Here, for example, the break of the demand line looks pretty serious and might prompt the trader to think that we're in trouble. Using a daily chart, however, the break looks like nothing more than a trivial oversold poke.

 

As to midpoints and channels and ranges, I've mentioned that there are a lot of overlaps up here, and finding S/R intraday becomes that much trickier. The trader who locates as many of them as he can (e.g., 54 and 59) will be better prepared to act if and when these levels become important and will be less likely to be caught off-guard.

 

Overnite and premkt activity can be very helpful, particularly the last hour before the open. Even if one doesn't trade the open, careful study of what traders are doing there can prevent him from pushing at the wrong side when he's ready to enter a trade.

[DbPhoenix 42]

Here's an example of what I was talking about above. Price finds R at 78, as anticipated, and even tests it five minutes later. But you may not want to enter a trade before the open.

 

So you watch, and you see that price, for whatever reason, finds support at 75. When it then drops below that level at the open, you wait for a test, which you get five minutes later, with a TQ div, and enter somewhere around 74.5.

 

 

[DbPhoenix 42]

Today has provided two more examples of trading price action, profitably, for the first, and avoiding a loss, for the second. Both of these come up repeatedly.

 

First, after the housing report, price hits 74 on climactic volume. It then tests 74 just a couple of minutes later. No TQ divergence, but a test on lower volume and a lower high (one therefore has permission to take it whether there's a TQ div or not).

 

Price then finds support at 60, which has popped up on the 20th and yesterday afternoon. This could be the lower limit of a new, higher range, or it could be the midpoint of a 40-80 range (or 45-75; whatever). If the latter, it could be choppy.

 

Either way, price rebounds to the midpoint of the the last wave from 74 to 61, i.e., chop (or double chop, if 60 acts as a midpoint), and going either long or short is pretty much 50/50. Whatever one does will likely be sloppy and require a wider stop than is comfortable.

 

 

[wjrusnak 10]

Today my levels turned out fairly accurate, but one must remember that finding levels is only half the battle. As DbPhoenix mentioned in the S&R thread, there was a nice short at 1774.50 around 10:00am. I missed it because there was no tick divergence (TD). Though, there were more obvious signals, other than a TD (or lack of one), directing one to enter this short.

 

First, the obvious entry criteria (and usually the first signal for me) was the price action on a 1 tick chart. One can notice a double top. If one was aggressive, s/he could have entered at the break of 1773.25. Even if you didn't catch that entry, the market was friendly enough to provide a second chance.

 

 

Notice that this second chance was a test back up to 1773.75 on lower volume. Entry for that could have been somewhere around 1773.00. Review for the entry: 1.) Double top on 1 tick; 2.) Test that didn't quite get as high as 2 minutes prior; 3.) The test was on lower volume.

 

Now for the exit strategy (according to me). Logical stops behind swings are marked with blue dashes, which also correspond to time. As you can see, when we finally get a decent supply line, it is broken only a minute later. That would have been my exit (with 1 contract) and my first scaling point had I traded more contracts.

 

Lesson: TICKQ is a great indication of the agreement between the futures price and the overall market, but one shouldn't deny so many other obvious signals when looking for entry criteria.

[wjrusnak 10]

First, after the housing report, price hits 74 on climactic volume. It then tests 74 just a couple of minutes later. No TQ divergence, but a test on lower volume and a lower high (one therefore has permission to take it whether there's a TQ div or not).

 

I'm glad you covered this. I was pretty frustrated missing the only good short for the day and around 10:30am I started to review and figure out why I missed that. There was no TQ as you stated, so I felt okay. Then I looked harder and saw a few things that I wasn't catching in real-time. I posted this review in the Coulda...Woulda...Shoulda thread

[DbPhoenix 42]

I'm glad you covered this. I was pretty frustrated missing the only good short for the day and around 10:30am I started to review and figure out why I missed that. There was no TQ as you stated, so I felt okay. Then I looked harder and saw a few things that I wasn't catching in real-time. I posted this review in the Coulda...Woulda...Shoulda thread

 

I saw the CWS post. Thanks for reviewing the trade from another perspective. When using the TQ to spot divergences, it's easy to overlook the classic Wyckoff setups, whether the test after a climax, a breakout from a springboard, or an ordinary test of support or resistance (or the higher low or lower high thereafter). But the TQ is the icing, not the cake.

[DaKine 10]

Not much has changed as far as levels go for me...

 

I will look for a short @ the 75-78s treading lightly as we have the possibility of new Hs...

 

I will look for a short @ 61s, sellers defended this area on Friday it is also the midpoint of the 40-80 range.

 

The current Overnight H 57s may also be a possibility for a short...

 

Friday's Low 46.75 may be a possibility for a long.

 

I will also look for a long @ 40s - 43 treading lightly as a breakthrough of 37 takes us out of this 4 day range.

 

[wjrusnak 10]

I took a slightly different approach at these congested levels. I have some of the levels marked off more flexibly as zones (i.e. 1774-1780). I realize that is a 6 point spread for one line labeled as Resistance, but thats the challenge of watching the price action at these levels (flexibility). Either way, it's fairly clear to see that we have a range of 1780 to around 1740 with a couple of significant levels in between.

 

[DbPhoenix 42]

The persistent trading range between 38 and 55 (midpoint 47) may also be of unanticipated importance.

 

Edit: There is also a tighter range from 47 to 57 extending back to last Monday. This may be why the market is settling in around 52 this morning. This may act as a trading range of its own or as a midpoint "zone" for the broader range. Unfortunately, these overlaps will continue until we get out of here, one way or the other.

Edited October 26, 2009 by DbPhoenix