Trading The Wyckoff Way

[bamford 10]

But why can't it be viewed that this huge volume spike was the last of the support buyers being taken out, and that the move will continue downward?

 

The way I look at this is that with most of the volume on the 18th occurring after the low, and the close approaching the highs of the previous several days of heavy (selling) volume, it suggests that prices are being actively bid up rather than just supported. So at this time and at this level, buying has the upper hand, and "what happens next" should indicate what the probable intent was.

 

An example of prices just being supported would be in March on the same graph---there is no indication that prices are being bid up. This area is similar to the sketch in post #4.

[mikew 10]

Thanks to the previous three posts. Its starting to make sense now. I'm going to go over it some more, and then I'll post my next set of questions.

 

One last thing:

 

Lets take it one bar previous. Dec 16th marks an increase in volume as well. On the 16th, you could just as easily say that this is climactic volume (over 4mil). But do you assume that the selling isn't finished yet, because the price closes at the low? Meaning, theres no buying power yet to turn price back against all the panic selling? Obviously with such high volume (the highest on the chart yet, since we don't know the 17th yet), there are buyers trying to halt the decline, but the selling panic is still too much.

Edited November 19, 2010 by mikew

[BlowFish 10]

Yeah, thats what I meant. This is the problem I seem to have in interpreting large volume spikes.

 

That is one of the perennial issues imvho. When is a climax the climax. Quite often you will get what looks like a climax in an area where you might anticipate demand, only for price to move lower and do the same at the next area, on even higher volume.

[Head2k 10]

Lets take it one bar previous. Dec 16th marks an increase in volume as well. On the 16th, you could just as easily say that this is climactic volume (over 4mil). But do you assume that the selling isn't finished yet, because the price closes at the low? Meaning, theres no buying power yet to turn price back against all the panic selling? Obviously with such high volume (the highest on the chart yet, since we don't know the 17th yet), there are buyers trying to halt the decline, but the selling panic is still too much.

That's correct. It is also useful to realize that a climax is not one point in space and time, it doesn't need to be represented by one bar. It is a process. In fact, the 16th can be viewed as a part of the climax. During a selling climax, buyers first absorb heavy selling during the last part of decline (16th and 17th) and when the selling pressure is exhausted (i.e. it climaxes), they actively compete for the remaints of the supply. That causes the bounce from the lows (17th).

Don't focus on single bars. Focus on the activity (processes) which they represent. Price doesn't move in bars, it flows irrespective of the bar interval you choose to display it.

[mikew 10]

That is one of the perennial issues imvho. When is a climax the climax. Quite often you will get what looks like a climax in an area where you might anticipate demand, only for price to move lower and do the same at the next area, on even higher volume.

 

Right exactly. Thats why I went and used the day before on the 16th as an example.

 

But you could even take it back further.. Suppose we only know the first 4 bars on the chart. Well the two bars on Dec 10th and 11th look like higher volume (over 3m, highest we've seen yet) and a bottom and on the 11th the bar closes nearer to the top. So on the 11th, we might start thinking "selling climax" only to see it go lower over the next 5 days

Edited November 19, 2010 by mikew

[Head2k 10]

Right exactly. Thats why I went and used the day before on the 16th as an example.

 

But you could even take it back further.. Suppose we only know the first 4 bars on the chart. Well the two bars on Dec 10th and 11th look like higher volume (over 3m, highest we've seen yet) and a bottom and on the 11th the bar closes nearer to the top. So on the 11th, we might start thinking "selling climax" only to see it go lower over the next 6 days

If you trade a particular market, you know how it usually moves, you know what is "normal". Climax is something extraordinary, something violent. Perhaps it might be difficult to distinguish climactic activity in a static daily chart, but if you watched price move tick by tick, you would see the pace and aggressiveness.

Also, in practical trading it is helpful to have some concept of support and resistance, i.e. prices or zones where you anticipate a turn, and some concept of what constitutes and invalidates a trend. Then you would be able to place the seeming climax into some broader conext.

[motorway 10]

You need to think in waves

You need to think in context

 

The sun crosses the equator...So is it going to be summer or winter ?

 

When you use the context of where from.... Then you know

 

Wyckoff is a very real method

 

hence it gets rediscovered

 

Try Richard Olsen...Think about climaxes and this dynamic

 

THINK ABOUT PRESS: How to Trade « OlsenBlog

 

Passive herding:

how traders get locked into the same position

A characteristic trader behaviour is that traders tend to hold on to losing

positions but to take profits early with winning positions. Whenever

price trends occur, traders on the right side of the trend closeout their positions,

whereas the traders with the losing positions stick to their positions.

 

As the trend progresses, the ratio of trend followers and counter-trend

traders tends to become ever more one sided, and eventually 70 to 80

percent of the open positions are counter-trend.

 

This is passive herding;

the traders opened their positions for different reasons, some of them were

following technical indicators, others followed some fundamental signal,

but they now have something in common – they sit on losing positions

with an unrealized loss and the likelihood of a margin call, if the trend continues.

 

Whenever positions of traders are very much one-sided with only long or

short positions, the likelihood of a small price spike triggering a cascade

of closeouts increases. This is typically the case when the price has reached

a new extreme. In this situation, traders need to be careful and ready

themselves for a likely avalanche due to cascading margin calls.

The herding behaviour is even stronger when the market has been trending

strongly and then rapidly changes its direction. Many traders will then

have the false expectation that the trend will just continue.

 

They go on opening

positions in the direction of the previous trend oblivious to the fact that the sign of the trend has changed. They are reluctant to realize losses

and thus there is strong passive herding. This is particularly dangerous;

a minor event would be sufficient to trigger a particularly violent cascade

of margin calls affecting all the traders who have been herding. The price

will then shoot off in the new direction starting a particularly strong new trend.

 

Ok another thing then to consider is the increase and decrease of the population of interest.. Which can shift the dynamics and make "where from" less important...

 

What is the tendency of stocks after they have been going up

what is the tendency after they have been going down..

 

Remember it is like a moving picture and also consider changes in the population of interest

 

Motorway

[mikew 10]

Thanks motorway

 

 

Try Richard Olsen...Think about climaxes and this dynamic

 

THINK ABOUT PRESS: How to Trade « OlsenBlog

As the trend progresses, the ratio of trend followers and counter-trend

traders tends to become ever more one sided, and eventually 70 to 80

percent of the open positions are counter-trend.

 

I don't understand this. How is the conclusion that mots of the open positions are counter-trend? Wouldn't that in effect mean that the trend would HAVE to be reversed by definition?

 

 

Ok another thing then to consider is the increase and decrease of the population of interest.. Which can shift the dynamics and make "where from" less important...

 

What is the tendency of stocks after they have been going up

what is the tendency after they have been going down..

 

Hrmm.. Without thinking, I would say the tendency after they've been going up.. is to continue going up. The same with going down..

[motorway 10]

don't understand this. How is the conclusion that mots of the open positions are counter-trend? Wouldn't that in effect mean that the trend would HAVE to be reversed by definition?

 

YES... And it is What Wyckoff means ( many occasions in the course ) regarding the quality of supply and demand, of the nature of overbought oversold. Of a Strong Technical Position or a Weak One...

 

As the trend unfolds the Quality of Demand and Supply alters Olsen==>

 

speculative positions impact the market twice:

first when a trade is opened and then again when the position is closed. This

duality makes it difficult to correctly analyze price movements. To make

things even more complex, there are different groups of speculators, including

short-, medium- and long-term traders, traders based in Europe,

the US and Asia, trend-following and counter-trend traders and many more.

 

Why prices revert

In liquid financial markets, up to 98% of all the trading is based on speculative

positions and the hedging of those positions. These positions, being

speculative, are temporary, and any opening trade will need to be closed.

The closing trade has the effect of inducing a price reversal. Due to the duality

of the opening and the closing trade, the price movements are never

fully one sided. At some stage, sooner or later, positions will be closed

and then the price rebounds will occur.

 

Ok What does Wyckoff Say about Waves ?

 

Every upward or downward swing in the market, whether it amounts to

many points, only a few points, or fractions of a point, consists of numerous buying

and selling waves. These have a certain duration; they run just so long as they

can attract a following. When this following is exhausted for the time being, that

wave comes to an end and a contrary wave sets in. The latter may attract more of

a following than the former.

 

Waves go up and then they go down... They attract followings ( Olsen says Herding )..

 

Technical Positions from which trends arise are built from these waves..

 

As something goes up... The tendency to go down is building and getting stronger.

So moves are interupted with lateral phases... Where the tendency then is to go down..

 

( This is happening at different scales )

 

But

After an average or a stock has moved some distance in a given direction,

it may encounter sufficient resistance to that particular movement to cause it to

modify its pace, or to rest. During the resting spell (lateral movement or trading range),

the force that was originally operative may be renewed or even

greatly strengthened with the result that the move will be resumed with greater

momentum than before.

 

This is your

Hrmm.. Without thinking, I would say the tendency after they've been going up.. is to continue going up. The same with going down..

 

But this is what I mean by consider the changing population of interest..It might well have gone down as the "herd" /"Following reversed their positions and new followings arose..

 

but if the "force is renewed" eg by influx of a large number of new participants .. They will override the existing technical position/consideration..

 

Much like large waves in the ocean swamp the dynamics of the back and forth ripples.

 

We judge with Price Volume and Time...

 

Esp Volume and Time

 

You can not understand easily one part of the course without understanding the whole.

Some sentences carry a lot of implication.

 

Never underestimate the importance of the Technical Position ( as RDW tells us )

it is the "Where From"..

 

In the example prices have been trending down..Supply is overcoming demand.. So when volume increases... Who is turning up ? Sellers ( no we already got them ) it must be Buyers... But of what "quality" ? The Price Range and Duration ( Price & Time ) of the Waves... using here the Vertical Line Chart as a tool to measure..

 

This interval of nine days marked a sharp acceleration of the previous major decline, culminating in a widening spread of the daily price range and a very marked expansion in the daily volume of trading as the market reached its low point

 

We have a big drop, and a huge volume spike. On this last bar, sellers succeeded in pushing the price past the previous days lows, but then buyers overwhelmingly came in to close at the high.

 

There is change of ownership

The new Buyers are not underwater

Many of the holders who were are now not holding..

 

The Technical Position is changed ( as Olsen would say the ratio of counter trend to trend followers is equalizing.. Note a Counter trend trader in this case is someone who went long at much higher price...Some of the recent buyers are now already in PROFIT )

 

Always ask yourself WHAT is the TECHNICAL POSITION...

 

Motorway

[mikew 10]

thanks motorway

 

 

Never underestimate the importance of the Technical Position ( as RDW tells us )

it is the "Where From"..

 

Can you explain what you mean when you say "Technical Position"? Do you mean the quality of the buyers and sellers? (Sorry, I just searched the course and found a good explanation in Section 14M)

 

And you've mentioned "where from" twice now, but I don't understand the reference.

 

Thanks again

Edited November 21, 2010 by mikew

[motorway 10]

Can you explain what you mean when you say "Technical Position"? Do you mean the quality of the buyers and sellers? (Sorry, I just searched the course and found a good explanation in Section 14M)

 

And you've mentioned "where from" twice now, but I don't understand the reference.

 

Thanks again

 

This is why you must read the whole course... over and over again

 

take this bit

 

As we have seen from preceding studies, the four principal phases of a

market campaign are: (I) Accumulation, (II) Marking Up, (III) Distribution, and

(IV) Marking Down.

 

When a stock is in phases (I) or (II) it is said to be in a bullish position

and when in phases (III) or (IV) it is in a bearish position. Or, its behavior may

be such as to indicate that there is no active interest in it, that is, no campaign is

underway or in preparation, in which event its position is neutral. (Sect. 14M,

Pg. 12, Pars. 2 to 5 and Sect. 15M, Pg. 4, Par. 4.)

 

Our object is to determine the technical position of all of the stocks in our

list, that is, which of the above three positions each may be in, and to just what

degree. (Sect. 18M, Pg. 4, Par. 3.) For this purpose we have to deal with three

basic factors: (1) Price Movement, (2) Volume, and (3) The inter-relationships

between Price Movement and Volume.

 

Ok Why do we have to determine technical position ?

 

we are

able to judge:

(M) When a move is Beginning and When it is Culminating, thus determining

the best Time to Act.

 

Ok think of a pendulum swinging ! ( get one and swing it ) at any time the movement determines the future position. But the current position also determines the future movement...

 

When it swings to an extreme a ( climax... Then this position determines the force and distance of the next swing down !

 

Ok I hope reference to Olsen is helpful .. If so here is Willain Pascal

 

In the stock market, you buy a stock because you want to resell it at a higher price. Your feeling about the expensiveness (the value) of the stock is intimately linked to your expectation to sell the stock higher or not. That expectation itself certainly depends on the stock price, but it also depends on other traders' expectations (you'll need to find a buyer).

 

We could say that a trader's expectation at time t of a further price increase is inversely proportional to the Return on Investment (ROI) this trader is running at time t. This means that if you already have a 50% profit, for example, your expectation for a further profit increase is lower now than at the time you bought the stock when you had 0% profit.

 

I found out that the average ROI of the pool of active traders gives a good representation of the value of a stock as perceived by said traders.

 

 

If everyone who holds a stock is sitting on large losses .. This is a certain Technical Position.... Now if they all sell and Now all the new buyers are sitting on small profits

 

The Technical Position is totally changed....

It would not go up until AFTER they SOLD.

Once they did sell... Not much could stop it from doing so.

 

Remember the Young RDW and his insight when his then Boss bought the hardware man out...

 

Motorway

[motorway 10]

TREND vs TECHNICAL POSTION

THE PROXIMATE DRIVER of ALL TRENDS is CHANGING (THE EXPANSION of) TIME HORIZONS.

 

 

Richard D Wyckoff was a true Genius , At an early age He had an experience that like a BOLT OF LIGHTENING illuminated his perception for evermore..

 

 

He relates it at least on two occasions . The earliest in a series of articles in the 'TICKER AND INVESTMENT DIGEST .. somewhere around 1907-1909

 

 

---To all lines of business YOU MUST buy cheap(er) and sell dear(er) ..Then I remembered how my former employer had got his start. he was a travelling salesman, and in jumping from town to town occasionally ran across concerns which were in financial difficulties. They simply had to have money.

His first opportunity came when a small dealer whose stock of hardware inventoried at $3,000 offered to sell out for $1,500 cash. "The boss" bid him $1,000 , wired east for a loan of that amount, got it, bought out the hardware man, and within a week turned the stock over to another for $1,800.

He bought while the hardware man was in a state of panic

 

He bought When the TIME HORIZON was almost "YESTERDAY" , When the TECHNICAL POSITION was WEAK . He sold When the TECHNICAL POSITION WAS STRONG and THE TIME HORIZON had become LONG.

The CHANGE OF HANDS, of WEAK to STRONG, -->ALONE, CHANGED EVERYTHING.

 

THE TECHNICAL POSITION is a STUDY of HISTORY. It is "The markets latent ability to withstand change" . TREND is for the FORECASTER and is "meaningless unless qualified as to TYPE ( TIME HORIZONS ).

 

It does not mean "the direction prices are NOW moving, but which THEY ARE GOING TO MOVE.

 

TREND is for the FORECASTER ( John DURAND ) , NOT the HISTORIAN...

 

---->

 

It seems to us, based on our experience, that Tape Reading is the defined science of determining from the tape the immediate trend of prices. It is a method of forecasting, from what appears on the tape now in the moment, what is likely to appear in the immediate future. Tape Reading is rapid-fire common sense. Its object is to determine whether stocks are being accumulated or distributed, marked up or down, or whether they are being neglected by the large investors. RDW

 

 

It is almost impossible to underestimate the "IMPORTANCE OF THE TECHNICAL POSITION" RDW

 

Motorway

[Head2k 10]

mikew, if you want to understand the inter-relationship between price waves and trends on different scales, then I suggest you should study AMT (Auction Market Theory). Most of the material about AMT is focused on MP (Market Profile), but you don't need to bother with MP, as MP is just a way of applying the AMT. It is important to understand the concept of AMT, and then learn how the principles of this theory are demonstarted in markets.

You should study DbPhoenix's blog. It will show you the basics in a very structured and clear way. Use the list of content on the left side to navigate, and start from the beginning.

 

And to the first one or two motorway's posts... IMHO, too much thinking about "who is doing what" is useless. Because you can't know who, anyway. The important thing is the result of all actions, actions of sum of all traders. The Composite Operator, as Wyckoff calls it. In other words, don't bother with thinking about "who", just watch buying and selling pressure and their changes.

[mikew 10]

I think I'm getting it.. !

 

If everyone who holds a stock is sitting on large losses .. This is a certain Technical Position.... Now if they all sell and Now all the new buyers are sitting on small profits

 

The Technical Position is totally changed....

It would not go up until AFTER they SOLD.

Once they did sell... Not much could stop it from doing so.

 

My initial question in the thread was exactly this. I was wondering, well if the people who are on big losses decide to sell, their selling would contribute to the downmove even more, so why wouldn't the downmove continue stronger?

 

But you say, "not much could stop it from going up". I think I understand it now. The future is now up, because all the people who needed to sell have already done that. And even if there are new short positions who expect the price to go down, eventually they need to close their positions, which will contribute to more future buying pressure.

 

This quote from Olsen helped me:

 

In liquid financial markets, up to 98% of all the trading is based on speculative

positions and the hedging of those positions. These positions, being

speculative, are temporary, and any opening trade will need to be closed.

The closing trade has the effect of inducing a price reversal. Due to the duality

of the opening and the closing trade, the price movements are never

fully one sided. At some stage, sooner or later, positions will be closed

and then the price rebounds will occur.

 

I wasn't really taking into consideration that every open trade needs to be closed. And whatever pressure that occurs as trades get closed, that is 'weak' quality, right? And the side of the trade that is just being opened is of 'strong' quality? So after a sharp decline, all the panic selling is 'weak', because they are closing out their losing trades, and now all the 'strong' buying is opening their position.

 

 

You should study DbPhoenix's blog. It will show you the basics in a very structured and clear way. Use the list of content on the left side to navigate, and start from the beginning.

 

I have read his blog, but I will do it again now after the insights and help from everyone so far in this thread.

 

But there is a different quality when you can ask questions and get direct feedback from everyone including yourself. So I hope its not a problem if I continue this thread further. So far we've only covered the very very beginning of the chart

[bamford 10]

Attached is a PDF of the contents of an article on "The Technical Position" written by John T. Brand (writing as "B") and published in the Magazine of Wall Street in 1916. Brand was an old tape reader and his material is much like Wyckoff's. In this article he covers several items mentioned previously in this thread.

tot6.pdf

[Kiwi 16]

A really interesting article bamford. I liked the bit where he hadn't found one in his time involved with the markets.

 

Worth reading for anyone trying to understand the markets and perhaps reduce their paranoia levels a bit.

[Head2k 10]

I have read his blog, but I will do it again now after the insights and help from everyone so far in this thread.

 

But there is a different quality when you can ask questions and get direct feedback from everyone including yourself. So I hope its not a problem if I continue this thread further. So far we've only covered the very very beginning of the chart

It is your thread, so continue at will. If it was a problem for me, I simply wouldn't post here

[peterjerome 10]

for those traders who believe in the power of PnF for screening...

i use PnF to locate double top(s) with a rising bottom.

this stock(s) is put into a watch list and monitored using momentum (CCI) to locate the actual TLB (trend line break) which always preceeds the actual double top buy signal from PnF.

this is a current trade of mine.

questions?

peter

[mikew 10]

Ok, Wyckoff continues

 

Having decided that the trend of the market is upward we must thereafter continue to trade on the long side until there are indications of a change in trend, or until the trend is in doubt. We must always be on our guard against any changes; and when the trend is in doubt we must take a neutral position, that is, be out of the market.

 

 

 

 

 

However, I'm stuck on his contradction. Bold is mine

 

For the next several days, until January 9th, the market makes further progress on the bull side, recording 156½ on that day; but observe that the closing figures on the 6th, 7th, 8th, 9th and 10th are all within a range of about one point. That means the market made no upward progress as a net result of four days’ activities following the 6th. The daily volume shows a tendency to taper off, which may mean a lessening of demand at the top of the swing to January 8th. This conclusion is partly confirmed by the shortening of the upward thrusts from the 3rd to the 7th, indicating that it was hard work advancing the market from l5O to 155. Buyers now seem reluctant to follow prices upward. On the day when the high of 156½ is recorded, the volume increases abruptly compared with the volume of the preceding sessions at the same time that the price runs up to a new high only to close near the day’s low (*) and actually below that of the previous session. All of the foregoing is evidence of the approach of a corrective reaction, but we still hold our long position because, as yet, we have had no indications of important distribution.

 

* The action of the 9th is an illustration of a typical buying climax, which is the reverse of a selling climax. On this day, a poor quality of demand is being promptly overwhelmed by the superior force of supply of good quality. In order words, the bulls, realizing that they are encountering resistance to the advance, break the stalemate of the 6th to 8th by bidding prices up to attract those buyers who were too timid to come in before the advance to 155, but who now fear that the market may get away from them because it is “making a new high.” Thus, there is a concerted rush of public demand which gives the larger and shrewder operators their opportunity to dump part of their lines on a broad and active buying wave, made to order for the purpose.

 

He says there is no indication of big distribution. Is this because the volume on this climax is lower, relative to the previous selling climax in mid December?

 

If he sees a corrective reaction in the future, why not close the long trade now, and either go short, or buy more at the bottom of the reaction? He says to hold onto the long position, even though he expects a pullback..

[mikew 10]

 

Such a reaction begins on the 12th and the low point of it occurs on the 16th. Volume on the reaction diminishes appreciably compared with volume on the rise from the December 29th low, a bullish indication, showing that the selling pressure is light.

 

Playing devil's advocate, why can't this be viewed bearishly as, "volume is low on this pullback, indicating that there are no buyers, price is dropping even with little selling pressure."

 

On the 16th, the closing is nearly at the high point of the day -- a bullish indication which is the reverse of the bearish indication on the 9th. This is our first sign that the reaction is nearly over. (*)

 

I don't see any special volume on the 16th, but closing near the high is a bullish indication. But, again, playing devils advocate, I see the same thing on the 14th. Prices were supported from the previous drop on the 13th, and now on the 14th, it closes at the high. But there is no mention that this is an indication that the reaction might be over on this date. But the market is always right, and if I would've went long on the 14th based on this, on the 15th I would probably be stopped out

 

(*) So here we have a new buying opportunity in expectation that the advance will be resumed. (**) Further confirmation of this comes in higher support on the 17th and in an almost complete drying-up in volume on a dip to the same low level on the 19th. The closing prices on the 15th, 16th, 17th and 19th show support within a narrow zone, mostly around 147-8. We must, therefore, look for the advancing tendency to be resumed.

[bamford 10]

What may be missing at this point in the material is a definition for what "indications of a change in trend" we should be looking for.

 

One of the characteristics is a sharp increase in volume, suggesting outside ("public") participation entering the market. In this case, the outside interests would be buying and "they," the smart money, would be selling into the demand.

 

In early January, the typical volume was reasonably steady at about 2 million shares and there was no significant increase leading up to the 9th. I think this, coupled with the the observation that volume was beginning to increase on days with low closes and the other items mentioned by Wyckoff, suggest there is little outside buying, indicating a short-term top and not and change of trend. Buying and selling climaxes occur on each time frame in addition to major turning points.

 

An early issue of the Ticker magazine had as the epigraph: "The Fundamental Principle of Wall Street is the Sale of Securities to the Public" (1908). So an important thing is who has the stocks. If the large interests have most of the inventory, esp. if recently purchased in an accumulation area where the public was dumping stocks, the large interests would have to be doing the selling---but there is little public demand to sell to. There is evidence of buying support 2/16 as the price approaches the accumulation zone, which is about where "Tom, Dick, and Harry" bailed out just the month before and are probably exhibiting "masterful inactivity" until "prices are high enough."

 

In February the volume increases sharply as the index breaks out above the absorption area, and sustained high volume and mostly horizontal price movement suggests that this is probably the outside demand "they" have been waiting for to realize profits.

 

The data under the blanked-out part of that graph for February and March looks much like the S&P 500 now, except for the sharp increase in volume.

 

BTW, thanks for posting that chart with the portion blocked out. It made me realize that I have been looking at a different PDF file that is apparently the 1937 course and not the 1931 material posted by dbphoenix in the sticky.

[gassah 10]

 

 

He says there is no indication of big distribution. Is this because the volume on this climax is lower, relative to the previous selling climax in mid December?

 

The one bar on the 9th isn't enough to say there is significant distribution. He states that the preceding days are more likely a lessening of demand at the top of a rally, which doesn't concern him too much.

 

If he sees a corrective reaction in the future, why not close the long trade now, and either go short, or buy more at the bottom of the reaction? He says to hold onto the long position, even though he expects a pullback..

 

Because he isn't looking to only trade the swings. He wants to hold through reactions trying to capture the larger moves, and unless there are signs of significant distribution he will hold.

[Head2k 10]

When you trade you need to decide what scale of waves / trends you want to trade. This decision must be based, apart of some other factors, on the resolution you need so you are able to spot your entry and exit signals.

Here, Wyckoff entered off a major selling climax and he doesn't want to exit on a signal of smaller importance and to look for a re-entry on a pullback where spotting the exact turning point might be more difficult than in the case of the big climax.

Playing devil's advocate, why can't this be viewed bearishly as, "volume is low on this pullback, indicating that there are no buyers, price is dropping even with little selling pressure."

If there is a rally, at some point new buyers become reluctant. They might be afraid that they are too late to the party, and the higher price isn't so attractive. Then the rally loses power and a pullback follows. Pullback is in fact a test. It tests if new buyers are just reluctant and want just a bit lower prices to enter with new force or add to their holdings. It also tests if the old buyers (who are holding) will start to get rid of their holdings and how much. And if the price decline attracts new sellers.

To sum it up: If price pulls back on light volume, it means that there is little selling interest (sellers are not very aggressive) and buyers are reluctant. Sure, price isn't supported much by buyers, but in case of a mere pullback it is supported enough so it doesn't make a new low.

Without this behavioral pattern price wouldn't move in waves. It is a cycle: Price rises too much and attracts some selling while buyers become reluctant. So a test of selling interest follows. If there is not enough pressure, then price resumes advance as lower prices attract new buyers and the apparent lack of selling pressure reassures them of direction.

[mikew 10]

Ok, thanks, I'll spend more time considering the dynamics of each potential buyer/seller and existing long/shorts as price moves.

 

I also wanted to jot this down to see if I'm getting it

 

 

 

Try Richard Olsen...Think about climaxes and this dynamic

 

THINK ABOUT PRESS: How to Trade « OlsenBlog

 

As the trend progresses, the ratio of trend followers and counter-trend

traders tends to become ever more one sided, and eventually 70 to 80

percent of the open positions are counter-trend.

 

 

Just wanted to revisit this..

 

Using the example of a downtrend, as the trend progresses (as the price decreases), supply is greater than demand. So what is meant in the above quote is, the people who bought long higher up are still long and losing, the shorts have succeeded and have taken some profits. Most of the open trades are the people who have held on the way down and are too stubborn to take the loss. Since these buyers are already in, there's no buyers left to support the price, which is partially why it drops. Then, once these buyers finally give in as panic increases, they finally close their trades and take their loss, and since their selling pressure is now gone from the market, the path of least resistance is upward.

[strohem 10]

Macrovector - you may not need other indicators. (Or, at least as many of the ones you are using.) It appears you've missed a lot of good information in this thread.

 

For what it may be worth (as pointed out earlier), PnF was but one of the tools used by Wyckoff. Just one.

 

For what it also may be worth, 20 years ago a senior engineer for a large, long-standing semiconductor firm - who was also a musician and ballroom dancer - became a client of mine. He had read Nicolas Darvas' book early on (I had too), he knew I used PnF and Wyckoff and - together - we did some pretty impressive things with his money. The market trend had/has as much, if not more, to do with success than the security's trend. Always remember that. (Think Booth School/Univ. of Chicago, circa 1969, here.)

 

I've never been disappointed in the method, nor have others of my clients. Some, however, had incorrect expectations of it.

 

I simply think Darvas was right - the boxes created an illustration of consolidation; of pent up supply or demand. He learned to act upon trends.

 

As for me, I've never been able to use PnF to any superior benefit other than with swing- or position trading. Not saying that daytrading can't be done with it - I just found easier ways that suited my preferred style of activity. My goal has always been to hold a name for as long as possible (months- or longer, if possible), and PnF trends have been invaluable in that regard.

 

The very slight resurgence in recognition PnF has received in the past decade or so is likely due (IMO) to the ease of incorporation into charting by way of automation (computers/the web). That does little to train a person. To truly learn its merits and understand its meaning, one needs to chart - by hand - 80 to 100 names a day (EOD) to see the relationships of supply and demand unfold and the message become clear. If you haven't done that for at least three years - by hand, you will not likely become a craftsman. You must see events unfold tens of thousands of times before you can reflexively respond.

 

Wyckoff and others used figure charts for a reason, and - while applicable - it wasn't to trade E-mini contracts intraday.

 

However, if you want a solution to your dilemma with "indicators", use side-by-side screens. Learning to chart by hand is a plus, as well - if you can keep up. Doing so will teach your mind to see "code" instead of blonds or brunettes.

 

Personally, I think I'd set PnF aside for your intents and purposes.