Trading The Wyckoff Way

[Bearbull]

For those who have genuine interest in judging buying/selling pressures in the market via price/volume relationships would do well to engage in multiple reads of the pdf file on "Analysis of 1930-31 charts" by Wyckoff available in Db's Blog. which BTW is from the original Wyckoff course.

This is devoid of any jargon which seems to be in vogue ie. no demand, no supply, hidden upthrusts, end of rising market, markets do not like upbars on high volume, professional/dumb money etc"

To illustrate that the principles outlined work in all markets and in all timeframes I have extracted some material from the file and posted it along with price action of the Dax market, on 2min charts for Friday 5th Dec, 2008.

Urge folks to take time and scrutinize all the charts along with the text and see for themselves how the various principles play out equally on day charts and 2min charts and their validity after passage of over a hundred years.

Incidentally the run into the close lifted the Dax some 200pts, the last chart is not presented for psychedelic effects but to reveal the use of trendlines, support etc as taught by Wyckoff, start with a low, join it the next low preceding the highest high. and so on. The job of the trendlines is to show trend, period, whatever support it exhibits in incidental, the support emerges from what happened to price at these levels as shown in horizontal red lines.

Here goes:

Wyckoff Principles:

A sharp rebound should not surprise us at any time now and it probably is not far away for there has been no rally of any size since August 29th -- about three weeks. Seldom does the market run continuously in one direction for so long without a reversal of some sort.

September 21st, the average loses 4 points more, making a low of 94, but recovers 5 points by closing time and this makes it close above the previous day. The volume is 4,400,000 -- again unusually high and almost equal to the day before. This action, combined with the 8 point spread in prices for the day and the slightly higher closing leads us to cover our shorts with a view to putting them out again on a further rally; or, we may prefer to sit tight and depend on our recently reduced stops to keep our trades alive if the expected rally should fail to develop material proportions.

On the 22nd, the volume drops off to about 2,000,000 shares; the close is slightly lower and the range has narrowed. The net result of these three sessions is to leave the market practically unchanged at the third day's close. Downward progress seems to have been checked and the small volume on the dip back from the high of the 21st, on Sept. 22nd, implies a lifting of selling pressure. After such agreat decline within three weeks, this is an indication of more rally. This comes on the 23rd, and gives us an opportunity to sell short again while the market is still strong or when we see the rally is failing. Such an indication is given by the way it rallies on the 23rd. On this day, the average recovers to nearly 107, closing at 105½, but the volume falls off to under 3,000,000 shares and we therefore suspect that it is merely due to shorts who all tried to cover at once. Such a rally is too effervescent. It is not likely to last because it removes buying power which formerly existed, and leaves the market without support between the high point of the rally and the previous low.

The market acts just that way; on the 24th it loses 8½ points from the previous day's close and ends 3 points above the extreme low of the 21st. The constant volume, compared with the previous day, plus the rapidity with which theaverage yields nearly all of the previous three days' gain, confirms the fleeting character of the rallying power and the lack of important (good quality) demand. We conclude that the market's inability to enlist worthwhile support and its tendency still to seek the lows will probably induce a fresh outpouring of liquidationshould it break the line of support at 95.

The situation is still critical on the 26th and 28th when a brief one-day rally (on light volume) and a dip back to 95 bring about a slab-sided, or downward slanting formation, judged by the tops of the 23rd to 28th, which suggests the pressure is downward.

Volume decreases to under 1,500,000 on the 26th and 28th, but in view of the market's recent bearish action this looks more like a swing to a dead center preceding new weakness, than diminishing force of supply. (NONE OF THE "NO SUPPLY" JARGON HERE)

Furthermore, the low closing of the 28th leaves the average hanging on the edge of the 95 supporting line. If it cannot rally promptly from here, there will be more decline ahead. Accordingly, should prices break through the low point of September 21st at 94 on increasing volume, we shall again sell more stocks short.

We realize that after a big decline we may be taking chances in trying to get what may prove the end of a bear market, but we do not know when the real turn will come so we keep on playing the short side until the market itself tells us we are wrong or that the trend is changing.

New lows are the rule until October 5th when the average touches 79, closing within a point of the low and the volume is more than 3,000,000 shares. On the evidence of this alone we find nothing that causes us to cover on this day"

[HAKUNA]

Great post, certainly opens the eye to other ways,perhaps better, of looking at price, volume. I had the VSA bootcamp CD and course DVD, the explanation in this post seems more detailed and easier to follow IMHO
I would have taken long trade (on the 2nd chart) after price confirmation following No supply and trendbreak, then get stopped out, don't know if I would then have gone short as the bars seem to be closing in the middle. The wholesetup looked like sign of strength in the background as per posts in the vsa threads.

[Bearbull]

That is the fundamental divergence of VSA from its original source which is Wyckoff. and over 400 pages in 2 VSA threads without much clarity in sight, folks still engaged in "Find the Bar", "Look, there is hidden upthrust, a failed test, end of rising market etc" and ofcourse "90% of the volume is professional activity"

[atto]

Originally Posted by DbPhoenix As to whether or not the market is dominated by professional money, of course it is. But, following this approach, it doesn't matter. What matters is whether price rises or falls, not why. One needn't concern himself with who's doing what; only with the results of the effort.

To elaborate, Wyckoff is disinterested in the exact cause for any specific market action, but rather is interested in the action (the fact it occurs in the first place). While most certainly some moves could be attributed to "professional money" or "amateur investors", Wyckoff argues that it doesn't matter. Someone with sufficient capital to move the markets as they did acted, which changed the supply/demand dichotomy.

[Bearbull]

It really is pointless arguing over professional/dumb money, Wyckoff already mentioned "The composite trader", market itself.
All the information regarding buying and selling pressure can be gleaned from the charts via price/volume relationships, as to who is doing what to whom and why is pure guesswork and largely irrelevant.
It is due to this constant obsession over professional/dumb money that I know some traders personally who find themselves countertrend trading most of the time and then sit there banging their heads yelling "but I was informed that 90% of that volume is professional money" etc.

In short, understand what the market is telling you what it wants to do , never mind who is doing it and why.

[Head2k]

Originally Posted by DbPhoenix ...And yet rather than make the attempt to work with it on its own terms, newcomers insist on adding this or that indicator, bands, envelopes, pivot points, Fibonacci, chart patterns, moving averages, various formulas and so on. Then they wonder why it doesn't "work".

This is about me, too. I also use one custom coded "indicator" (or, as I prefer to call it, a "visualization tool"). This relates to a question I've been asking myself for quite a long time. Wyckoff is about principles, basic concepts. These principles must be understood by Wyckoff followers, but one cannot trade from principles alone. There are questions such as concrete entry and exit timing. What is your view of supporting tools (beyond Wyckoff methodology) in these areas?

[DbPhoenix]

Originally Posted by Head2k This is about me, too. I also use one custom coded "indicator" (or, as I prefer to call it, a "visualization tool"). This relates to a question I've been asking myself for quite a long time. Wyckoff is about principles, basic concepts. These principles must be understood by Wyckoff followers, but one cannot trade from principles alone. There are questions such as concrete entry and exit timing. What is your view of supporting tools (beyond Wyckoff methodology) in these areas?

As I said, if one understands -- practically and not just intellectually -- the dynamics of buying and selling pressure against support and resistance, the entry and exit timing are not nearly as much of an issue. But at some point, that means going to the chat room (or working with somebody in some other way) and doing it. Hindsight posts on message boards are, for the most part, philosophy and theory, even if those posts are tied to charts.

Many of those who say they trade intraday do so during coffee breaks and lunch and so forth. I can't imagine anyone being able to understand these principles, much less apply them, by trading so intermittently. In order to understand price action, you have to watch it move. That would seem to be a non sequitur, but otherwise one is just throwing darts.

Edit: I should point out here that Wyckoff is by no means all about intraday trading. One can also watch price "move" on EOD charts, and EOD trading is a great, big, wide, wonderful world which most "intraday traders" should probably be focused on anyway.

[DbPhoenix]

Speaking of oil and of trading "the Wyckoff Way", anyone care to tell the story of the following price action a la the example given in the opening post?

In until the end, then out. No additional information outside the pricevolume movement required.

[Head2k]

Starting with the second chart.

In a half of October we see an uptrend running up into increased supply, i.e a potential buying climax. That is marked by a sharp rise in volume together with price slowing its advance and then turning down. However, volume diminishes quickly on a subsequent reaction. That means the selling pressure has no real follow-through. Absent this follow-through price can lift with only little effort and it takes also little effort to overcome a preliminary resistance marked by the highs of the last rally. It seems like the potential climax was caused merely by profit taking, since the sellers are done and they don't represent any meaningful resistance any more.

The reaction in November looks more serious. It finds support at lows of a reaction from the end of October. The first day that hits these lows looks like a potential selling climax. Quite high volume and closes off its lows. This gives us a preliminary support, and if we are in long position we should probably tighten our stops somwhere under it. Then we must watch what happens next - are the sellers done or will the selling pressure be renewed tomorrow?
In next two days price forms a W with the second trough being a successful test.

On the top of subsequent rally we see the same setup, just upside down. It is M with second peak showing a lack of interest in upside direction. That is different from the 2 previous tops where price stopped because heavy supply.

This lack of demand results in a reaction making a lower swing low. There is no sharp rebound, price spends several days at the same area instead. Buyers steadily absorb all there is to take. Volume continously decreases during tests of 50 area.

... I will continue later

[DbPhoenix]

Originally Posted by Head2k ... I will continue later

Thanks for getting the ball rolling.