Charting The Stock Market: The Wyckoff Method

[mister ed 10]

Charting The Stock Market: The Wyckoff Method is a book with an incomplete title. While part of the book deals with explaining and describing the charts commonly used in Wyckoff analysis, its main value lies in its discussion and explanation of the principles behind Wyckoff analysis, and the application of these principles in trading. This is a book that punches far, far above its weight. It is a work of reference that can be picked up again and again, and each reading seems to offer new insights.

 

Do not make the mistake of thinking of this book as an introduction to Wyckoff. While it can serve that purpose, the density of the information within means that beginners will find themselves overwhelmed, and will have to take it slowly. I cannot imagine how an ‘introduction’ to Wyckoff could be written – one is either prepared to study his material carefully or not. Speaking from personal experience, it took me many months to start to comprehend how much value is here.

 

The book is written in three parts, each with a different author.

 

The first section, Part 1, entitled Principles of the Wyckoff Method (pp. 1 – 127), is written by Jack Hutson.

 

Part 2: The Wyckoff Method in Action (pp. 131 – 148), is written by David Weis.

 

Part 3: The Wyckoff Method: Five Steps to Success (pp 151 – 190), is written by Craig Schroder.

 

Following part 3 is a Glossary of Wyckoff terms, a List of Figures, and an Index.

 

Being written in three parts, by three different authors, means three different styles, and three different approaches. Each part, too, serves a different purpose. Hutson’s section (well over half the book) introduces and discusses principles and their application; in Weis’ section he applies Wyckoff analysis to a market; while Scroder’s section places the principles into a logical approach to selecting stocks to buy or short.

 

While much of the book focuses on stocks and shares, the principles of Wyckoff can be applied to any exchange traded, liquid financial instrument. Weis’ section, for example, applies Wyckoff analysis to bond futures, both on an intra-day and daily basis.

 

Some quotes from the book, so you can get a flavour of what Wyckoff is all about:

 

 

“Richard Wyckoff believed that using charts mechanically, without judgement, is a practice headed for more failure than success. Drawing diagrams or imaginary geometrical patterns from charts or applying an arbitrary system of rules to their formations is anathema to the Wyckoff method. Instead,Wyckoff investors study charts to uncover the motives behind market action to interpret the behaviour of stocks." P.13

 

 

“Our discussion of Wyckoff’s analytical methods has so far concentrated on deductive reasoning…we first determined the position and the trend of the general market, then the positions and the trend of the group averages, and finally selected individual stocks …

 

The opposite approach - inductive reasoning – offers…a valuable way to double-check…conclusions…” p. 75

 

 

“The reasoning behind Richard Wyckoff’s classic method of chart analysis is simple and straightforward: when demand for a stock exceeds supply, prices rise; when supply is greater than demand, prices decline. The goal of this method is to make the most efficient use of investment capital by selecting only issues that will move soonest, fastest, and farthest in any market and by timing trades to capture those moves” p. 117

 

 

“To continue with our study of the June ’82 bond market, next we’ll dissect the volume/price behaviour during the markup and distribution phase …” p. 141

 

 

“ Week 5, which immediately follows point X, shows a change of character. Price spread is again relatively wide, but volume is reduced. Something has changed…the change of character tells the investor looking for an opportunity on the short side to pay closer attention.” P. 185

Edited February 5, 2008 by mister ed