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Wyckoff Trading Method

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  #41 (permalink)
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Another Intuitive Surgical Update. It continues higher on good volume. I expect it to continue to do so.

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  #42 (permalink)
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DrGary View Post
One Wyckoff principle is the concept of driving up through and overcoming supply, often referred to as a "sign of strength." Take a look at the NVida chart. It is a weekly basis.

You can see that this stock was hard-hit by the bear market of 2008. It spent that entire year in a downtrend. By the second quarter of 2009, however, it broke the downtrend channel and rose higher. By the fall of last year, it was clear NVDA was making a higher low.

Some fundamental news surfaced, and NVDA has risen dramatically over the past week and one-half. If may look like the train has left the station and it's too late to get on board, but the odds favor more upside.

We are seeing a push up through supply - the supply that formed the resistance during the first quarter of 2010 (boxed on the chart).

Tom Williams, who developed VSA, talks extensively about the Wycoff principle of demand overcoming known supply areas. We see it by urgent buying on wide range bars and huge volume. Whatever supply exists from short sellers at resistance or trapped longs looking to get out (and yes, there are many longs who bought in that area and held on all through the down move of 2010) is absorbed by the heavy buying. We can see this in the very high volume in the last two bars.

So, how do you trade this? At some point, there will be a pullback. If that pullback shows only light supply, then an entry can be considered.

The second chart is a tick chart of the past few days in the S&P e-minis (ES), including today. See any similarity between the weekly NVDA and this intraday chart? Although they look a bit different, it's the same principle.

Bob Evans owned the Wyckoff Associates organization set up by Wyckoff to educate the public about the nature of the stock market. Evans was a great Wyckoff educator. I've listened to many, many of the weekly tapes he produced from the late 1940s through the 1960s. On those tapes, he would often tell "homey" stories to help traders better understand the Wyckoff Method. One of those stories is known as the "Creek" story, or "Jumping Across the Creek."

The story is about a Boy Scout hiking in the woods. He comes to a creek and finds it is too wide to cross. Still wanting to get to his destination on the other side of the creek, he follows it downstream, looking for a place where it narrows so that he can jump across. Finally, he reaches a spot where he thinks he can jump it. He backs up a bit, gets a running start, and successfully jumps across the creek.

In Evans's story, the creek represents supply. Our Boy Scout is unable to surmount the creek because supply is just too great at the early points. In the market, the supply line curves and twists as drawn in blue (free-hand) on the chart. Because the jump across the creek takes a lot of effort (a running start on the part of our Scout), we will see that effort in the volume and the range of the price bars. This is another Wyckoff principle - effort vs result. Here we see a lot of effort (in the volume in NVDA and in the momentum oscillator in ES) and the result is positive - both charts show higher prices.

Clearly, supply has been overcome. We have a sign of strength in the market. Although Wyckoff would buy on a breakout, it was his least favored location. Better to buy on a pullback. So, back to Evans ...

After the Boy Scout has jumped across the creek, he notices that he is a bit tired after all that effort. So, before moving on to his destination, he decides to take a short break. So, he goes Back to the Edge of the Creek, takes off his boots, and dips his feet into the cool waters of the creek.

We often (not always) get a pullback to the old resistance area (creek). As in the ES chart (green arrow), look for narrowing price bar ranges and an overall lack of supply. This is a typical market sequence and confirmation that the Jump has been successful. It is confirmation because price returns to the known supply area and supply does not materialize. It is a good location for a trade.

Although both the ES and the NVDA charts show the same principles, the patterns and "look" of the charts are different. What is most important are the principles highlighted. Learn these and other Wyckoff principles. They will serve you well.

Disclosure: Please note that I currently hold shares of NVDA in my personal account.

nice gary, and good use of the 3 - 10 - 16.

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  #43 (permalink)
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Laurus12 View Post
Hello Gary Surprise to know that you are in the forum ...

Laurus

Good to see you here, too! (Got your message - thanks, I wasn't sure who Laurus was ).

I spend most of the time on my own site, of course, but I am always interested in any constructive discussions about the Wyckoff Method. Big Mike has created a great site here with a philosophy I resonate with, so i am quite willing to share what I know and eager to learn from others.

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  #44 (permalink)
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Fridays are typically range-bound days in the S&Ps (ES), but not yesterday. Instead, we had a trend day - i.e., a day that opens at one extreme, trades persistently in one direction, and closes on the other extreme. Consistent with the overall trend of the market, Friday traded from low to high.

We often get clues that a trend day is about to occur. One clue was Thursday's trading - Thursday traded as an inside day where the overall range on the day was small. We often (not always) see breakouts and trending conditions after an inside day.

Another clue was that after a small gap down opening, the market didn't trade more than a point lower, and then broke out of it's opening range to the upside. After the break of the opening range, overall market volume began to pick up and fueled higher prices all day, another important clue.

The market ran into resistance at Wednesday's highs, but held gains and absorbed the existing supply around that area.

As we discussed earlier (post 38), after a break through of supply (Jump Across a Creek), the market will often (not always) come back to test the resistance area for additional supply. We see this same pattern with a different look here. Finding no supply, it rallies higher and closes on its highs and new highs for the year.

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  #45 (permalink)
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Dr.Gary has shown the concept of Jumping Across the Creek as well as the set up known as the Wyckoff Spring. Here is another known as the Upthrust. The Spring and the Upthrust are both taught in Dr. Gary's chart reading course, which I have taken. I am not associated with Dr. Gary or his website, but found the course to be an eye opener for me because I learned concepts which helped me to get some insight as to what the market is doing or not doing and it is determined by what we see in the chart and not what an indicator is telling us. Big Mike has been preaching indicator free trading for a long time.

The charts show a broad view as well as a close up view. It's not as simple as just looking for a bar that closes on the low as shown in the chart. I wish it were, but I think there is enough evidence in the chart to indicate a short would be a reasonable trade. If I'm wrong, I hope Gary lets me know.

David

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  #46 (permalink)
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Okay, here is a potential Upthrust (before the fact) in the 6E that took place on Friday. I'm not sure if this is a good set up or not because the down trend line was broken, so that could be a bullish sign. On the other hand, there are signs of weakness as well, so Its tough to say. I would like to see the support broken on the 15 minute, right chart and then test that support as resistance before taking a short trade.

David

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  #47 (permalink)
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David, what i find difficult in this approach is that you need to second-guess if the volume you see and the shape of a bar at any one point is bullish or bearish enough to infer that one side is in control momentarily and is more likely to win the battle. I must admit all ingredients are there to make a discretionary call. On the other hand, someone with just enough knowledge seeing that price was on the verge to make a similar top and hit some resistance could just as well place a short order right at the top resistance line and hope price would fall down without over rationalization which is the danger you face. If you know where volume is more likely to kick in, don't you think you should rather make an educated guess for the most likely direction and pray and minimize the thinking process. I tell you this as this is the danger and the pitfall of this VSA/Wyckoff approach. If the idea of trading with less indicators is to simplify the decision process then i think this approach is everything but simple. Is it changing four quarters for one dollar ?

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trendisyourfriend View Post
David, what i find difficult in this approach is that you need to second-guess if the volume you see and the shape of a bar at any one point is bullish or bearish enough to infer that one side is in control momentarily and is more likely to win the battle. I must admit all ingredients are there to make a discretionary call. On the other hand, someone with just enough knowledge seeing that price was on the verge to make a similar top and hit some resistance could just as well place a short order right at the top resistance line and hope price would fall down without over rationalization which is the danger you face. If you know where volume is more likely to kick in, don't you think you should rather make an educated guess for the most likely direction and pray and minimize the thinking process. I tell you this as this is the danger and the pitfall of this VSA/Wyckoff approach. If the idea of trading with less indicators is to simplify the decision process then i think this approach is everything but simple. Is it changing four quarters for one dollar ?

Trend,

I hear you loud and clear. I'm not saying this is simple or easy. I'm also not a big VSA fan because VSA has a lot more designations and I get lost in all the naming of each bar and from what I understand VSA comes from wyckoff. I think the main thing about what I learned regarding wyckoff is market structure. Another way of putting it would be the posture of the market. Structure, as I'm sure you know, is more than just HH and HL, but is there the same momentum or effort behind each swing. I don't know if Background is a VSA or wyckoff term, but looking at what happened in the past as opposed to looking at the most current 15 bars can give clues. The charts i posted was an example of what an Upthrust is. They happen all the time, but it doesn't mean its a setup. Structure and background play a big role. I've attached a couple more charts. One is a daily and another 15 min with additional detail. The daily shows horizontal resistance and Trend line resistance at the level of interest. It also shows a weak rally as well as weak closes on the up move. The 15 min shows the up swings decreasing in length and the down swings increasing. Combine that with increased volume on the upthrust bar and it tells a good story.

If you look at the ES chart Dr. Gary posted recently you will see an upthrust at the resistance level. What is different? Market structure (in an uptrend) other signs of strength such as Jumping across the creek. The context is different than my example.

The idea is to try and read the market by its own action instead of the action of indicators. I'm not saying its a holly grail and I'm not saying its easy. I haven't even begun to trade it yet, but I hope to. I also post the before the fact stuff to see if I'm making correct calls, or at lease correct enough to profit from them. Gold worked out so far and so has ISRG, so there must be something to the madness.

I'm not anti indicator and will probably use one or at the most 2 to help with the method, but they will be secondary tools. I hope this makes sense. Its late and I need to go to bed.

David

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Okay, here is a potential Upthrust (before the fact) in the 6E that took place on Friday. I'm not sure if this is a good set up or not because the down trend line was broken, so that could be a bullish sign. On the other hand, there are signs of weakness as well, so Its tough to say. I would like to see the support broken on the 15 minute, right chart and then test that support as resistance before taking a short trade.

David

Hello David. I am leaning more to that this should be seen as a Buying Climax, and not a UpThrust, before Reaccumulation. With the 1.3275 area as final support before moving higher would be my guess. The bottom range area from 1.2875 to 1.3040 looks like a relatively longer time Accumulation area with rising bottoms which might also suggest a relatively bigger "cause" and that the up move is therefore not finished yet. At least I think we would have a retest of higher prices. Note that I do not know how to use Point and Figure charts yet, so the latter regarding "cause" (and "effect") would only be from my previous experience and personal judgement.

I took the liberty to reuse one of your charts for illustration and hope you do not mind. The ST, secondary test, in the illustration I see as not going higher because of previous strong resistance back on January 4th with the UpThrust and back.

Laurus

“If you wish to see the truth, then hold no opinions for or against anything.” - Hsin Hsin Ming
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trendisyourfriend View Post
David, what i find difficult in this approach is that you need to second-guess if the volume you see and the shape of a bar at any one point is bullish or bearish enough to infer that one side is in control momentarily and is more likely to win the battle. I must admit all ingredients are there to make a discretionary call. On the other hand, someone with just enough knowledge seeing that price was on the verge to make a similar top and hit some resistance could just as well place a short order right at the top resistance line and hope price would fall down without over rationalization which is the danger you face. If you know where volume is more likely to kick in, don't you think you should rather make an educated guess for the most likely direction and pray and minimize the thinking process. I tell you this as this is the danger and the pitfall of this VSA/Wyckoff approach. If the idea of trading with less indicators is to simplify the decision process then i think this approach is everything but simple. Is it changing four quarters for one dollar ?

This is a big, fatal mistake virtually all traders make - i.e., focusing on the current bar and its volume and trying to figure out whether it's bullish or bearish and should I take a position. I am not trying to attack here - we all do this. I am trying to say that that approach is truly just guessing and not the way to trade this (or any) method, and certainly not what Wyckoff intended. Current market action needs to be put in context. But -- and it is a huge but, our eyes are naturally pulled to the right edge of the chart and our minds immediately begin to make judgments about what the eyes see. And, please, do check this out for yourself -- see if you don't immediately go to the right edge when you first look at a chart.

We all need to set aside our natural instincts and first assess what the market has been doing and how it has been doing it (to paraphrase Jim Dalton). Wyckoff was a master at this and conveys it well in his writings. It is certainly not easy to do; there is no question about that. It is not about simplifying the decision making process, per se; it is about clarifying what you see. It takes a fair amount of seeing a lot of market action (experience), lots and lots of practice (very few do this), and a clear mind.

This reminds me of an experience I’ll use to try to illustrate this idea. In September, I did a presentation before a group of about 45 traders and showed them the attached chart. It is a 5-minute chart of the S&P e-minis (ES). I told them that in my judgment the best (day) trades on this chart were to sell short at F and H.

Several traders nearly jumped out of their chairs arguing that C was a "double top" and the "correct" place to take a short trade. After all, they argued, it was the high of the day! As we discussed it, though, it became clear they were focused on the right edge of the chart and saw only that price had reached resistance.

Certainly, there was supply that came in at bar A and on the bars marked B. And, yes, the market did turn at C. But I believe that taking a trade at C or the bar after C was little more than a guess. Seeing this real time, I truly would not have a strong sense of which way the market was going to turn. The market was going sideways. It was holding its gains from the day before - it certainly had not reacted much. Moreover, it was making higher lows for an hour and a-half. Going short here was at best a 50-50 guess, in my judgment.

But at F we have a totally different story. We see lower lows being made and a consistent breakdown of support levels. Volume comes in to the downside as the market falls on increased range. Sellers were now in control. The downside swing has lengthened, and the rally up to F goes into a resistance area and shows no interest on the part of buyers in either the volume or the ranges of the bars as price also approaches the downtrend line. Now we have a clear context. This is the place to make the trade. You can make a similar assessment at H.

So, the point here is not that Wyckoff is simple or easy, or that thinking is somehow eliminated. Wyckoff -- like every sound trading method -- is difficult to master. More importantly, it is about looking clearly at the market background and structure first, and then using the right edge to trigger an entry. The Method is meant to give clarity to your trades so that when you do decide to go long or short, you are not making guesses, but basing your trades on a reasoned, logical, and clear-minded assessment of the overall market context as well as the immediate action.

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