Mr. Wyckoff created a methodology that requires the trader to use judgment for positioning trades. We live in an era where sophisticated computer algorithms are all the rage in trading circles. These automated systems are designed to remove trading judgment from the human process and build it into the computer’s functions. In Wall Street lore these automated trading systems were called a ‘Black Box’. Black Box systems were popular because they promised to remove 'flawed' human emotion from the trading process and therefore generate steady profits. In the end the markets would turn on these automated systems and render them ineffective. It could be argued that if Black Box systems really did work and were the holy grail of investing, cyclicality of prices through the business/investment cycle would become history. And we know from the recent past, that is not the case. The investment cycle is alive and well.
Black box methods (secret mechanical systems) were around in Mr. Wyckoff’s era. But he rejected the notion that such techniques could succeed in the long run. He strongly believed that a trader must understand the ‘Real Rules of the Game’ of speculation. The driving force of price trends is in the campaigns of the Composite Operator. The C.O. is dependent on the large up and down trends of prices and the tendency of the majority of investors to do the wrong thing at the wrong time. Mr. Wyckoff understood that this co-dependent relationship would never fundamentally change. He advised the devoted investor/trader to understand the real rules and develop the skills and knowledge to conduct trading operations in harmony with the large informed interests of the Composite Operator.
The impulses of human nature tend to work against being successful in investing. Therefore, the Wyckoff Method was designed to help the devoted individual trader to shed those natural impulses and replace them with the habits that make for successful speculation. It takes time and practice to retrain one’s thinking to be in sync with the forces that create the big profitable price trends.
We have covered much ground on the disciplines of ‘tape reading’ (chart reading) the Wyckoff way. Putting the pieces together means to integrate what we have learned so far into a cohesive process that maximizes the potential for success in our trading campaigns. This methodology should solidly align us with the interests, motives and forces of the large informed interests. We conduct our campaigns when they conduct their campaigns. We buy when they buy. We sell when they sell. We rest when they rest. The classic human impulse is to buy when the C.O. is selling and to sell when the C.O. is buying. This instinct leads the average investor to hold large stock positions when the C.O. is out of the market (during large markdown phases) and resting up for the next big bull campaign.
Here is the framework for our market campaigns.
Understand the Present Position of the Market. Is the market in an Uptrend? Is the market in a Stepping Stone Reaccumulation in an ongoing uptrend? Is it in the final stages of an Accumulation? From this analysis we can make a judgment about the markets readiness to begin a move. Determine which stage the market is likely in (Accumulation, Markup, Distribution and Markdown). Using trading range and trend analysis methods, Wyckoffians have superior tools for making these determinations.
Select a Stable of Stocks that are Poised to Move with the Projected Trend of the Market. Using industry group analysis and stock analysis, identify stocks that are leading the market. These are stocks that you are expecting to move further and faster than the market will move. Using Vertical Charts and the excellent tools in stockcharts.com, relative outperformance can quickly be determined. A quality list of leading stocks, in leading groups will prepare us for that moment when markets jump into uptrends.
Identify a Good Cause (Point and Figure Analysis) where Absorption has Taken Place. Accumulation or Reaccumulation can be measured using horizontal PnF counting techniques to estimate a potential for price appreciation. Only consider stocks that exceed your minimum reward to risk objectives.
Select Stocks that are Ready and Poised to Move with the Market. Find those stocks that are poised on the ‘springboard’ to jump upward and out of their area of absorption and into a new or continuing uptrend. There will always be stronger stocks ready to lead the market upward, and these are the stocks we seek to campaign.
Wait Patiently Until the Market is Ready to Begin Turning Upward. When a new uptrend begins the speculator has the wind at her/his back. By timing purchase commitments to coincide with a fresh new uptrend, profits can build quickly. Be alert and ready to act at the beginning of the markets ascent. Markets can move suddenly and quickly. By completing the above processes, a Wyckoffian is ready to make the best decisions at the right times. Integrating these ‘Best Practices’ will put us in alignment with the methods and the activities of the Composite Operator.
Mr. Wyckoff has provided us with all of the required tools to do the above analysis and to be prepared to act in a timely manner. It takes practice and skill to integrate these elements with a high degree of mastery. Practice will bring us closer and closer to the ideal.
Note: For declining markets, the concepts above are applied in reverse.
All the Best,
Roman Bogomazov and I have created a new two part webinar series to help traders and investors adopt or refine the habits – psychological and analytical – needed to acquire mastery of the Wyckoff Method of trading. (click here to learn more)