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The Wisdom of Wyckoff: Presented by Thomas Hamilton Special Risk Capital Management, LLC
The Wisdom of Wyckoff: Presented by Thomas Hamilton Special Risk Capital Management, LLC
Optimist:
“The Glass is Half Full”
Pessimist:
“The Glass is Half Empty”
Engineer:
“The Glass Is Twice As
Big As It Needs To
Be !”
I am an
Engineer. I am a
Technician. I am
a “Quant”.
Richard Wyckoff - The Man
• Born November 2, 1873; Died March 19, 1934
• Married three times
•Trader and Educator though out early 1900’s
• Editor of “The Magazine of Wall Street”, founded 1907
• Researched Common Characteristics of Winning Stocks
• Provided Insight as to How & Why Professionals Invest
• Emphasized Stop-Loss and Risk Control Techniques
The Times of Wyckoff
Ascending Wedge
ImporTANT:
The Low of a Significant Up bar defines the Support Level
The High of a Significant Down bar defines the Resistance Level
Suggestion: for Daily bars greatest ATR of all 3 previous days;
For Weekly bars, greater than average ATR of 3 previous weeks.
Note:
For a Position Change to be Valid, it Must Close Above the
Resistance Level (Up) or Below the Support Level (Down)
Thoughts:
- Works in all time frames, best on weekly for position traders.
- Need to use discretion during low volatility / congestion areas.
- It’s not perfect, but does provide confirmation and guidance.
Advanced Concept: Formularizing Wyckoff
A Study of Comparative Relative Strength
& Accumulation/Distribution Days
Swing Nomenclature
Swing “A” is the current swing move; “B” is the previous completed
counter move, “C” is 2nd move back (in the same direction as “A”). All
swings must be a minimum of x% (5 or 8%), though they can be
more.
Comparative Relative Strength (stock to an index)
• CRS is compared over a 5% swing of an Index (NASDAQ Composite).
• CRS is the % price move in the swing, peak to trough, comparing change in % of stock to change
in % of the index.
• CRS Swing Signal –
A AND B > 0 =
Bullish A AND B < 0
= Bearish
Observations: I find the A/D days count and the CRS value of the current swing to be very
helpful in monitoring a position and is a good early warning or confirming signal to exit
the position.
Using the swing comparison method is good, but tends to be much more selective in defining
entry candidates. These would likely be low risk stocks, though be prepared to “miss some good ones”
too.
Measuring Accumulation & Distribution of a Stock
Definition of -
Accumulation Day = C in upper 1/3 of bar range AND C > C[1] AND H >
H[1] Distribution Day = C in lower 1/3 of bar range AND C < C[1] AND
L < L[1]
• A/D Swing Count Signal –
A >= C AND A > B =
Bullish A<= C AND A < B
= Bearish
Counts are compared over an 8% price swing of the stock
Putting (some of it) Together
Signs of a Trend Change:
A Developing Structure of Accumulation or Distribution.
Market -
You gain confidence that you know what’s happening and
why (market structure, not news).
Stock -
You know the signs of the large market movers (the “CO”)
and how they are trying to position themselves and when.
What We Didn’t Cover -
A lot !
The Nine Buying and Selling Tests
Price Structures and Phases in Detail
Analysis in Multiple Time Frames
(i.e. daily – weekly)
Point & Figure Charting Techniques
Price Projections
Market & Sector Strength Analysis
Identifying the Buying “Sweet Spot”
Supply (selling strength) and Demand (buying strength)
Additional Signs of
Strength & Signs of Weakness (SOS & SOW)
Trading Tactics - How to Enter and Exit a Trade
Problems and Things to Consider . . .
Most effective with Supply & Demand securities (stocks).
- Stocks have finite amount of supply; Float Shares.
- ETF’s & Futures contracts are derivatives. Their
value is derived from the underlining securities
(cash) value; thus Demand Volume effects price,
but Supply is not limited.
Volume may not be accurate.
- Off exchange, private sales and dark pool volume
may not be reported.
Volume May Not Reflect “Pure” Supply or Demand
- Flash / Algorithmic Trading; short term
computer driven & arbitrage cause temporary
distortions.
Thoughts for Further Study
Ultra High or Low Volume, in the right background, can be an
indicator of Large Composite Operators moving into or out of a
security.
Bullish: average to increasing volume (but not ultra high volume) on an up bar
and
decreasing on a down bar, in an Up trend.
Bearish: average to increasing volume (but not ultra high volume) on a down
bar and decreasing on an up bar, in a Down trend.
Institutions take positions over time, many days, buying or selling, trying to
have minimal effect on price.
Ultra high volume often marks a significant top or bottom.
Weakness starts to appear on Up bars. i.e. Up Thrust – ultra high volume,
and No Demand – ultra low volume.
Climatic Action: high volume on a very narrow or wide range bar
(after a significant up trend) possible high level of distribution, demand =
supply.
Beware !
Summary
Take the time to understand price structure
and confirming volume.
It’s most effective when applied knowing the correct context
and
background, observe that it is dynamic (not static).
The objective is to detect Accumulation at the Bottom as price
begins to rise and Distribution at the Top just as price begins to
fall.
It can be applied in all time frames, it just
takes practice.
Can be applied to derivative securities, though
the differences can be more subtle.
Resources & Thanks
Online Course: http://www.informedtrades.com/blogs/stockjock/
Stock Market Institute: ww.wyckoffstockmarketinstitute.com
“The Three Skills of Top Trading”, by Prof. Hank Pruden
(Behavioral Systems Building, Pattern Recognition & Mental State Management)
“Charting the Stock Market”, edited by Jack Hutson
“How I Trade and Invest in Stocks & Bonds”, et al, by Richard Wyckoff
Golden Gate University, College of
Finance: Adjunct Professor Mr. Roman
Bogomazov
The importance of staying “in the now”: “The Power of Now” and “A
New Earth”, by Echart Tolle
stock charts courtesy of MetaStock, used with permission
Information About SRCM
and This Presentation
A) My first attempt was to “cherry pick” stocks, that is picking the ones that had the most movement
(long or short) over the entire time period. This was way too easy ! But . . . I also used the exercise to
see if ROE (fundamental measure of management profitability) was a factor in selecting stock
candidates. It was not ! My conclusion: strong/weak stock Fundamentals to not necessarily equate into
large stock moves either long or short. (see example, next slide)
B) Ranking stocks by “Mutual Comparative Relative Strength” and then filtering out ones based off of
Historic Volatility (H.V.) and the amount and time from a low in H.V. (an aid in identifying ‘Cause’) is
helpful scanning for high probability stocks.
C) Entry: I used “Wyckoff Bars” to determine a likely best entry bar. If strength in the background my
goal is to enter quickly, thus on the next SOS or Spring bar. If strength is not evident in the background
or the structure is not well defined, I waited for a SOW or Sweet Spot bar, with a higher/lower Closing
price.
D) Exit Stop: Using Historic Volatility (or some other measure of volatility) is helpful in determining
whether to use a tight or loose stop to exit a position. When a stock is trending (H.V. increasing) I used a
tighter stop, when a stock consolidated, forming a base of possible ‘Cause’, I used a looser stop. (I also
consider is a stock is hyperbolic is movement / volatility, use an extremely tight stop (this is unusual
though).
E) Exit Consideration: If the “Mutual Comparative Relative Strength” switches (from + to – if Long;
from – to + if Short) pay added attention to stops as this could be a warning sign.
Do Company Fundamentals have an Effect on Future Stock Price
Performance ?