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 .

Division 2 4
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A COURSE OF INSTRUCTION -3
IN h
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TAPE READING AND ACTIVE TRADING 4
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C O P Y R I G H T 1932

R ICHARD D. WYCKOFF, ON E
Niw York.
 TABLEOF CONTENTS

~. P
-“
1 1 INTRODUCTION

2 1 JUDGINGTHE IMMEDIATETRl#fD
2 3 Buyingand SellingWaves
2 4-A Wave Chart of the Leaders

2-A 1 BUYINGAND SELLINGWAVES - PART II

5 1 HOW TO LINK THE WAVE CHARTWITH THE STOCK IN ‘WHICHYOU

iWE TRADING
3 1-A A VerticalLine Chart and ContinuousLine Chart

4 1 TRM)INGAREASAND HOW TO PROFITBY THNM

4 3-A TradingArea of AuburnMotors

5 1 THE TAPE READINGCHART

5 8-A Tape ReadingChart of J. 1. Case

6 1 HOW TO SPOT THE BUYING AND SELLING POINTS WITHIN A SMALL

FRACTION

7 1 JUDGINGSTR$NGTHOR.W3AKNESS

8 1 HOWTO KEEP PERCENTiiGEIN YOUR FAVOR

9 1 TRADINGON INITIALACTIVITY

10 1 mGING THE MARKETBY TESTSAND RESPONSES

11 1 THE BEST STOCKSFOR ACTIVETRAI)lNG

12 1 STOP ORDERSAND OTHERVITAL POINTS

12 2 Jud@ng XQur Ftficimcy
12 ~ Tradingin UniformLots
12 3 Dow-Jone$Averagefl
12 4 Tradingon Paper
1: 4 Tradeat the Market
12 4 Put a Time Limit cm Your Trades
12 5 Qualifications of a SuccessfulSpeculator
12 6 lhvmrAsk Advice
(“
1$? 7 Fallacyof Averaging
12 8 CapitalRaquired
12 9 How Prc)fitsAccumulate
12 9 Where to Trade
12 10 Choiceot Brokers
12 11 Studyyour Losses

Copyright1934 by RichardD. Wyckoff,Inc.

SEC. P.

12 12 PractiaePersistently

Cs 1 CHARTSTUDIES
w 1 Amwriad Telephoneat Bottomof Reaction
Cs 3 AmericanTelephoneat Top of Rally
Cs 5 AlliedChmical at Bottomof Reaction
Cs 7 Allied Chmicd at Top of ~ly
Cs J. 1. (laseat Bottomof Reaction
Cs 1? AmericanCan Combinedwith Five Leaders
 SUMMARYOFTHE RICHARD D. WUXOFF
00URSEIOFINSTRUCTIONIN TAPE READINGAND ACTIVE TRADING.

J@du Ction. Generalprimiples involvedin tradingto take advantageof

section1. the minor fluctuations.

Basing judgmenton impartialanalysisof avai.lab~e

factg
insteadof ill advisedimDUJPeSa

How to internrettam actio~and learn to make YO1.W OWll

with a high degreeof accuracy.
&Q&3mn cknt d%$cidon~

How to constructend~terrm% a Wave Chart.

The selectionof’stocksthat refli]ct

.loadorshin
and have
LtYL
o=Q~~~~ c CIIWAI.
How to detectthe minor price surgesand estimatetheir
significance.

How to recognizethe symptomsof a reversalof the trend.

UMiM the How to employthe barometricquality of the Wave Chartin

#Mlrt ● judgingthe trend of the individualstockwhordnyou are
section3. trading.

How to operatein harmonywith the Law of Supplyand Dwand.

Trading The general significanceof c,tradingarea and the exception-

&QML% al tradingopportunities it may offer.
section4.
How to judgewhethera stockin a tradingarea becomes
b~~ ish OX’bearish.
How to decidewhen to trade close to the dangerline with
relativelysmallrisk.

Tane Reading Correlationof price movement,volumeand time.

gi&$.i& ~.
How to interpretthe fractionalprice changesand the var-
iationsin volumeduringminor fluctuations.

The logical1imitatims of risk and readjustmentof stop

QZ!@Xk
How to recognizeconditionswhermlnderthe risk maY be 1Lmited
to a $Mlaufr~ction.

cop~igllt1932 by RichardD. Wyckoff

 --2-.

and How to so~.tthe buyingand sellinglevelswithina small

EQJFJdU fraction.

Section6. How the marketis _nun&y 1 Eivinrinformatia~to those

who COIlgoad the ~

a
HoW to avoid over$tx the market.

How to WQ MD Y@+lra d what to do at the turningpoints.

Recognizingthe evidencesof technicalstrengthor weakness.

iiwmiml
or Whet constitutesa normalrally or rco.ction,
and why.
Section7.
How you may @NelQn Your jUMment so thnt accumulatingsymptoms
of strengthor weaknessbecomerecordsof subconsciousmemory
rad resultingd~ciaons are V’htud.lY intuitivcl,

How to ld.mi~,
roducqand elhinatq the risk.

How to Lnsur@Your PM’ its,

How to developa tradingpolicywhereinrisks are consistent

with probableprofits.

The generalsignificanceof incrensedLctivitY.

How to interpretchangesin the degreeof activity.

9.
S63ction
The imnortanc
e of volume wxzes in tradingzonesand
followingth$ formationof an apex.

HOIJthe operatortests the technicalconditionof the market.

section 10. How the individualtradermay secure,withoutexpense,the ben-

efit of the large operators tests of the market’sstrength.

e; how to recoznize them and profit

Lines of resistane
o..ccordingly.

How to observewhen the marketis in an overbou~htor oversold

condition.

How to recognize evidenceof manipul~tion.

The significnnccof the market’sresponseto news items having

the elementof surprise.

Best Stocks How to selectthe best stocksfor fictive

trading.
For Active
Trading, Recognitionof changingleadership.
Section11.
The importanceof uverngeprice r:mge md its relutionto
flo:~tingsupply.

Copyright1932 by Ri.chmd D, Wyckoff

 -3-

The advantage of familio.ritywith the chief characteristics

of leadingj active issues.

Use of HOW and when to use stop orders.

Stop Orders.
Section 12. The scientific location and road.jus+,ment
of stop orders.

Substitutes for stop orders.

Miscellaneous Judging your efficiency.

Vital Points.
Section 12. Consistent trading policies.

h’lh?rr)r~t~t~on of the averages.

Testing your trading ability without monetary risk.

~b~arket
orders vs. limited orders.

Limiting the duration of a trade.

How to avoid the dangers of ill-advised ad~ice and tips.

Dangerou~ pitfalls and kiov~ to avoid them.

HOIWto select your broker and judge his efficiency.

Chart Tape reading charts of leading active stocks and tP.eir

Studies. interpretation.

Typical trading maneuvers illustrated, wiih comentsj

suggestions and explanations.

How to recognize the termination of a reaction, and the

subsequent buying signals.

How to recognize the termination of a rally, and the

usual indication of impending reaction.

How to use the combination trading chart and wave chart of

barometric letadcrs.

Copyright 1952 by Richard D. Wyckoff

t
 TAPE READING AND ACTIVE TRADTNG

For the three to five-point moves

with risk limited to

one-half to one-point

The majority of those who follow our Method devote an hour

day, more or less, to studying and planning their campaigns. But we

have learned that an increasing number wish to trade in the market

continuously, either in their brokers’ offices or in private offices

of their own, equipped with a ticker and other facilities. From these

traders we have received many requests for further detailed information

on Tape Reading; and as the technique of active trading from the tape

is different from that outlined in the first part of our Course, we

have prepared the following to meet the requirements mentioned.

This Division of our Course of Instructionj like the First Divi-

sion, is based on judgment of the technical position: Supply and demand --

support and pressure.

No news, earnings or other corporate or fundamental statistics

are considered; we use only tho~e which relate to the factors: Price

Movement, Volume and Time.

The active trader who is a Tape Reader is concerned only with

Copyright 1932 by Richard D. Wyckoff TR Section 1 Page 1

the immediate*rendof the smallmoves in the murket. This trend can be

detectedby thisMethod soon a.i%er~hc openingof the Stock Exchangeat

ten o~clockdai~g It may changefrom bQUsh to bmrish, or vice versa$

and reverseitselffrom one to three times duringe.wh day’s session.

We instructsuch tradershow to followthese trends,changing

or reversingtheirpositionsas often as the marketaffordstradingoppor-

tunities.

In most instancestradesare closedout the same day they are

made, but i??thereare strongreasonsfor carryingany stockovernight,

this may be done.

Detailedinstructionsare given as to the best stocksto choose

and the exact time to make commitments,based on methodsformulatedand

successfullyemployedfor over twentyyears of tradingand advisorywork.

Stop ordersare placed on every trade,from one-halfto one point

away from the buyingor sellingprice. These stopsmust be constantly

watchedsnd moved as quicklyas the marketpermitsin order to reduce

risk,then protectprofits.

This form of tradingdisregardsthe long trend of the market,

as well iisthe intermediatetrends. It takesinstantadvantngeof the

technicalralliesand reactionsthat promiseto yield a profitin the

same stockmarketsession,on eitherthe long or the short side of the

market.

-M * *

Tape Readingis tho art of determiningthe immediatecours~or

trendof pricesfrom the actionof the marketas it appearson the tape

of the stock ticker. It mims to detectthe mows that are Lik@y to occur

Copyright1932 by RichardD. Wyckoff TR Section1 Page 2

in the next few minutes or hours; gettingin when they beginand getting

out when they culminate.

It requiresactivityand flexibilityof mind; readinessto change

or reverseone’sopinionquickly;slso nerve,poise,decision,promptness,

courageand absoluteindependenceof judgment.

Its purpos~is to derivean averageprofitfrom a seriesof trades.

By keepingthe risk down t~ a minimumand constantlystrivingto reduceit;

by clevermsmipul.ation
of stop orders,a net profitover comiwission~,
taxes

and lossescan be realized.

All commitmentsare temporary-- theirdurntionis usuallylim-

ited to hours. They are intended to take advantage of the small,imm@i-

ate fluctuations.
with this Method you, as a trader, search for your opportunit.ies

(andwork for your profithare and ~-- today. In mo~;tcasesyou will

preferto go home with a clesm sheet -- with no commitments orI either

side of the market. Thus v:hen you start trading nuxt morning your mind

is clearfor new impressions;

your judgmentis unbiasedby reasonof your

neutralposition.

At each mo.rningls
openingyou make a swiftanalysisof the market;

sensethe trend;’
decideon the best stock,and if conditionsare favorable,

you make your commitment. Then you watch the marketfor a confirmationor

contradiction
of the correctnessof your position. il.1.so for the psycholog-

ical. moment for noving stops, closingtrades or crowding stops so close to

the market price that you leave the way open for n furtherprofit,or you

are closedout on stop at a smallfractionfrom the extremehigh or low.

Tradingthus, you are afforded several times as many opportun-

Copyright 1932 by Richard D. Wyckoff TR Sectior~

1 Page 3
 ities in these small swingsw you would have if you wz~ited
for the more

importantswingsof ten to thirtypoints.

If a tradedoes not make good at once,you closeit out, whether

it standseven or at a smallloss. You will never tradewithouta stop,

for your risk must be kept down to a minimum. You will never take a big

loss. You will never be tied up. You can claanhousein an instant.

And you can stay away from the tickeras often tandas long m you wish.

This form of tradingis entirelydistinctand dlffcrentfrom

that describedin the otherMvi.sionof our Method,which aims to secure

profitsfrom the ten, twentyand thirtypoint swings. It meets the re-

quirementsof thosewho wish to trademore or less constantly.

Includedin this Divisionof the Courseis a plan for charting

the detailedtransactions
in certainstocksas they appearon the tape,

by which you can sense the immediatetrend;figurethe exactpointsfor

placingyour stop ordersand where ta move them to reducerisk when the

marketgoes in your favor. It showsyou how to C1OEWyour tradesthe

same day at the most advantageousmomentsby watchingthese Tape Read-

ing Chart indicationsand gettingout near the extremepointsin the

advancesand declines.

Under tlzisMethodyou might take new positionsfrom one to

three times a day, dependingupon the activityof the market. It is

the nearestappronchyet devised,so far as I know, to tradingon the

floor of the StockExchange.

But the most importantadv,ontage

of a combinationof Tape

Reading end tradingfor the longor swingsis that it will aid you in

increasingyour profitsin this way: Sections11 and 12 of the First

Divisionof our Courseshow how to determinewhich stocksshouldmove

Copyright1932 by ~chard D. Wyckoff ‘i%SectionL Page 4

three tc five pointsin a certaindirection. You apply the Tape Reading

Methodin makingyour trade :ltthe most favorablenoment,and the poGi-

tion you then take with a smallrisk of one-halfto one point may later

developinto Position2 on the long side,or Position4 on the short

side,and in{dicute
a run of ten, twentyor thirtypointsin your favor.

By thus tradingwith a fractionor a point originalrisk and letting

your profitrun into the many pointsindicatedin your forecastof the

probabled3.stance
in points,you will greatlywidenyour marginof profit.

For this reason,theseTape Readinginstructions,combinedwith our lcmger-

swingplan will materiallyenhancethe profitpossibilities

in both Divi-

sionsof the Course.

Copyright1932 by RichardD. P?yckoff

,

JUDGINGTHE IMMEDIATETREND.

For this purposewe use a Wave Chart,made up of the price of

five of the most activeleadingstocks. The pricesof theseare added

togd+her,and plottedon a sheetof cross sectionpaper,with the time

scaleat the bottomof the verticallines, and the price scaleat the

left, corresponding
with the horizontallines. Specimensheetfollows.

All movementsin the marketare made up of alternatingbuying

and sellingwaves. We judgethe strengthor weaknessof the market

by the distancein pointsand fractionsrecordedby thesewaves;we

combinethis distancewith the lengthof time each wave takes to run

its course.

In studyingthe distanceand durationof esch wave, if the buy-

ing waves are longerin durationand travelfartherthan the selling

waves,we get an indicationthat the immediatetrendis upward. If

the sellingwaves exceedthe buyingwaves in time and distance,the

immediatetrendis downward. Wheneverthe buyingand sellingwaves

seem to offseteach other ond no material.

strengthor weaknessis in-

dicated,the immediatetrendis in doubt. Our positionshouldthen

be neutral.
Selectthe five leading stocks. At the openingof the market

add the pricesof their first sales,includingthe fractions,which

shouldbe addedin eighths. Put a mark at the price representingtheir

total at the properplace on the price scaleand on the 10 otclockvor-

Copyright1932 by RichardD. Wyckoff TR Section2 Page 1

ticalline. Next wretchfor eithernn upward or downwardswing to ex-

haustitself.When it smns to stop,put u dot on the chartat the

propertime and price leval. Xf the marketthen reverms its direc-

tion this prows that tiw po$$tionof the dot is correct. If it goes

on in the sa@@ direction,chmmgethe dot until the movementagain hesi-

tatesand sh~w~ siguoof a reversal.

Them watch the new wave until it seemsto cam to an end. Place

the dot, TM marketwill confirmcm contradictyour estimateof that

turningpoint. And so on until you are thoroughlyfomilinrwith judg-

ing and recordingthe start,durationand finishof each successivewave.

The ~mmediatotramdis Lndicatodas soan as one buyingand one

sellingwave havo been complwtmd. You then know on which sideis the

most power -. the buyingor the sailingside. And all you have to do is

to go with that tiido.

But you must alwayshe on the lookoutfor a changein this immedi-

ate trad. It is likelyto chmge its directionfrom one to three times

in n singleEMZlswion.
Thio is how you datectthe change: In an up trend,

when the selung wavoa begin to increasein time and distancesor the

buyingwavw mhorten. E$$heror both will be an indicationof a change

in the immediatetrend. Apply the sam reasoningto a dom trend. Watch

closelyfor these chamgesfor they tell you when to buy and sell;when

to get long or short;when to closeyour presenttrade and reverseyour

detailsare on thQ chart,Page 4-A.

position. IhU’ther

Rmmber you have nothingto do with the other trendsof the

market-- d.thar the long trend or tlw intermediateswingsof 10 to 30

points. The latterswingsare the basis of the First Divisionof this

Coursein Sto@kMarket Sci.anca

and Technique. Tradingfor such wings

is .anentirelydiff’orent
proposition,reqwiringless time and attention,

Copyright1932 by Rial%mxl
D. Wyakoff l% Sect&on2 Page 2
 but havh$

uatmg 2 m

Wtv$eC1’kmr’t

AJtht$qgh the buying or tl’m mmdag WLWQB &ay M $nmic$snt on

certaindays to carry the marketin e certaindirectionuntil th~ close,

this does not man that it will eontimm to dc so the next day. And it

do%n not fnmn that yOU $hotidWLmy any tmdtxi overnightfor this rmwn.

Tomorrowf 8 trendwill dofim its~f in the same W~. Lnd it is best not

to go into tommrow~B ses$iomwith any stockson hand unlem threeis acme

extrmrdintqf reason in the action of the market. Such a rcmon would be,

for example,a strongdmmkapmnt of power Mar the beginningof what looks

like an %mportAntbull or km swing,$mlicated~ increasingactivityand

volm in a @ten direction~with scamdy any pointsof llesitntion,

or

ralb$ or reac$im$ ZM the mm may be. In such instonces,a long pmition,

for exmpla$ might be allow$xi

to run with R frequentraisingof stops so
that a tmdo originallymd~ with a half to one point stop might run into

mvmal or many pointsand thu$ ixmrmso the net averageof profiton all

yo@ tra$wlfor the month. Full advantageof such a situationmy be

takenby them who understandcw IWthod of +awUnfg for the largarstings

and cm forecm% the probablemmiimr of points certainstocksshouldmove.

anc$Ba tradeis Xnadoon $dW Str(wagth of dimctiarm hmd.n, and its price

@A$ well may from the startingpoint, and imdicate&,accmding to the

othatMvisim of our Methodsthat it will probabLydmmlop a move of

M to 30 pm!.ntse
the traderU.owflhia profitto run accordingto instruc-

tiOXiS, and lmg#!profitsshouldrm~t.

The Wawo Chart twdwm Tape Reading. Afteryou have used it for

a while,you ~ not need it. Yom aye and brainwill seo and record

Copytight1932 w E4idmrdD. Wgckoff TR Section2 Page 3

the wave CM&t too quicklyand do not mpoct intuitionto come until

you have had long wpmienca and much practice.

***

of tho market.
Tho five leaders$hculdalwaysbe repr~sentative

At timeswhm a leading rail hu~ considerableeffectit shouldbe in-

cluded. At other timesa ut$ll,ty,

like ConsolidatedGas, might coae

to the front;it shouldtak~ the place of somo otherleaderso long as

this ColditicmLmate. Selwtion of tlwse leadersmay btilikenedto ob-

sm’wingtho pullingpower of a &oup of five horses: If you ware driving

t?nwh a groupamd you naticmione horse laggingin tae tr~aeasnd another

alwaystu@.mg ahead of the rw$t,you would at once decidethat the fcx’mr

shouldba r@l.acedand that the Iattw is the real leader. Apply this

roason$ngin Ice@ping your fivm leaders amcmg tho most reprosmtative of

all the stock~in the mark~tin their abilityto influencethe rest of

the list. Keep weiglxtng

the$Q from day to day. Wood out poor ones,

which mmns those that haw lost theirinflucance,

or have becometoo in-

activeto be included.
**-W

Chart of the previousday shouldbe beforeyou when

so that yw get the relationof todaytsmarketto that

of ywterday.

Copyright193$? by Fti.chwd D. Wyckoff TR Section2 Page 4

 \
-4
“
 BUYINGAND SELLINGWAVES

(’IhelVave
Chart-PartII)

In the First Divisionof our Courseof Instruction,Section

4, we presentedPart I on the use of the Wave Chart. The materialin

Part I di~cussasin somowhatgreaterdetailthe instructionsset forth

in TR Section2 of the Second Division;therefore,it may be substi-

tutedfor this last-namedSection. Or, if you prefer,you may remove

Parts I and 11 from theirpresentbindersand place thornin a separate

loose-leaffolder. You will then have a completetext book on the theory

of the Wave Clurt as I have developedand expandedit.

On pages 7 to 9 of Part I, I showedyou how to interpretthe

Wave Chartfrom the standpointof pricemovement,durationof each buy-

ing and sellingwave, and comparf.i.tive supportor pressure. The follow-

ing illustrationwill show in more detailhow to apply the additional

factorsof volumeand activityto your analysisof the smallwaves.

Copyright1934 by RichardD. Wyckoff,Inc. TR Section2-A Page 1.

 In this illustration(Figure1),

it will be seen that volumeand activity

both shrinkto very smallproportionson

the littlebuyingand sellingwaves from

10 olclockto 1:40 P.M. The day starts

with a smallrallywhich is promptlyfol-

lowed by a smalldip. Bulls and bears are

evidentlywell matchedat this point.

After the firstdip (Period2), the bulls

try to put pricesup, but they fail to at-

tract a following,as shownby the failure

<
of activityto increase. Demandpeters

out aroundthe 11:00A.M. top. A small

340

Fl 335

FIG.1
dip in the fourthperiodbringsout very

littlestock on the downside,however,and

thisencouragesthe bulls to try again.

Qncc more they fail to attrscta follow-

ing. Note how the rally in period5 dies

out aroundthe two previoustops. So now, the bears endeavorto break the

deadlockby offeringstocksdown (Period6) until 1 ofclock. This man-

euver meetsno bettorsuccess. Activityfails to increaseon the down-

side, however,and a tentativelybullishsignalis given by the evidence

of supportaroundthe morninglow.

At this point the markethas come to a completestandstill.

Everythingnow dependson the abilityof one side or the otherto rouse

a following,eitherby breakingdown the supportlevel or by pushing

pricesup throughthe forenoontops. When the bears fail at 1 o!clock,

Copyright1934 by RichardD. Wyckoff,Inc. TR Section2-A. Page 2.

it is the bulls~turn to try their strengthagain, This time,dexmd is

a little stronger. Prices rise a littlebit above the previoushighs and

activityincreasesa trifleas they advance.

If we are tradingfor the short swings,this is our cue to pre-

pare for action. If activityfalls off on the next sellingwave,we may

expectthe bulls to becomeaggressive.We do not have long to wait.

Prices sag a bit in the next fifteenminutw but the activitydies out

completelyon the dip. This is the cue we have been waitingfor. It

tellsus that the supplywhich held the bulls back on previousrallies

has been absorbedon the small earlierreactions. Therefore,T7e step in

with confidenceand buy. We are promptlyrewardedby a sharprise in

Period 9.

Any questionas to the validityof thisupwardmove is settled

by the sharpincreasein activityas pricesrise throughthe previous

tops. Shortlyafter 2 o~clock,the bulls rest momentarilybecause,at

this point,the averagehas risen to a level where stocksencountered

supplyon the precedingFridayand Saturday. (Notshown.) Evidently

this supplyhas also been disposedof, becauseactivitypromptlyshrinks

on anothertemporarysell-off, Since there is obviouslyno pressureyet

and few offeringsto be takenat this level,we stay long and wait for

the bulls to push on again as they try for a higherobjective. This

they attainjust before the close.

In this and the exampleon page 7, Part I, we have consider-

ed the Wave Chartisusefulnessprimarilyfrom the standpointof short-

swing tradingoperations. For your analysisof the intermediateand

longerterm movements,you will find it helpful.

to constructa OXV+

Copyright1934 by RichardD. Wyckoff,Inc. TR Section2-A. Page 3.