BarroMetrics Views: Insights from Wyckoff and The Profile
It’s been a week for mail. The offer of ‘free coaching’ from the attendees from the Intensive Training Seminar brought a ton of mail. This was closely matched by questions regarding the Wyckoff and the Profile.
Time prevents me from answering the questions individually. I think the best way to proceed is to provide what I consider the essential principles of each theory.
Outlining is easy to do for Wyckoff because he sets them out in his work:
- The Law of Supply and Demand: why does a market go up? Because there are more buyers than sellers. Why does a market go down? Because there are more sellers than buyers.
- The Law of Cause and Effect: “The effect realized by a cause will be in direct proportion to that cause. Consequently to get an important move,…there must be an important cause…. that takes time…to develop” (Introduction to Wyckoff Method of Stock Market Analysis [Stock Market Institute])
- The Law of Effort vs Result: “In terms of the law of effort versus result….It is the volume that produces….the result. …When the amount of effort and the extent of the result are not in harmony, something is wrong”. (Introduction to Wyckoff Method of Stock Market Analysis [Stock Market Institute])
For me these principles were reflected and developed in Pete Steidlmayer’s Market Profile.
- “The market is an auction process” The principle augments Wyckoff’s ‘Law of Supply and Demand’. Understanding that the market is an auction was critical to my success. I agree with Brett Steenbarger that technical analysis starts with pattern recognition; but for me, how the patterns come about is just as important, if not more so. Thus in a sideways market, we have a Primary Buy and Primary Sell Zone. The zones reflect rejection areas (or as Tom Alexander calls them “unfair” prices). Knowing why the zones are termed rejection zones, and knowing how the zones come about, allow us to create scenarios around what may be happening when prices are not rejected. (See tonight’s post on the Forum-Twitter service).
- Peter felt that price action had four stages: a) A directional move (what I call an Initial Price Movement) b) Start of Development c) Development d) End of Development and start of new Initial Price Movement). When a new Initial Price Movement began after a normal development, the Law of Cause and Effect applies. But if we see smaller than normal development, we should see a larger than expected move. (It took me ages to reconcile this with The Law of Cause and Effect’. I found the resolution had to do with context).
- The purpose of the market is to facilitate trade. This is similar to The Law of Effort vs Result. Market Delta‘s software has been the significant improvement for this principle. Note that Peter had several versions of the purpose of the market. “Facilitation of Trade” was the first and in my view the best of the formulations.
You’ll see these ideas in operation each time I analyze a market.