Richard Wyckoff III

I don’t usually post on weekends. But it’s Xmas so think of this as my Christmas present to you for your support. Merry Christmas and Thanks!

In this post I’ll conclude the Wyckoff series and suggest source materials in case you’d like to take your studies to another level.

Like Steidlmayer, Wyckoff’s work evolved over time – from his early days as a tape reader to the technical trader by the time of his death. Throughout his career there was one constant: principles mattered over patterns. Understand the principle, and you can adjust the pattern. As they say, history repeats itself but…never repeats in exactly the same way.

By the end of his career, Wyckoff had three main principles:

  • The Law of Supply & Demand
  • The Law of Cause & Effect
  • The Law of Effort and Result

Rather than have my take on what Wyckoff meant, read the information straight from the horse’s mouth. You can download the first 5 pages of the “Introduction to the Wyckoff Method of Stock Market Analysis” (published by the Stock Market Institute and including the charts) at http://www.tradingsuccess.com/pdf-pub/wyckoff.zip. ((For this, you need to thank my techie, O K Lee (real name) who was kind enough to work on a Sunday).

Principles are crucial to success. But to learn to apply the principles, we need a model of application.  So, by the time of his death, Wyckoff had also developed a model for trading changes in trend and trading continuation trades.

The best source of this model is the Stock Market Insitute in Arizona. The good news is they finally have a web site: http://wyckoffstockmarketinstitute.com/. The bad news is they no longer seem to carry the ‘Introduction to the Wyckoff Method of Stock Market Analysis’. Futures and FX traders needed only the Introduction; stock traders/investors would find the full course useful. It would certainly pay futures and FX traders to ask SMI if they still have the “Introduction….” for sale. If you do learn the model, always keep in mind Wyckoff’s comments about the importance of principles. Without understanding them, the model cannot be adapted when the trading environment changes.

Other sources:

  1. There is an excellent but incomplete summary in: The Three Skills of Top Trading: Behavioral Systems Building, Pattern Recognition, and Mental State Management (Wiley Trading) by Hank Pruden
  2. This book contains no theoretical explanations but contains some great practical applications: Timing the Trade: How Price and Volume Move Markets! by Tom O’Brien
  3. Stocks and Commodities has a series of articles by different authors. Go to the bookstore and search for Wyckoff: http://traders.com/

Tomorrow I’ll review the S&P recommendation I made on Friday.

4 thoughts on “Richard Wyckoff III”

  1. Ray

    In what way is the summary in The Three Skills of Top Trading by Hank Pruden incomplete?

    As a novice, I am unable to detect such fine lines.

    Would like to know. Thank you.

  2. Hi Ana

    To give your question the answer it deserves, it would need: a) a short e-book and b) a copy of Pruden’s book – which I have left in Singapore.

    In any event, the point to remember is that Pruden was writing about those aspects of Wyckoff he found useful. His book was not intended to be an exposition of all of Wyckoff’s ideas. For that purpose, he did a great job of summarising Wyckoff’s ideas.

    Having said that, here’s an example of what Pruden did not cover (from memory): the way Wyckoff drew trend channels. Channels were an important part of Wyckoff’s profit taking strategy.

  3. Thanks, Ray, for enlightening me on the summary which is lacking ie about Channels.

    I believe Tom O’Brien’s Timing the Trade has a good exposition on Channels in chapter 12, on how to plot upward, sideways and downward channels.

    Conviction on a channel break is the key and conviction comes in the form of volume.

    Confirmation of the break on light volume on retracement back to the channel wall is similar to ‘jumping the creek, coming back to ice’ which I mentioned in your earlier post on Wyckoff.

  4. To round off on Wyckoff, here is a partial reproduction from TraderFeed on Feb 18 2007

    http://traderfeed.blogspot.com/2007_02_01_archive.html

    From Ray:
    I am writing to introduce an idea that has been around since at least the days of Richard Wyckoff (1920). I have seen it in many different guises from Bruce Babcock’s ‘Slinky System’ (http://www.rb-trading.com/bbbio.html) to Bradford Radsche’s ‘Turtle Soup’

    (http://www.lbrgroup.com/index.asp) to Joseph Hart’s ‘Repo’ (http://www.trend-dynamics.com/). Nowadays, I use the word ‘RePo’ to identify the pattern.

    I’ll describe the buy pattern; reverse the rules for a sell. The conditions for a buy are:

    q Identify an uptrend in the timeframe you are trading.

    q Identify a correction to that trend
    ………………..
    ……………….

    From Brett: Notice what makes this setup powerful. You’re going in the direction of the longer timeframe trend, waiting for a pullback, but then requiring that the market begin to reestablish this trend before you enter. By definition, this method will not have you trying to guess price highs and lows. Rather, you’ll wait for the market to make an apparent high or low and then enter when you get a bar moving convincingly in the opposite direction. My strong suspicion is that this setup could work on multiple timeframes, including intraday. Many thanks to Ray for his generous sharing of an idea that has contributed to his success.

    Full post on Feb 18 2007 at TraderFeed.

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