Book Reviews, Trading

Book Review of My Secrets of Day Trading in Stocks by Richard D. Wyckoff

I have been meaning to read books from Richard D. Wyckoff because he is reputed to be a master of reading supply and demand from the tape. He had also developed a course titled “Richard D. Wyckoff Course in Stock Market Science and Technique” which is now carried by the Wyckoff Stock Market Institute.

The book is pretty thin, about 200 pages, but it is chock-full of superb materials. This book is probably one of the best, if not the best, book that I have ever read on tape reading so far. I highly recommend anyone with an interest in tape reading to read a copy.

The book covers many valuable tidbits of information, including which stocks to play, when to enter, when to exit, how to manage stops, how to trade in dull markets, how to read market moves, and a lot more. Even though this book was written in the 1910s, I still find almost all of the information to be relevant today.

I happen to chance across another book by Wyckoff titled “Studies in Tape Reading” published by Cosimo Classics, and was surprised to find that the content appears to be the same. A quick search in Amazon showed that there are a few other books of different titles with Wyckoff stated as the author. I would be interested to take a look at those other books to see if they have different content.

Towards the end of the book, there were two paragraphs which I felt are simply great summaries of what it means to be a tape reader. I have noted them down below as Great Summary of Tape Reading #1 and #2. Enjoy!

Great Summary of Tape Reading #1

  • By a process of elimination he [the Tape Reader] decides which side of the market and which stock affords the best opportunity.
  • He either gets in at the inception of a movement or waits for the first reaction after the move has started.
  • He knows just about where his stock should come on the reaction and judges by the way it then acts whether his first impression is confirmed or contradicted.
  • After he gets in, it must act up to expectations or he should abandon the trade and get out of it immediately.
  • If it is a bull move, the volume must increase and the rest of the market offer some support or at least not oppose it.
  • The reactions must show a smaller volume than the advances, indicating light pressure, and each upward swing must be of longer duration and reach a new high level, or it will mean that the rise has spent its force either temporarily or finally.

Great Summary of Tape Reading #2

  • I buy and sell when I get my indications.
  • In going into a trade I do not know whether it will show a profit or a loss, or how much.
  • I try to trade at a point where I can secure protection with a stop from 1/4 to 1/2 point away, so that my risk is limited to this fraction plus commission and tax.
  • If the trade goes in my favour I push the stop up as soon as possible, to a point where there can be no loss.
  • I do not let profits run blindly but only so long as there appears no indication on which to close.
  • No matter where my stop order stands, I am always on the watch for danger signals.
  • Sometimes I get them way in advance of the time a trade should be closed; in other instances my “get out”  will flash on the tape as suddenly and as clearly defined as a streak of lightning against a black sky.
  • When the tape says “get out” I never stop to calculate how much profit or loss I have or whether I am ahead or behind on the day.
  • I strive for an increasing average profit but I do not keep my eye so much on the fraction or points made or lost, so much as on myself and keeping alert.
  • I endeavour to perfect myself in resolute calmness and precision, quickness of thought, accuracy of judgment, promptness in planning and executing my trades, foresight, intuition, courage and initiative.
  • Masterful control of myself in these respects will produce a winning average – it is merely a question of practice.

Day Trading and Tape Reading Requires Your Full Time and Attention

  • It requires the devotion of one’s whole time and attention to – the tape. He should have no other business or profession.
  • “A man cannot serve two masters,” and the tape is a tyrant.
  • He should spend 27 hours a week or more at a ticker, and many more hours away from it studying his mistakes and finding the “why” of his losses.

Execute “At the Market”

  • Slow execution won’t make it in Tape Reading. Your orders should generally be given “at the market”.
  • [My note: The advice given above is based on the fact that in Wyckoff’s time, the process of reporting transactions on the tape consumes from 5 seconds to 5 minutes, and transactions are executed by floor brokers which take further time.]
  • Many foolish people are interminably hung up because they try to save eighths by giving limited orders in a market that is running away from them. For the Tape Reader there is a psychological moment when he must open or close his trade. His orders must there be “at the market”.
  • Haggling over fractions will make him lose the thread of the tape, upset his poise and interrupt the workings of his mental machinery.
  • In ‘scale’ buying or selling it is obvious that limit orders must be used…. but as the Tape Reader generally goes with the trend, it is a case of “get on or get left.” By all means “get on.”

Watch All the Leaders, not Stocks in Isolation

  • A leader’s “strength” will be affected by weakness among all the other leaders.
  • A person whose finger is crushed will sometimes faint from the shock to his nervous system, although the injured member will not affect the other members or functions of the body.

Leaders Seldom Follow Minor Stocks

  • 40% to 80% of the total daily transactions are concentrated in the ‘Leaders’.
  • Next in importance comes what we will term the Secondary Leaders; for example those that at times burst into great activity, accompanied by large volume.
  • Another group which we will call the Minor Stocks is comprised of less important issues, mostly low-priced, and embracing many public favourites.
  • Some people, when they see an advance inaugurated in some of the Minor Stocks, are led to buy the Primary or Secondary Leaders, on the ground that the latter will be bullishly affected. This sometimes occurs, more often it doesn’t. It is just as foolish to expect a 5,000 share trader to follow the trading patterns of a 100 share trader.

Interest Rates and Business Conditions Move the Markets

  • The various stocks in the market are like a gigantic fleet of boats, all hitched together and being towed by the tugs “Interest Rate,” and “Business Conditions”. In the first row are the Big Six, behind them, the Secondary Leaders, the Minors, and the Miscellaneous issues.
  • It takes time to generate steam and to get the fleet under way. The leaders are first to feel the impulse; the others follow in turn.

Watch the Broader Market for Panic and Booms

  • While it is the smaller swings that interest him most, the day trader must not fail to keep his bearings in relation to the broader movements of the market.
  • When a panic prevails he recognizes it in the birth of a bull market and operates with the certainty that prices will gradually rise until a boom marks the other extreme of the swing.

Violent Movements Usually Signify the Termination of a Trend

  • A long advance or decline usually culminates in a wide, quick movement (i.e. a break) in the leaders.
  • The same thing happens in the market as a whole – an exceptionally violent movement, after a protracted sag or rise, usually indicates its termination.

What is Considered Normal Reactions

  • [My note: During that time period, leaders are trading around 100. Reading around 120, Union Pacific around 180, Central around 130, Gas around 160.]
  • In a bull market he considers reactions of from 2 to 5 points normal and reasonable.
  • He looks for occasional drops of 10 to 15 points in the leaders, with a 25-point break at least once a year. When any of these occur, he knows what to look for next.
  • In a bull market he expects a drop of 10 points to be followed by a recovery of about half the decline, and if the rise is to continue, all of the drop and more will be recovered. If a stock or the market refuses to rally naturally, he knows that the trouble has not been overcome, and therefore looks for a further decline.
  • Of course, these things are mere guide posts, … but they are valuable in teaching him what to avoid. For instance, he would be wary about making an initial short sale of Smelters after a 15 point break, even if his indications were clear. There might be several points more on the short side, but he would realize that every point further decline would bring him closer to the turning point, and after such a violent break the safest money was to wait for an opportunity on the long side.

How to Distinguish a Rally From a Change in Trend

  • A good way to do this successfully is to figure where a stock is due to come after it makes an upturn, allowing that a normal rally [i.e. rally is to reaction, as uptrend is to downtrend. A rally is a temporary bounce.] is from one-half to two-thirds of the decline. That is when a stock declines two and half points we can look for at least a point and a quarter rally unless the pressure is still on. In case the decline is not over, the rally will fall short.

Get Out Early or Reverse Position When There is a Change in Trend

  • An expert [Tape Reader] can readily distinguish between a change of trend and a simple, minor reaction. When his mental barometer indicates a change he does not wait for a stop order to be caught, but cleans house or reverses his position in an instant.

Look Out for Accumulation Once You Know the Point of Distribution

  • The operator who was watching only Union would have been surprised at this; but had he viewed the whole market he must have seen what was coming.
  • Knowing the point of distribution, he would be on the lookout for the accumulation which must follow, or at least the level where support would be forthcoming. Had he been expert enough to detect this, quick money could have been made on the subsequent rally as well.
  • … there is always a level, even in a panic, where buying power becomes strong enough to produce a rally or a permanent upturn.

Operate in Stocks with the Widest Swings

  • The Tape Reader must endeavour to operate in that stock which combines the widest swings with the broadest market; he may therefore frequently find it to his advantage to switch temporarily into other stock issues which seem to offer the quickest and surest profits.
  • There is another way of turning a dull market to good account, and that is by trading in the stocks which are temporarily active, owing to manipulative or other causes.

Do Not Let a Profit Turn Into a Loss

  • It therefore appears that the Tape Reader’s problem is not only to eliminate losses, but to cover his expenses as quickly as possible.
  • If he has a couple of points profit in a long trade, there is no reason why he should let the stock run back below his net buying price. Here circumstances seem to call for a stop order, so that no matter what happens, he will not be compelled to pay out money. This stop should not be thrust in when net cost is too close to the market price. A small reaction must be allowed for.
  • If the Tape Reader is operating for a fractional average profit per trade, or per day, he cannot afford to let a point profit run into a loss, or fail to “plug” a larger profit at a point where at least a portion of it will be preserved.

How to Manage Stops

  • Put in stop orders if a trade is carried overnight or if you cannot monitor the tape
    • A stop should be entered against the possibility of accident to the market or the trader.
  • Types of stops
    • Arbitrary: The consensus of shrewd and experienced traders is in favour of two points maximum gross loss on any one trade.
    • Support / resistance. Place a stop at 1/4 point below / above the points of support / resistance.
    • Automatic: Suppose the initial trade is made with a one-point stop. For every 1/4 point (i.e. 2 price ticks) the stock moves in your favour, change the stop to correspond, so that the stop is never more nor less than one point away from the extreme market price.
  • Raise the initial stop above the level necessary to cover commissions.
    • As soon as the stop is thus raised to cover commissions, it would seem  best not to make it automatic thereafter, but let the market develop its own stop or “signal” to get out.
  • Use mental stops after the initial stop
    • For my own part I prefer, having decided upon a danger point, to maintain a mental stop and when the price is reached close the trade “at the market.”
    • There may be ground for a change of plan or opinion at the last moment; if a stop is on the floor it takes time to cancel or change it, hence there is a period of a few minutes when the operator does not know where he stands.
  • Raise stops when indications are not clear
    • The original commitment should, of course, be made only when the trend is positively indicated, but situations will develop when he will be uncertain whether to stand pat, close out, or reverse his position.
    • At such a time it seems better to push the stop up to a point as close as possible to the market price, without choking off the trade. By this we mean a reasonable area should be allowed for temporary fluctuations.
  • Use a trailing stop
    • If a stock rises three points and then reverses one or one and a half points on light volume, he must look upon it as a perfectly natural reaction and not a change in trend.
    • The expert operator will not ordinarily let all of three points get away from him. He will keep pushing his stop up behind until the first good reaction gets him out [i.e. trailing stop triggered] at close to the high figure.
    • Having purchased at such a time, he will sell out again as the price once more approaches the high figure, unless indications point to its forging through to a new high level.
    • When you push a stop close behind a rise or a decline, you leave the way open for a further profit; but when you close the trade of your own volition, you shut off all such chances…. This plan of using stops is a sort of squeezing out the last drop of profit from each trade and never losing any part that can possibly be retained.
    • This will in most cases cause failure to get all of the moves int he one most active stock for the day, but should result in many small profits, and I believe the final results will exceed those realized by sitting through reactions with any one stock.

Trailing Stop Examples

  • Example #1
    • I got short at 150 3/4. In a few moments it sold below 150. My stop was moved down so there couldn’t be a loss, and soon a slight rally and another break gave me a new stop that insured a profit.
    • A third drive started, and I pushed the stop down to within 1/4 of the tape price at the time, as it was late in the day and I considered this the final plunge.
  • Example #2
    • Suppose the operator sells a stock short at 53 and it breaks to 51. He is foolish not to bring his stop down to 51 1/4 unless the market is ripe for a heavy decline.
    • With his stop at this point he has two chances out of three that the result will be satisfactory.
      • The price may go lower and yield a further profit;
      • The normal rally to 52 will catch his stop and enable him to put the stock out again at that price [i.e. you can sell short again at a higher price];
      • The stock will rally to about 51 1/4, catch his stop and then go lower. But he can scarcely mourn over the loss of a further profit. If the stock refuses to rally the full point to which it is entitled, that is, if it comes up to 51 1/2 or 5/8 and still acts heavy, it may be expected to break lower, and there usually is ample time to get short again at a price that will at least cover commissions.

Go with the Trend

  • We have defined a Tape Reader as one who follows the immediate trend. This means that he pursues the line of least resistance. He goes with the market – he does not buck it.
  • When he goes with the trend, the forces of supply, demand and manipulation are working for and with him.
  • A market which swings within a radius of a couple of points cannot be said to have a trend, and is a good one for the Tape Reader to avoid.

Successful Tape Reading is a Study of Force and the Courage to Go with the Winning Side

  • Successful tape reading is a study of force; it requires ability to judge which side has the greatest pulling power and one must have the courage to go with that side.
  • There are critical points which occur in each swing, just as in the life of a business or of an individual. At these junctures it seems as though a feather’s weight on either side would determine the immediate critical trend.
  • Any one who can spot these points has much to win and little to lose, for he can always play with a stop placed close behind the turning point or “point of resistance”.

Pay Close Attention to Stocks Under Pressure or Stimulation

  • A stock generally shows the Tape Reader what it proposes to do by its action under pressure or stimulation.
  • E.g. during major events or announcements. Also compare its movements relative to other market leaders.
  • The study of ‘responses’ to stimulation or outside influences on stocks is one of the most valuable in the Tape Reader’s education. It is an almost unerring guide to the technical position of the market.
  • Should a stock fail to break on bad news, it means that insiders have anticipated the decline and stand ready to buy.

Identifying Supply Absorption After a Break

  • One of the muckraking magazines once showed that Rock Island preferred had been driven down to 28 one August to the accompaniment of receivership rumours.
  • Thousands of shares of stock were traded in per day, after a ten-point decline and a small rally.
  • The transactions were very large – out of all proportion to the capital stock outstanding and the floating supply.
  • If the volume of sales represented long stock, someone was there to buy it. If there was manipulation it certainly was not for the purpose of distributing the stock at such a low level.
  • So, by casting out the unlikely factors, a Tape Reader could have arrived at the correct conclusion… we well remember that the indications were all in favour of buying the stock on the break.

Shrewd Traders are Always Testing the Market

  • The market is being put to the test continually by one element of which little has been said, i.e., the floor traders.
  • These shrewd fellows are always on the alert to ferret out a weak spot in the market, for they love the short side. Lack of support, if detected, in an issue generally leads to a raid which, if the technical situation is weak, spreads to other parts of the floor and produces a reaction or a slump all around.
  • Or, if they find a vulnerable short interest, they are quick to bid up a stock and drive the shorts to cover.
  • Other people are doing for him what he would do himself if he were all-powerful.

Identifying Who or What is Manipulating the Stock is Irrelevant

  • It is a matter of indifference to the Tape Reader as to who or what produces these test, or critical periods.
  • They constantly appear and disappear; he must make his diagnosis and act accordingly.

Individual Stocks Seldom Buck the Larger Trend

  • If a stock is being manipulated higher, the movement will seldom be continued unless other stocks follow and support the advance.
  • Barring certain specific developments affecting a stock, the other issues should be watched to see whether large operators are unloading on the strong spots.

Do not Average Down

  • Averaging does not come within the province of the Tape Reader. Averaging is groping for the top or bottom. The Tape Reader must not grope. He must see and know, or he should not act.

When to Close A Trade

  • A Tape Reader must close a trade:
    • When the tape tells him to close;
    • When his stop is caught;
    • When his position is not clear;
    • When he has a large or satisfactory profit and wishes to utilize those funds for better opportunities.

Be Flexible to Reverse Your Position if The Market has Turned

  • Within the recording of sales, there runs the fine silken thread of the trend.
  • So, when one is short of Union Pacific and this thread suddenly indicates that the market has turned upward, it’s foolish to remain short.
  • Not only must one cover quickly, but if the power of the movement is sufficient to warrant the risk, the operator must go long. In a market of sufficient breadth and swing, the Tape Reader will find that when it is time to close a trade, it is usually time to reverse his position.
  • Placing a “double” stop above a resistance level
    • … the stock opens at 181 1/4 and the first point of resistance is 181 1/2. The first indication of a downward trend is shown in the dip to 181 1/8, and with these two straws showing the tendency [the stock dipped to 181 1/8 two times], the Tape Reader goes short “at the market”, getting, say, 181 1/4.
    • In making the initial trade he placed a “double” stop at 181 5/8 or 3/4, on the ground that if his stock overcame the resistance at 181 1/2 it would go higher and he would have to go with it.
    • Being short 100 shares, his double stop order would read “Buy 200 at 181 5/8 stop”.

A Stock That Met Significant Resistance is a Good Short Target in a Decline

  • When a leader has met significant resistance on the way up (i.e. large volume supply stopped the advance), it is a good target for a short when a decline comes. This is because the large lots which have been distributed will probably come into the market as soon as weakness develops (i.e. get dumped by the recent buyer).
  • We have all heard people boast that their purchase was at the top eighth and that had the effect of turning the stock down. Those who make their purchases after this fashion are quickest to become scared at the first sign of weakness, and throw overboard what they have bought.
  • Therefore, the Tape Reader is picking out the stock in which he is likely to have the most help on the bear side.
  • [My note: Lack of support in a stock, which is detected by shrewd traders, is also a good short target.]

Small Lots are Just as Important as Large Lots

  • It is just as important to study the small lots as the large lots. The smaller quantities are like the feathers on an arrow – they indicate that the business part of the arrow is at the other end.
  • i.e. there is no business to be done at the particular level, the price will likely reverse direction to do more business at the other end.

Stages of a Manipulative Operation

  • A complete manipulative operation on the long side consists of three parts:
    1. Accumulation
    2. Marking up
    3. Distribution
  • In the case of a shorting operation – the distribution comes first, then the mark down and the accumulation.

Do Not Buy During Accumulation, Enter After the Mark-Up Has Started

  • Accumulation will show itself in the quantities and in the way they appear on the tape.
  • He [the Tape Reader] does not buy it at once, because it may take weeks or months for the manipulator to complete the accumulation of his line, and there might be opportunities to buy cheaper.
  • By holding off until the psychological moment he forces someone else to carry the stock for him – to pay his interest.
  • When the marking up begins he gets in at the commencement of the move, and goes along with it till there are signs of a halt or distribution.
  • … His first trade seems to have been made on what appeared to be inside buying. No trend had developed. He saw round lots being taken at 178 3/4 and over and reasoned that a rally should naturally follow pronounced support. His mistake was in not waiting for a clearly defined trend. If waiting for the buying was strong enough to absorb all offerings and turn the market, he would have done better to have waited until this was certain.
  • When a stock holds steady within a half point radius it does not signify a reversal of trend, but rather a halting place from which a new move in either direction may begin [my note: it is more important to see that the stock has turned up, then the fact that the stock has stopped going down].

Stocks That Don’t Break Are Held by Strong Hands

  • This was a vicious three-point jab into a market that was only just recovering from a decline in early February. What was its effect on the other principal stocks? Union Pacific declined only 3/4, Southern Pacific 5/8 and Steel 5/8.
  • This proved that they were technically strong; that is, they were in hands which could view with equanimity a three-point break in a leading issue.

Look for Stocks That Are Held by Strong Hands

  • Both the market as a whole and individual stocks are to be judged as much by what they do as what they do not do at critical points.
  • If the big fellows who accumulated Union below 120 had distributed it above 180, the stock would have broken something like 30 points (~17%), due to its having passed from strong to weak hands.
  • As it did not have any such decline, but only a very small reaction compared to its advance, the Tape Reader infers that Union is destined for much higher prices; that it offers comparative immunity from declines and a possible large advance in the near future.

A Reaction Usually Occurs After 3 or 4 Consecutive Days in One Direction

  • It is seldom that the market runs more than three or four consecutive days in one direction without a reaction, so the Tape Reader must realize that his chances decrease as the swing is prolonged.
  • The daily movements offer his best opportunities; but he must keep in stocks which swing wide enough to enable him to secure a profit [my note: because you only have 3-4 days’ worth of swing, you need to find a stock that will swing more within that 3-4 days.].

Sell When a Stock is Due to React

  • I became aware that a large percentage of my losing trades resulted from failure to close at the culmination of what I have termed the immediate trend.
  • I watched them closely and the moment I saw that the selling of these two stocks had ceased, gave my order to buy New York Central, getting it at 137 1/4. It never touched there again, and in ten minutes was 139 bid for 5,000 shares.
  • Here I should have sold, as my buying indication was for that particular advance. Especially I should have sold when I saw the rise culminate in a spectacular bid which looked like bait for outside buyers.
  • I knew the stock was due to react from this figure, and it did, but at the bottom of the normal reaction selling broke out in fresh quarters and the whole market came down heavily. The result was that my profit was only a fraction of what it ought to have been.
  • I should have sold when 139 was noisily bid, and when the reaction had run its course, picked it up again, provided indications were still bullish. If they were not I would have been in the position of looking to get short instead of waiting for a chance to get out of my long.

Dull Periods Mark the Close of Each Chapter

  • The factors that were active in producing the main movement, with its start, its climax and its collapse, have spent their force.
  • Prices, therefore, settle into a groove, where they remain sometimes for weeks or until affected by some other powerful influence.

Dull Markets Lead to a Pronounced Swing in One Direction

  • … when prices are stationary, we know that from this point there will be a pronounced swing in one direction or another.
  • There are ways of anticipating the direction of this swing. One is by noting the technical strength or weakness of the market. The resistance to pressure mentioned as characteristic of the dull period in March, 1909, was followed by a pronounced rise, leading stocks selling many points higher.
  • When a dull market shows its inability to hold rallies, or when it does not respond to bullish news, it is technically weak, and unless something comes along to change the situation, the next swing will be downward.
  • On the other hand, when there is a gradual hardening in prices; when bear raids fail to dislodge considerable quantities of stock; when stocks do not decline upon unfavourable news, we may look for an advancing market in the near future.

Constantly Be On Watch to Get In at the Start

  • No one can tell when a dull market will merge into a very active one, therefore the Tape reader must be constantly on the watch… Thus he stands to benefit to the fullest extent by any manipulative work which may be done.
  • In other words, he says: “I’ll get out of this lot when the big boys and their friends get out of theirs”. He feels easy in his mind about this stock, because he has seen the accumulation and knows it has relieved the market of all the floating supply at about this level. This means a sharp, quick rise sooner or later, as little stock is to be met with on the way up.
  • If he neglected to watch the market continuously and get in at the very start, his chances would be greatly lessened. He might not have the courage to take on the larger quantity.

Trend Lines Can Be Used to Identify the End of Accumulation / Distribution

  • So we see the advantage of watching a dull market and getting in the moment it starts out of its rut.
  • One could almost draw lines on the chart of a leader like Union or Reading (the upper line being the high point of its monotonous swing and the lower line the low point) and buy or sell whenever the line is crossed.
  • Because when a stock shakes itself loose from a narrow radius it is clear that the accumulation or distribution or resting spell has been completed and new forces are at work.
  • These forces are most pronounced and effective at the beginning of the new move – more power is needed to start a thing than to keep it going.

Abnormally Large Volumes Within a Small Radius Is Indicative of a Fake Move

  • The best way to distinguish the genuine from the fictitious move is to watch out for abnormally large volumes within a small radius. This is usually evidence of manipulation.
  • The large volume is simply a means of attracting buyers and disguising the hand of the operator.
  • A play of this kind took place when Reading struck 159 3/4 in June 1909. I counted some 80,000 shares within about half a point of 159 – unmistakable notice of a coming decline. This was a case where the stock was put up before being put down, and the Tape Reader who interpreted the move correctly and played for a good down swing would have made considerable money.

Using Charts as a Mechanical Trend Indicator

  • If one wishes a mechanical trend indicator as a supplement and a guide to his Tape Reading, he had best keep a chart composed of the average daily high and low of ten leading stocks, say Union, Reading St. Paul, N.Y. Central and Erie among the railroads, and Anaconda, Smelters, U.S. Steel, Car Foundry and Westinghouse among the industrials. First find the average high and average low for the day and make a chart showing which was touched first [my note: this would be very helpful if Wyckoff was referring to averaging prices across the ten stocks using intraday data, and identifying whether the low point was reached first for that day, or the high point was reached first for that day].
  • This will be found a more reliable guide than the Dow Jones averages, which only consider the high, low and closing bid of each day, and which, as strongly illustrated in the May, 1901, panic, frequently do not fairly represent the day’s actual fluctuations.
  • Such a composite chart is of no value to the Tape Reader who scalps and closes out everything daily. but it should benefit those who read the tape for the purpose of catching the important five or ten point moves.
  • Such a trader will make no commitments not in accordance with the trend, as shown by this chart. His reason is that even a well planned bull campaign in a stock will not usually be pushed to completion in the face of a down trend in the general market. Therefore he waits until the trend conforms to his indicators.

Both Long-Term and Short-Term Trading Can “Get There”

  • Is it better to close trades each day, or hold through reactions, and if necessary, for several days or weeks in order to secure a large profit? The answer to this question depends somewhat upon the temperament of the Tape Reader.
  • If his make-up be such that he can closely follow the small swings with profit, gradually becoming more expert and steadily increasing his commitments, he will shortly “arrive” by that route.
  • If his nerves are such that he cannot trade in and out actively, but is content to wait for big opportunities and patient enough to hold on for large profits, he will also “get there.”
  • Trading for the larger swings require one to ignore the minor indications and to put some stress upon the influential news of the day, and its effect upon sentiment; he must stand ready to take larger losses…
  • There is no reason why the Tape Reader should not make long-term trading an auxiliary profit producer if he can keep such trades from influencing his daily operations.

Don’t Scalp Both Long and Short Simultaneously

  • There is nothing more confusing than to attempt scalping on both sides of the market at once.
  • You might go long of a stock which is being put up or is going up for some special reason, and short of another stock which is persistently weak. Both trades may pan out successfully, but in the meantime your judgment will be interfered with and some foolish mistakes will be made in four cases out of five.
  • A bearish indication is favourable to one trade, and unfavourable to the other. He finds himself interpreting every development as being to his advantage and forgetting the important fact that he is also on the opposite side.
  • If you are short of one stock and see another that looks like a purchase, it is much better to wait until you have covered your short trade (on a dip if possible), and then take the long side of the other issue.

Tape Reader’s 7 Commandments

  1. Do not overtrade!
    • Many opportunities for profit develop from each day’s movements; only the very choicest should be acted upon.
  2. Eliminate anxiety!
    • Anxiety to make a record, to avoid losses, to secure a certain profit for the day or period will greatly warp the judgment, and lead to a low percentage of profits.
  3. Don’t trade when the market isn’t acting right!
    • The market may be unsuited to Tape Reading operations. When prices drift up and down without trend, like a ship without a rudder, and few positive indications develop, the percentage of losing trades is apt to be high.
  4. Get a broker you can trust!
  5. Do not leave orders to the discretion of the broker!
  6. Keep alert, calm after losses!
    • If he finds that a series of losses upsets him it is an easy matter to reduce the number of shares to one-half or one-quarter of the regular amount, or even to ten shares, so that the dollars involved are no longer a factor.
  7. Stay physically and mentally fit!

The Greater the Preparation, the Greater the Probable Extent of the Swing

  • A study of the stock market means a study in the forces above and below the present level of prices.
  • Each movement has its period of preparation, execution and termination, and the most substantial of movements are those that make long preparation. Without this preparation and gathering of force, a movement is not likely to be sustained.
  • Preparation for the principal movements in the market will very often occupy several months. This may be preceded by a decline in which large operators accumulate their stocks. They may even precipitate this decline in order to pave the way for such accumulation.
  • Large operators differ from small ones in their ability to foresee important changes in stock market values from six months to a year in advance, and to prepare themselves for it.
  • A study of these preparatory periods discloses to those who understand the anatomy of market movements the direction and possible extent of the next big move.
  • Thus, a study of these important turning points, principal among which are booms and panics, is the most essential.



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