This is a nice little book containing a collection of articles written by Richard D. Wyckoff that were originally published in the Stock Market Technique magazine from March 1932 to July 1933, inclusive.
Wyckoff initially published his articles under The Ticker magazine. He had then owned and published under The Magazine of Wall Street, which he sold to The Ticker Publishing Company in 1926. He finally published under the Stock Market Technique magazine.
Readers of this blog would know that I am a huge fan of writings by Wyckoff as his works and those of Jesse Livermore’s present what I believe is the best framework to approach the markets.
In this short book (~115 pages), there are much less “techniques” written as compared to his Studies in Tape Reading book, and many of the articles are on bashing other approaches (e.g. fundamental analysis, Dow Theory, newsletter writers, insiders, etc.). The articles allude to how good an approach tape reading is, but falls short by not going into the details (e.g. he writes that tape reading allows him to forecast target prices but did not explain how).
Nonetheless, there are still good tidbits to be taken. I liked how he went into details on how the Composite Operator operates, why the 50% retracement level is important, how to determine the trend, and his expose on the Dow Theory (I had wanted to read Hamilton’s book, but guess will give that a miss now).
For those who have read other Wyckoff materials that are more “heavy on content”, you might want to give this a miss, but it is a thin volume which might be good for some subway rides.
Focus on Supply and Demand
- The effect of the combined operations of bankers, pools, large operators, floor traders and the public is, when boiled down on the tape, of the same effect as if it were produced by one man’s operations — the Composite Operator (C. O.).
- It is important that you observe the market from this standpoint, that your trading operations be based, not on what you formerly regarded as the market’s characteristics but on the fundamental law of supply and demand, which is at the bottom of every move that is made in every stock in the market at all times.
- It does not matter whether the buying and the selling, or both, are genuine or artificial: that is, manipulative — designed for a purpose: this law is working and will continue to work always.
Study Price and Volume
- The place to study the market is at home after business hours. All you need is your evening newspaper. But do not read the financial news — only prices and volumes.
- … the experience of the past few years has emphasized the value of disregarding all considerations except those which relate to price movement, volume and time. If one is endeavoring to realize profits from the principal swings in prices of stocks, it is my opinion that he should disregard fundamental as well as corporate statistics relating to the stocks in which he is trading, stick closely to a study of the action of the market and become deaf and blind to everything else.
- I am frequently asked: Do you mean to say that you don’t consider what the stock is earning or the dividend it pays? Or its prospects? Or the condition of the industry? Or any of the other factors that are generally used in forming opinions about stocks? My answer is: You can get the best results by concentrating on the action of individual stocks and the market as a whole — when you know how — because all such influences as earnings, dividends and industrial prospects are reflected in price and volume adjustments before they otherwise become apparent.
How Manipulators Operate
- Selecting their targets
- Manipulators are constantly testing the market to see whether it is most responsive on the bull or the bear side.
- If he wants to advance the market, he tests the leading stocks to find the one that has the least resistance.
- He follows the line of least resistance. He avoids bulling the rails because he would there have to play a lone hand. He does not want to take big blocks of stocks which stand in his way; someone else can do that.
- He advances the ones that are easiest to put up while requiring the smallest purchases on his part.
- Getting a following
- After a while the small bulges which he has produced in his testing operations, followed by the more active bidding up of a larger number of stocks, encourage floor traders and the public to get in on the bull side.
- An increasing number of stocks advance on expanding volume and a bull swing of substantial proportions is under way.
- Providing support
- The Composite Operator (C. O.) further encourages this bullishness by helping along wherever he can.
- If he sees certain stocks or groups lagging, he will send a broker into those crowds to bid them up.
- If weakness breaks out anywhere, he will give support.
- Distributing at the top after demand is exhausted
- Suppose the bull swing has now been running for several days and after sizing up the situation by a series of tests, he finds that the buying power has temporarily become somewhat exhausted; that is, most of the people who could be influenced to go in and buy have done so; they cannot spend that same money twice and there is a scarcity of other buyers to take their places. Demand has shrunk.
- He now supplies whatever the market will take; he sells all he can around the top of the swing and on the way down.
- Buying back quietly after a 60% reaction from the top
- If the rise in averages has amounted to 10 points, he may keep on selling until it has declined 6 points; then he may begin to buy back what he has sold — not by bidding up these stocks but taking them as they are offered.
- Out of 1,000 shares offered at a certain price he may take 600 or 700 leaving 300 still offered and the market unchanged. His re-accumulation is not apparent.
- Engineering shakeouts to complete purchase at around 50% retracement
- After a while he absorbs most of the floating supply at a level about half way back from the top.
- The selling power is now lessening; in fat, he is unable to buy back all he wants; so he drives several stocks downward to weaken the market so he can complete his purchases on the reaction. These drives are also his tests.
- While these stocks are weak, others advance a little as a result of his raising buying limits. Thus the averages are scarcely altered.
- People who are bearish point to the few weak stocks and decide that the market is going much lower. They make some ventures on the short side. These help the C. O. to buy more. He takes their offerings.
- Market turns and starts to advance gradually with the accumulation
- With the bears making no progress and no more stock pressing for sale, the market is now in a position technically known as “sold out” for the time being.
- All the offerings of those who sold on the way back from the top are now absorbed; hence for the next five points up — on the averages — there is little opposition to an advance. The C. O. therefore adds to his lines, buying as carefully as he can, so as not to advance prices.
- Starting to bid up around 30% retracement level
- After the averages have recovered about 3 points out of the 5 they lost, he has replaced about all the stock he wants and begins to bid up prices all around the room.
- The market advances to the level of the previous top. Here a lot of those who bought at that time and who held through the reaction place selling orders so they can get out even or at a small profit.
- This makes a lot of activity and narrow swings around the old top and chart observers say: Here is a double top; we should sell short on this.
- But the C. O. finds that the long selling combined with the short selling is not sufficient to stop the advance of the market. There is latent buying power that appears to increase on advances.
- He bids certain stocks up to new highs in order to encourage this outside buying power.
- Outside buying power overwhelms sellers, sellers forced to support by covering
- The strength spreads to other issues and the market goes on through the old high for the averages.
- Bears, finding they are wrong, begin to cover; their stops are caught in many cases.
- Bulls who have been holding back come in and buy. The bull procession widens and deepens.
- Unload shares in the ensuing bull wave, and start to put out shorts
- And so the C. O. continues his operations on the bull side until the bull wave has lasted so long as extended to so many stocks and brought in so many buyers that the C. O. is able not only to unload every last share of his long stocks; but, as his unloading such a large supply overcomes the remaining demand, he also begins to put out a line of shorts all through the list.
- He keeps on selling until all of the demand at the high level is satisfied.
- The market is now saturated with stocks and there is no buying power to lift that tremendous load which would have to be moved in order to advance prices to a new high level.
- Aggressively short the market
- The C. O. sees this situation and knows that the time is ripe for a break.
- He bids up several leading high-priced stocks to new high levels, which causes the public to say: The averages are up into a new high. We should buy more.
- Meanwhile he has been selling so many other stocks that their prices are sagging under the weight. He keeps on selling, getting out the ones he bid up, and getting short of them also.
- Now he is adding every hour to the supply of stock. The reaction has brought the public through the successive stages of hesitation to caution and then into a state of fear.
- That is, they fear the market is going down but they hope it will recover enough to let them out. This emotional conflict on the part of the public causes people to hang on and do nothing.
- Market crashes down
- The market goes lower and lower because there are fewer buyers except occasional shorts covering.
- Prices are falling of their own weight. Supply is vastly heavier than demand.
- The C. O. has only to wait to realize a big profit on his shorts, to be added to the great profit he has already gathered on his longs. And with this vast sum at his command he knows that he can buy a tremendous number of stocks at the bottom of the decline, paying greatly reduced prices compared with those at which he sold.
- First, assess the market condition
- The market is always in a certain well defined position, no matter what conditions may be. It is either in a strong uptrend, or in a slow advance, or in a reaction, or a rally from a reaction, or in a recovery from a slump, or in some other position which he is able to discern and designate. At times the situation is so evenly balanced that he regards it as in a neutral position. in that case, he favors neither the long nor the short position.
- Look for stocks that are moving in accordance with the trend of the market
- Each individual sock is in a certain technical position and has its own trend.
- Naturally, if the trend of the general market is upward, he selects the stocks which individually are in an upward trend.
- Choose stocks that will probably yield the greatest number of points profit
- In every important move in an individual stock there is a period of preparation.
- There are certain ways in which, in many instances, the approximate extent of a rise or decline in a stock may be determined. In such a case, he would naturally choose the stock which will probably yield the greater number of points profit.
- Hold position until the objective point is reached or until he observes contradictory signs.
Enter As Close to the Danger Point As Possible
- Livermore: “I go long or short as close as I can to the danger point, and if the danger becomes real I close out and take a small loss.”
- If this stock is being accumulated within a range of 80 to 83, he tries to buy it as near to 80 as he can, so as to reduce the risk and secure the maximum profit.
- Going long on bulges and selling short on weakness is the equivalent of buying a frame house in the midst of a blazing forest [i.e. don’t buy at a high and sell at a low, its safer to enter at a turning point]
Enter Only When it is Ready to Move
- Why not let somebody else carry a stock while it is going down and while it is passing through that period of preparation for an advance? You should have it only when it is ready to move.
- Never buy an egg until it is laid.
Enter Because of An Opportunity and When the Mind is Clear
- They [traders] should not delude themselves that they can anticipate everything that happens in their favorite stocks…. Trading should never become a habit so that you’ve simply got to satisfy that craving to jump in and out. Such a practice warps the judgement; eagerness to trade supplants deliberation.
- Not because we itch to buy or sell should we make a trade, but because the market says: Here is a real opportunity.
- And when we get in, we should not be on a nervous edge until we get out again. When we do this it is because we are not sure of our ground. We should make certain before we start. And only get out because the action of the market indicates it is time to close the trade.
- Continually the market is confirming or contradicting what it has previously forecasted. When it fails to do either, we have the sign of a neutral position and we should close out and stand pat until indications again become positive.
- We should make commitments only when all signs point to a probably profit. Our decisions should be made calmly and deliberately — not under stress or in haste as though this were our last chance to trade.
- And so, whenever we feel these elements of uncertainty, either in our conclusions or in the positions we hold, let us clean house and become observers until, as that eminent trader Dickson G. Watts wrote, “The mind is clear; the judgment trustworthy.”
Timing is Everything
- Three men came to Wall Street. The first always knew what was the best buy. The second knew why it was best to buy. But the third knew neither of these things; he only knew when to buy. He made the most money.
Be Constantly Watching Relative Movements
- The average man cannot judge which stock offers the most likely profit unless he is constantly analyzing its behavior, comparing its action with that of pivotal issues, and thoroughly understands the relative movements of all the leading stocks. Selecting the best opportunity simmers down to this: knowing just how, just which, and just when.
Never Overtrade [Dixon Watts]
- To take an interest larger than the capital justifies is to invite disaster.
- With such an interest a fluctuation in the market unnerves the operator, and his judgment becomes worthless.
Run Quick, or Not At All [Dixon Watts]
- Act promptly at the first approach of danger, but failing to do this until others see the danger, hold on or close out part.
Stay Out When in Doubt
- When in doubt, stay out. If you are in, and grow doubtful, get out.
- It is better to be out of the market for a week or a month than to make one wrong trade. Stay out and your judgment will clarify.
- Dixon Watts: Don’t enter the market on half convictions; wait till the convictions are fully matured.
Trade Active Stocks
- Are you riding a dead horse? Get off and get on a live one.
- Successful trading depends on a systematic control of losses and the securing of profits in excess of those losses.
- A stop-order a few points away is insurance against a large loss in case you are wrong.
- Let us be men. If we have losses in stocks, let us admit that it is because we didn’t play the game right. Why? Because we didn’t know the game.
Don’t Play Both Sides of the Market
- An investment position is a great handicap when you are trying to convince yourself that the money is on the short side.
Have a Trading Plan
- How many battles would General Grant have won had he planned them with as little precision as most people use in their stock market operations?
Don’t Average Down [Dixon Watts]
- Probably four times out of five this method will result in striking a reaction in the market that will prevent loss, but the fifth time, meeting with a permanently declining market, the operator loses his head and closes out, making a heavy loss — a loss so great as to bring complete demoralization, often ruin.
Average Up Only When an Important Advance is Expected [Dixon Watts]
- But buying at first moderately, and as the market advances adding slowly and cautiously to the line — this is a way of speculating that requires great care and watchfulness, for the market will often react to the point of the average.
- Failure to close out at the point of average destroys the safety of the whole operation.
- This method should only be employed when an important advance or decline is expected, and with a moderate capital can be used with comparative safety.
Never Put Up Cash on a Margin Call
- Your first line of defense is a top order — placed when you make the trade, or immediately after.
- If you fail to limit your risk at the inception, make a practice of looking over your commitments every day, or twice every week and selling out, at the market, all showing a loss. That will keep your sheet clean and allow your profitable trades to run until the time comes to close them out.
- Now suppose that you have ignored these two safeguards and that you still require a third line of defense. What is this third line of defense? It is this: Never put up cash in response to a margin call.
- When a broker calls you for margin, you have final, positive proof that your judgment was wrong when you made the trade…. you should by this time be convinced that the trades were made at the wrong time, on the wrong side of the market or in the wrong stocks.
- Instead of putting up more cash and hanging on to your weak position, confess that you have made a mistake. Tell your broker to close out those losing trades — at once. Take whatever loss ou have made and congratulate yourself it is no more, remembering that a loss is punishment for bad judgment.
Know When to Get out [Jay Gould]
- If the story of the men that Wall Street made rich were written, it would fill several books. If the story of the men that Wall Street made rich and then broke were written, it would fill a library.
- These men who became rich were in almost every case men of ability, good traders, and keen business men, but they overplayed their hand. They knew when to come in, but they didn’t know when to get out.
- The perfect speculator, the perfect gambler, if you will, must know when to come in; more important, he must know when to stay out; and, most important, he must know when to get out once he is in.
How to Know Whether the Trend is Upward or Downward
- We keep a record of the 100 leading active stocks. The percentage of these 100 stocks which are in a bullish or bearish position is in itself an indication of the trend of the market.
- Assess the percentage of stocks, out of the 100 leading active stocks, that are
- Indicating long down-swings of 10 to 30 points;
- Indicating short declines of 3 to 5 points; and
- Indicating long upward moves.
- [Tracking how the percentage changes among the different categories above] … is probably the most farsighted barometer that exists. We find that it forecasts coming changes from one to three weeks in advance.
- When the market turns from bearish to bullish, initially nearly 100% of the stocks are indicating long down swings of 10 to 30 points. That percentage would then decrease sharply. For those indicating short declines, those short down-swings would be indicated, then they would actually occur; then, having been accomplished, there would be fewer in the short-swing bearish position, which was evidence of a lessening of the pressure.
- [My note: I would presume that the way of assessing those “indications” would be to forecast target prices either based on support/resistance levels or based on Wyckoff’s P&F target price method.]
Keep a Reserve
- A reserve force should therefore be maintained and kept for supreme movements, when the full strength of the whole man should be put on the stroke delivered.
Taking a Neutral Position Clarifies the Mind
- No one but a floor trader should always be in the market. Those who trade from the tape in an office should assume a neutral position frequently.
- A neutral position clarifies the mind.
- Continually the market is confirming or contradicting what it has previously forecasted. When it fails to do either, we have the sign of a neutral position and we should close out and stand pat until indications again become positive.
- It is true that there may be times when a neutral position may lose an opportunity; but there are plenty of other opportunities coming along daily and weekly.
- Without any stocks, we are in a far better mental attitude and can judge what it is best to do next. With no open trades we see clearly.
Operate Like a Pool Manager
- He [Your Pool Manager] is continually trying to mark down his cost. His original line is accumulated at a low level. He sells some on the bulges and takes this back on the dips. These profits reduce the cost of his original line.
- He makes the bulges in order to bring in outside buying and to enable him to sell.
- Always he keeps an account of how much he is long and his average price — that is his position.
- He must continually foresee coming changes in the market and adjust his position accordingly. If he sees danger to his long position, he will get out and go short.
- He does not concern himself so much with the direction of the trend as he does with his ability to detect what is likely to happen, so that he will b e on the right side when it does happen.
- The individual trader who operates his own account can get long at the bottom of the swing, sell part of his line on manipulative bulges made for the purpose of letting the insider out of part of his line. Then he can take back this lot on a dip and thus mark down his average cost.
Problems with Value Investing
- It is difficult to make money when prices are high… even if you wait for the big slumps, the market is likely to keep on going down and eventually you find yourself tied up.
- This method makes money some of the time but of course, it ties me up frequently.
- If I waited for panics my money might be idle for several years. So, as I am in the business of investing for myself and others, I cannot let my capital remain idle. I admit the penalty is ‘being tied up’ but I don’t see how I can avoid this.
Qualities of a Speculator
- Self-reliance: A man must think for himself, must follow his own convictions.
- Judgment: Good judgment, is an essential to the speculator.
- Courage: Confidence to act on the decisions of the mind.
- Prudence: Power of measuring the danger, together with a certain alertness and watchfulness. The mind convinced, the act should follow. Think, act, promptly.
- Pliability: The ability to change in opinion. He who observes, and observes again, is always formidable.
Dow Theory Doesn’t Work
- Alfred Cowles analyzed all of Hamilton’s (author of The Stock Market Barometer) market calls over a 26 year period, and concluded that the Dow method as interpreted by Hamilton earned a total return of 12% per annum compounded from December 1903 to December 1929. In the same period, the [Dow Jones] industrial group made a profit of 15.5% per annum compounded. Hamilton failed by a considerable margin to earn as much as he would have made by an outright continuous investment in the industrial averages.
- As Hamilton himself wrote about that pet part of the theory in which one average breaks out of a line, this indication is “sometimes misleading,” “frequently misleading,” “constantly misleading,” “independent and therefore untrustworthy,” “usually deceptive or invariably deceptive.” All these terms Hamilton employed in describing the break through feature of one average.
- As to the “confirmation” given by one average to the other, he uses among others, the terms, “more apt to be deceptive than not.” And “merely a coincidence when it happens to occur.”
Insiders Don’t Know How the Market Will Treat Their Stock
- A trader writes: I personally know a man who has been associated with one of our largest corporations for nearly thirty years. He holds a responsible position with that company, and knows more about its inner workings than any average outsider. Early in July, last year, based upon what he knew about the company’s immediately past and future prospects,he sold his last 500 shares at 24 with the expectation of re-purchasing it at 15. At the very moment he was selling out, your way of forecasting indicated it was going from 24 to 40. It more than made good by rising above 42, which again proves that the action of the market is a safer guide than the opinion of any insider.
Daniel Drew on Starting a Bear Campaign
- In order to start a bear campaign, you must first balloon the stock sky-high. Because when you are a bear you sell when the stock is high, and deliver when the stock is low. Your profit is the difference between those two figures — the greater the difference, the greater the profit.
- Besides, it is usually easier to put out a line of shorts when the market is high. Through some kink or other in human nature, the ordinary run of people are bullish and hopeful towards a stock when it’s high. The stock has gone up so finely, they suppose it’s going to keep on going up, and you usually find them ready buyers of your short sales.
Three Types of Men on Wall Street [from Jay Gould]
- Builder / Projector – There is the man who is by nature a builder. He is only incidentally in Wall Street because that is our financial center. his activities are mainly in enterprises scattered about the country, in all of which he is deeply interested. This type, the builder or projector, is not always a good trader. He visions enterprises and sees them through in the physical aspect. If he starts a railroad he sees the road through from the very beginning to the very end. His satisfaction comes from accomplishment. Vanderbilt was an example of a successful projector.
- Banker – The second type of man is in Wall Street is the banker. He acquires money by possession and its adroit use. Morgan was an example of a clever banker.
- Speculator / Manipulator / Gambler – The third type, the real Wall Street man, the man whose interests are bounded by the East River and the Trinity Church, is the speculator, the manipulator, the stock gambler, if you will. This type, the manipulator, must first be a good trader.
- The old clothes man is in a sense a good trader if he can persuade you to part with the suit you need, but his imagination is limited to your back doorstep. The small dealer is a trader. “It looks like snow, boys,” said the Finns, for they had snowshoes to sell. They believed in advertising, and they worked by suggestion. That is why we use Ivory soap.
- The large manipulator, besides being by nature a trader, must have an active imagination which sees things in broad outlines. He must envision what is not visible, he must believe in this seeming mirage, and must have the courage and the nerve to gamble on the product of the imagination. The man who conceives complicated plans, sees them through clearly in his mind and has the courage of his faith, — that man may be a manipulator. These are some of his affirming qualities; but there must also be lacking in him, at least until business is over, those lovable human frailties which go under the name of pity, of generosity, of mercy.
Bucket Shops are Forced to Make Money
- The bucket shops make money because the public takes small profits and big losses. This forces the bucket shops to take small losses and big profits.
How Do Newspapers Know It Is Profit Taking?
- Whenever the market pops up for a rally and then reacts, many wise newspaper writers label it “profit taking.” To determine that this really is the cause, they would have to ask all the sellers all over the world: Were you taking profits? Then they must calculate whether the total sales of those you were taking profits exceeded the combined total of those who were taking losses, getting out even and selling short.
- Why not say:The market reacted because at that time there were more sellers than buyers? And tell us, scribes, about those rare instances where someone takes a loss. We’d feel better.
- Speculation as a Fine Art by Dixon G. Watts (a leading operator in Cotton)
- The Book of Daniel Drew by Bouck White (link here)
- Jay Gould — The Story of a Fortune by Robert Irving Warshow