This is the 2nd volume of Stock Market Technique by Richard D. Wyckoff. The book review for the 1st volume can be found here (link).
This 2nd volume captures the articles published in the magazine Stock Market Technique from August 1933 to July 1934, inclusive.
My comments for this book are similar to my comments for the 1st volume. Much of the book alludes to a highly accurate and profitable method [tape reading] but did not really go into details, and the book also spends time disparaging other methods. Nonetheless, there are still good tidbits of knowledge in the volume.
My main takeaways from this book are two: (i) play for the big swings, the big money is not in the small fluctuations, and (ii) ideas are ephemeral, you need to quickly grasp them and develop them to their full potential.
On the first main takeaway, I have recently switched my focus from intermediate term swing trading to intra-day futures trading, and the more I delve into intra-day futures trading, the more I am realizing that moving to a higher time frame and playing for the bigger swings comes with so many added benefits:
- Improved accuracy in interpreting market action, which translates to improved win rate. Large institutional players play for the big moves, they have no choice. Interpreting their overall actions by looking over a longer period of time improves the accuracy of interpretation tremendously. I do appreciate that intraday scalpers are able to achieve very high win rates. While that is certainly achievable, the learning curve is way steeper than learning to interpret longer-term plays.
- Less susceptible to being whipped around by games played by the sharks. Sharks can manipulate the markets over a short time frame, but when you use basic conditions as your allies, no shark can swim against the tide for long.
- Much better emotional stability. Instead of having your heart suspended by every incoming tick, going for the big swings allows you to approach the markets in a more calm and logical manner which leads to better decision-making.
- More profitable. This is a view echoed by Jesse Livermore, but is of course arguable, as there are many purportedly successful intra-day traders that make millions each year. Nonetheless, my view is that a longer term time frame allows you to capture much more of the daily range compared to intraday traders that try to capture a small % of each day’s range.
- More time flexibility. While there is a rise in systems / automated trading, discretionary intraday traders need to sit in front of the screen ready to pounce as each opportunity comes by. If they don’t put in the screen time, they don’t make income. This is compared to longer-term players that have much more flexibility in organizing their time to perform analysis, while requiring minimal screen time to monitor positions and make adjustments.
- More scalable. While this issue only comes into the picture when you have a decent pot of gold, longer-term strategies are more scalable compared to intraday strategies. I am not aware of any hedge fund that manages billions of dollars by only implementing intraday strategies.
On the second main takeaway, I often have the experience of ideas popping into my head as I go through various trading / investing materials, but I frequently did not follow-up on develop those ideas, and they just get forgotten or unattended for months or years. By the time you get back to them, you would have forgotten the essence of that inspiration. As such, I try now to quickly put in a decent amount of work into ideas that I have, so that when I revisit them again, the core has been thought through or developed, which facilitates any further work.
In conclusion, this book is a decent browse for Wyckoff fans, but if you are looking for details on methodology, you should go for his course materials instead.
Selecting the Best Opportunities
- The accumulation of a stock on a large scale may be compared with the loading of a gun with powder. Absorption the stock not only gathers it into one large holding but at the same time reduces the floating supply around the level where the accumulation takes place.
- In selecting the stock which promises to yield the greatest profit in the shortest time, we must therefore use some means of calculating the forces that generate the rise, or the decline.
- We must also estimate the probable resistance to be encountered as the stock starts on its indicated journey to its objective.
- In an up-trend we discard all groups and stocks that are in a bearish position because we must always trade in harmony with the trend of the whole market. Then we discard the individual stocks that promise to move only a limited number of points, for we prefer moves of 10 to 30 points.
- By a technical method of calculating whether a stock is in a bullish, bearish or neutral position and how far it should travel when it starts, we are thus able to select the one, two, five or ten best opportunities at the moment.
Buying on Bad News
- A strange coincidence applies practically to all stocks under manipulation: The bad news generally comes out at the bottom and the good news at the top of the swings.
- The public usually buys on the good news and sells on bad. Insiders and professionals do the opposite.
Judging Strength or Weakness by the Half Way Points
- There is advantage to be gained by watching the half-way points on rallies and reactions as a basis for judging strength or weakness.
- When a stock advances two points and then reacts one point, it may be called a normal reaction; but if it reacts less than a point, it gives us an indication of strength. If it reacts more than a point, there is an indication of weakness.
- A stock advances because the buying power is greater than the selling power; but if it does not hold this advance: if it immediately reverses and loses all or most of what it has gained, this tells us that someone at once took advantage of the strength and sold the stock back to its starting point by offering more shares than the buyers were willing to accept.
- The same illustration may be applied to a drive down of say three points more or less, followed by a recovery of practically the same amount. This is a sign of strength: the rebound showed that there was more strength than weakness. This sign is more bullish than bearish because the sellers, having spent their force, are met and overcome by the buyers, who, at the moment of completion of the recovery, are in a comparatively strong position.
- They have taken all offerings on the way down and whatever stood in their way on the advance. The floating supply is thus reduced; unless further offerings appear higher up that they are not willing to take, the way is then open for a still further advance.
Play for the Big Moves
- Livermore, after years of stock market vicissitudes, realized that this man Partridge had the right philosophy. The big money was not in the small fluctuations but in the main swings. That is to say, old Partridge, when he once got this position, held on to it until the main trend had about run its course.
- Most of the big stock market profits of operators of large calibre, have been made by following this same principle.
It’s Not the Kind of Chart, But Your Ability to Interpret That Counts
- They [charts] show what is going on now and what is likely to happen in the future — near or distant.
- Charts reflect the development of forces that are likely to act as soon as they are strong enough to overcome the resistance that opposes them. They present in graphic form accumulated evidence as to whether or not this resistance will be overcome.
A Pool Out Of Thin Air
- Many of Edward Wasserman’s campaigns were started out of thin air. One day when the tape was barely moving, he said to the clients in the office: “Let’s make up a little pool in Southern Railway and start a move in it. I’ll buy a thousand if you will.”
- Eddie went over on the floor and bought a few thousand shares all at one price. Then he called up friends and told them there was going to be a move in Southern Railway.
- When all these trades appeared on the tape in such an absolutely dead market, it did look as though something had started. Here was a chance for some of the thousands of people sitting around hundreds of ticks all over the country to get a little action. Outside buying orders began to come into the crowd; in a few minutes Southern Railway was up a point and a half.
- Eddie and his friends quickly took their profits. The evening papers said Morgan had been buying Southern Railway.
How a Successful Floor Trade Operates
- His [Isaac N. Spiegelberg] method was to select one of the most active stocks and stay in that crowd day after day, familiarizing himself with the peculiarities of its movements and getting an insight into the manipulation of it.
- Constant observation showed him that his success or failure depended largely on his ability to follow the immediate trend, and to turn quickly if he was wrong.
- But he explained that the most important thing in floor trading is to cut your losses short and go with the stock as long as it travels your way.
- The most accurate guide, he claimed, was the tendency and the technical position of the market.
No One Wins What Others Lose
- The losses that you incurred occurred while you held the stock — not at the time you bought it, nor at the time you sold it. It was purely an inventory loss. The property went bad on your hands, which is another way of saying that “Paper losses are real losses”.
Extract the Full Value of an Idea
- The most important thing in all life is an idea, and an idea is born in a second.
- We should realize it, concentrate on it, use every effort to extract the idea’s full value, for it often leaves us the next second never to return again.
- Millions of men have had thoughts, conceptions, ideas that might have made them important in the world’s history, and have never amounted to anything because, while the thought was born, nothing was done about it.
Concentrate on a Limited Number of Stocks
- In stock trading it has often been proved that attention on one or two, possibly three stocks is a satisfactory course to pursue.
- A trader would do well never to handle more stocks than he can study intensively and watch constantly.
- By concentrating on not more than three stocks, you will become so familiar with their every little movement that the slightest change will have significance for you. You will be able to interpret the action of these stocks far better than the casual observer. And that is all you need do to make money.
- There is a man in New York who has been concentrating on Steel for 25 years. He knows its every habit, idiosyncrasy and peculiarity better perhaps than any other person in America. He never buys or sells anything but this one stock, and makes money out of it all the time.
A Small Trader Should Be a Hitch-Hiker
- Even if it be admitted that at certain times and under certain conditions prices of individual stocks may be influenced temporarily, the small trader should appreciate that all of this manipulation, involving certain price swings, is conducted without personal expense to him.
- The small operator often fails to realize he has the same privilege as anyone else of observing from hour to hour, day to day and week to week, manifestations of the Law of Supply and Demand as disclosed by prices and volumes on the ticker tape. If he observes these facts in sequence, he may record them, correlate them, and interpret them in a manner that will give him practically the same information as is in the possession of individuals or interests heavily committed in the market for his favourite stock.
- He can see accumulation or absorption of the stock from day to day, and final preparations for the upward swing.
- He may observe signals that are usually disclosed as the prepared move gets under way. He can do all this with practically no expense or risk.
- The small trader should imagine himself as a hitch-hiker in the market. When he sees a chance that offers reasonable odds in his favour, where the probability of profit far exceeds the risk, he buys, limits his risk and awaits developments. So long as the stock behaves properly, in accordance with technical action that confirms his original judgment, he maintains his position.
- As soon as he finds the stock has reached its indicated objective, approximately, or begins to waver in its stride, or passes through a set of maneuvers that clearly indicate supply is increasing, and a reactionary movement seems imminent, he acts on the information thrust upon his attention and gets out.
Watch the Whole Market
- The action of the whole market tells you when the selling is better than the buying and vice versa.
- The action of a single stock is its own best forecaster.
- To become a successful trader, you must learn to judge by the action of the market. It is the action of the market which carries the greatest influence with the insiders.