Wyckoff 101 - Part 1: The Background
Welcome to Wyckoff 101. My aim through this collection of articles (unsure of the total amount at the moment) is to take you through what Wyckoff is, how it’s used and why I plan my trades with Wyckoff. If the demand is there for it we’ll expand to cover off schematic use, live examples and ways to continue the discussion.
I will add that I find PA incredibly helpful as a companion to Wyckoff, the ability to find levels that match with Wyckoffian schematics is important to ensure you’re not entering in less favourable positions. If you want some reading while I’m creating the rest of this resource, please check out these fantastic PA analysts (and watch TraderMayne’s YouTube videos):
It makes sense to start with the background, who was Wyckoff, where did this idea come from, what do we mean when we talk about “Wyckoff” and is it successful? What better place to start than…
The Beginning
Richard Demille Wyckoff (1873–1934) was an early 20th-century pioneer in the technical approach to studying the stock market. He is considered one of the five “titans” of technical analysis, along with Dow, Gann, Elliott, and Merrill. At age 15 he took a job as a stock runner for a New York brokerage, then he became the head of his own firm while still in his 20s. He also founded and for nearly two decades wrote and edited “The Magazine of Wall Street,” which at one point had more than 200,000 subscribers. Wyckoff was an avid student of the markets and an active tape reader and trader. He observed the market activities and campaigns of the legendary stock operators of his time, including JP Morgan and Jesse Livermore. From his observations and interviews with those big-time traders, Wyckoff codified the best practices of Livermore and others into laws, principles, and techniques of trading methodology, money management, and mental discipline.
We work in irrational markets, an investor who is trying to remain calm and keep their head clear can easily become frustrated or confused by new methods of selection, timing and predicting market movement. Wyckoff advocated a return to basics (or the approach he never deviated from.)
As far back as the 1930’s, Richard Wyckoff, a self-taught broker, promised to reveal the “real rules of the game.” Here we are nearly 100 years on still discussing Wyckoff’s method of trading. Wyckoff was a stock broker, he saw first hand that “the basic law of supply and demand governed all price changes; that the best indicator of the future course of the market was the relation of supply to demand.” His theories are applicable across a range of markets.
Wyckoff published the first technical analysis method in 1908, and in 1911, he began sending his clients weekly forecasts, utilising charts with price and volume movements and his own analysis. Wyckoff was consistently disagreeing with analysts who were using charts for buy/sell decisions, he believed, “Stock market technique is not an exact science. Stock prices are made in the minds of men.” (We’ll cover this more in a later article as he begins to touch on the role of the Composite Operator (CO).)
In his opinion, purely mathematical or mechanical chart analysis could not compete with finely developed, practiced judgement. He often ignored financial reports, news items, earnings reports, rumors, brokers’ tips, and was especially scornful of “half-baked trading theories expounded in boardrooms and popular books on the stock market.” I guess the more common reference for the majority of people reading this is if you replaced “rumors and brokers’ tips” with “Twitter and Discord.”
He was especially scornful of “Half-baked trading theories expounded in social media groups.”
Exploring the Method
Wyckoff believed that an analyst should be a detective, their role is to uncover the forces behind price and volume fluctuations. He was a market psychologist, weighing the human motivations that fuel these moves, and a general who is planning a financial campaign to intercept stocks when the charts showed they were at their most profitable stage.
Wyckoff had a set of very simple goals, they should not be any different from yours today:
- To select only stocks that will move the fastest, the soonest, and the farthest in a bear or bull market
- To limit losses and let profits grow
- To make the most efficient use of your investment capital
Wyckoff’s popularity as an analyst grew dramatically, and his newsletters were in huge demand. After over 40 years in the market, he continued to teach a method based squarely on the law of supply and demand. “When the demand for a stock exceeds supply, prices rise; when supply is greater than demand, prices decline.” (Pretty damn simple right?) He compared the stock market ticker tape to a movie, saying, “Every minute of the day it is demonstrating whether supply or demand is greater.” I mean I appreciate entertainment wasn’t as diverse as we have now but jeez… served him well though.
The Wyckoff method charts price and volume and their relationship over time. These are the only things you need to utilise on your chart, price and volume. You don’t need anything else.
The goal is to judge how the market, groups of stocks, and individual issues are reacting to the supply and demand struggle. You are looking for turning points — the final high of a bull market or the last low in a bear market. Our approach as Wyckoff analysts is to spot peaks and troughs of the intermediate moves that appear in between as well.
Wyckoff’s theory is guided by the fact that every change in the market is made up of waves of buying and selling that will go on as long as they can attract a following. When the following is exhausted, that wave ends and a contrary wave begins. Small daily waves gradually develop into larger waves, which eventually build into a bear or bull market swings. If the wave is significant, Wyckoff acts harmoniously with it.
Lastly, Wyckoff used Point and Figure charts, particularly during buying and selling tests. This is something we tend not to use any more, I personally don’t dive into P&F unless it’s an unusual situation that calls for it. I remember only one occasion recently on our touch of 5.8k BTC in June. P&F is primarily used for:
The direction in which prices are moving
The most opportune time to buy, sell, or close out
The prices in which a stop order should be placed
Concluding
Here’s the thing, once you get to know and understand the Wyckoff method it is a direct and uncomplicated approach. It allows you to trade less and make more, with the right application. You need price and volume, nothing else.
Through this series of articles I will bring out the finer details of the Wyckoff method and show you some working examples. The current approach I have for this revolves around the following topics:
Introduction
Glossary (Particularly helpful as we essentially have our own language)
Accumulation
Distribution
Market Cycles
Re-Accumulation
Re-Distribution
Live Examples
…
If there is anything you would like to see added to this list please feel free to drop me a message on Twitter or through Medium.
