Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Profit from Wyckoff’s Timeless Methods
08/31/2011 3:30 pm EST
Richard Wyckoff is a technical analysis pioneer whose methods still work in the present day, explains Corey Rosenbloom, reviewing how Wyckoff’s teachings can be used to analyze the markets.
Some technical traders use theories from way back when or early on in the markets to help them make trading decisions. One of those traders, or theorists, was (Richard) Wyckoff, and our guest today, Corey Rosenbloom, is here to talk about how he uses his theories.
Corey, who is Wyckoff and why is he important to your trading?
Richard Wyckoff is an old school technical thinker, which we call him a “modern;” he’s not as popular, let’s say, as Charles Dow, or the thinkers in that sense, but Wyckoff was in the midst of that thinking, and he was a very influential thinker at the time, and his methods still hold sway today.
Really, he built upon Charles Dow’s methods of accumulation. He’s most famous for the life cycle, or the general composite investor looking at that type of methodology in terms of accumulation, where the large institutions are buying when the price is being held down or there is not a whole lot of price action going on.
Charles Dow called that “realization.” Wyckoff simply called it “markup,” and people are coming into the market buying a stock and accumulating it.
Then the final stage was a distribution phase, when institutions were coming out of the market, and let’s say the new, smaller investors are coming in in euphoria when the market is at a new high. The institutions are distributing.
We’re looking for divergences, looking for non-confirmations at the highs. That’s where Charles Dow stopped, in his distribution. Wyckoff took it a step further and said there is a “markdown” phase, and really, he uses a lot of his work in volume and internals, confirmation, non-confirmation, and purity in the price.
How do you implement his theories into even short-term trading? That sounds a little long term, but you somehow integrate the two together.
Exactly, what I do in my intraday trading is take swing trading methodologies and then interpolate them on the intraday charts. It’s a little bit different though, and most traders do just use volume and momentum, say intraday, and take a stock in movement. I’m looking at confluence levels, looking at the holistic picture.
NEXT: Recognizing Important Signs of Strength and Weakness|pagebreak|
Wyckoff teaches price confirmation. At the beginning of any kind of move, there will be a surge in momentum; we call these Wyckoff signs of strength, or if it’s a downside burst, a Wyckoff sign of weakness.
In the beginning of an uptrend, the downtrend will be going lower and there will be an initial sign of strength. We may see a surge higher in volume on what looks on the price chart to be nothing more than a random rally in the context of a downtrend, but if we look behind the scenes, as Wyckoff teaches, at volume—he looked at breath—we look today at TICK, which is the difference in the stocks that are ticking higher or lower as a market internal.
See related: Trading with the NYSE TICK Indicator
These kinds of things—and momentum also—are almost like an impulse or burst. That can distinguish what to most people seems to be a random upswing and a beginning of a new trend.
Of course, as that trend matures, we say the opposite. We see non-confirmations toward the end. It could be a five- or one-minute chart, and then of course, a signal that kicks to the downside, which is a Wyckoff sign of weakness. A new TICK low or new momentum low or new impulse low on the indicator when the price is not making a corresponding low.
Does Wyckoff do anything to help us with stops; about knowing when we’re wrong and when to get out?
Sure, Wyckoff was actually a tape reader. He’s famous for a couple of publications in that, so he uses a lot of price purity.
Price, if there’s an assumption that price should make a movement in one direction, it should not, therefore, take out prior lows if it should be going up. Stop losses should not be placed magically or randomly, but in the places the price should not go.
If that does happen, that should create movement; it should create action and impulse, and maybe in some sense, panic on the side of those who were thinking it was going to go in one direction but it went the opposite.
Therefore, the stop-loss logic, or exit logic, when wrong should match the entry logic when correct, when putting on a position. In other words, one should not be spooked out by a random candle.
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