The Wyckoff Wave

Common sense ain’t so common.

There are myriad opportunities on the lesser time frames and Wyckoff can certainly help with that trading style. But to get to the fullest potential offered by the Wyckoff Method, it takes time for analysis and a lot of ‘wait-and-see’ while markets develop. As you may have surmised, the Wyckoff Method is a very Low Risk, High Reward system. For the lesser time frames patience is a virtue. For the Wyckoff Method it is a strict prerequisite.

The lesser time frames cut the ‘wait-and-see’ time by increasing risk and taking much smaller profit per trade. This is not necessary in the upper time frames. Evan Echoes, in lecture 9A & B, recommends a watchlist in the neighborhood of 25 securities to cut the ‘wait-and-see’ time down between trades without making cuts in patience or risk:reward.

I think this could be easily accomplished. Pick a security, mark up some charts, trade it. Then begin adding more securities from different sectors and industry groups.

This part of Lesson 2 describes two more advantages to a Wyckoffian trader: How to pick a Security, and How to trade in Harmony with itsmarket. Unfortunately, most of the remainder of this Lesson is about models and indicators that are, IMO, impractical for the everyday investor who is not affiliated with the Wyckoff Institute. One is the Wyckoff Wave and another is the Optimism-Pessimism index. (There are more. The Institute is getting like TradeGuider with dozens of indies.) However, there are still some valuable lessons to be learned here.

Market Harmony (The Wyckoff Wave)

The Wyckoff Wave is a good idea…

There are many instances where a particular stock appears to be ideally suited for an important move, and then performs quite poorly. The reason in most cases is that the condition of the general market is working against the stock. Trading should never be done against the market. it can be successful, but the likelihood is small. The best and most frequent profits come by trading in harmony with the market

It must represent the market, must be sensitive enough to be of value to traders in all time frames, and must be monitored in a way that results in the most complete detailed picture of the market’s action.

The Wyckoff Wave is a group of stocks considered top performers in each of the main sectors: Energies, Finance, Technology, Utilities, etc. Grouped together and weighted by their performance, they make up the Wave which is plotted and tracked on a chart just like any other price. The Institute considers this to be the best benchmark for tracking a stock’s “Market Harmony” and Relative Strength”.

“Sensitive” and “representative”. There is probably no single indie that could do this in all markets. But I think there is a group that could accomplish this – maybe better than the wave.

Basically the Wave is about not taking a position out of sinc with the market. For instance, your security is an outperformer but it is going up in a down market. Not a good idea to trade it. Also, the Wave is about…

Relative Strength

How is your security relative to its sector or industry group? You can find your sector/industry group, or pick a better sector/industry group, from the links below. The make a new performance chart, “PerfChart”, by combining the sector/industry group and your security on one chart.

Picking a Security

There are a bunch of methods to go about this. The most difficult is to start with a security. You can scan then compare them to a sector/industry group one at a time, then analyze each possible one you find.

I think it would be easier to find an outperforming sector then look through it for outstanding securities. So, what do I mean by “outstanding securities”? First, I would look for a price that wasn’t too low – nothing under $5.00 USD. Then it should have average volume of at least 1 million a day. If so, I would check the chart to see if it had a good base or in a trend that wasn’t too much past the 3rd point that confirms it. This will quickly eliminate a lot of potential candidates.

Once the basics are found to be good it’s time to check its relative strength. It needs to be outperforming its sector.

 

You can find securities in that sector at finviz.com. Here how I set up the screener:

Set “Order:” to “Return on Equity”. This tells a lot about the fundamentals of a company.
Set “Desc” and you’ll get the order top performers first.

Then put in any criteria you want.

I set “Sector” to “Basic Materials” “Industry” to “Oil & Gas Refining & Marketing” and got 28. The first page had several showing trend or base patterns. (Hover the pointer over the symbol link to get a small – quick glance – chart. If you click the symbol link, you’ll get a lot of info about the company and a bigger chart.)

When you find something you want to analyze, do it. Then…