Wyckoff’s Course

First let me state that I am wondering about Mr. Tom Williams and his book which is commonly referred to as VSA. It appears, as I read more and more of Wyckoff, that Mr. Williams contributed less and less to his own book and methodology. Those who have studied VSA and are busy studying Wyckoff can help me determine how much VSA is actually Mr.Williams. Maybe we can reduce his book to a phamphlet by removing that which is Wyckoff. So far it seems VSA is not “Wyckoff on Steroids”, but some CliffNotes on Wyckoff? Then again, how much of Wyckoff is Wyckoff and how much is “Hoyle” who wrote “The Game in Wall Street”, published in 1898?

This course’s details are not at all hard to understand, there are just so many of them and they are all vitally important. It won’t take a genius to learn this (Thank God or I would be out!). Nevertheless, it will take a massive amount of practice. And the course comes with cheat sheets: look in the “UNIT 3” folder and check out “Definitions.rtf” and “Important Points.rtf”. There are also some documents that go back over the material in a different order and from a slightly different perspective at times.

Now on to Lesson 2 which I find is too big and filled with too much info so I will break it into 3 parts. It is no wonder Wyckoff sometimes only placed one trade a month. His analysis is exacting and, for now, overwhelming. This reminds me of one of Jesse Livermore’s great lessons: learning to sit on his hands, that is, patience. Also included in this lesson is another surprise or two.

Anyhow, Part 2 will cover Point and Figure Charting and get into the very heart of trading – buying and selling:

If a stock or the market is found to be inoneof the prime buying or selling positions, it is still only a potential buy or short sale and not an automatic trade. The reason is that the favorable trading position fails to provide a particularly crucial piece of information. This is an indication of how far the anticipated move is likely to carry the price. Unless the preparation in the trading range builds a potential fora worthwhile move, no action can be taken no matter how obvious the opportunity seems to be. A measure of this potential can be made through the use of figure charts, and a concept known as counts or counting.

This section will include the buying and selling tests.

Part 3 will cover Analyzing the General Market:

Thus far, the discussion has been of principles and procedures as they appiy to one particular stock. The purpose in this is to simpiify the presentation of the various concepts. When it comes to actuai trading there is more than just one individual stock, There is a whoie market of stocks. Taken together, they represent the generai market. Aithough no one investor can trade the whole market, he is trading in the market, Therefore, the concept of the market is a force that must be reckoned with. 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 generai market is working against the stock. Trading shouid never be done against the market. it can be successful, but the likelihood is smali. The best and most frequent profits come by trading in harmony with the market.
Starting in Lesson 2 Wyckoff felt it necessary to begin by going over the Three Laws again, so I’ll start with them, too.

The law of supply and demand is of greatest importance. If the demand to buy a stock is greater than the available supply, the only way that the demand can be satisfied is for the price to rise to a point that draws in enough supply to meet it. When this point is reached, the price stops advancing. If the supply of stock to be sold is larger than the offers to buy, the only way that the supply will be absorbed is for the price to drop, to a point that draws in enough offers to buy to soak up all the shares. When this happens, the price stops declining.

The law of cause and effect, basically, tells us that we cannot get something from nothing. When the market enters a period where demand exceeds supply or, where there is an excess of supply over demand, it is not just a freak occurrence. Each of these comes out of a period of preparation and the extent of that preparation has a direct and inseparable effect on the final result. If there is no preparation, there will be no move.

Finally, there is the law of effort versus result. The market, or a stock, is continually attempting to go one way or the other. These attempts may be very short in duration or quite lengthy. Either way, they represent an effort generally expressed in terms of volume. When the price responds to the effort, an important price movement is likely. When the effort and result are contrary in nature, there is likely to be an important change in the direction of the price.

I don’t want to be restating Wyckoff or trying to interpret him, but…I want to lay out what I’m thinking and, hopefully, get it corrected if I’m wrong. I stated in the discussion on the last lesson about the law of Cause and effect that:

“From Wyckoff’s 2nd law of Cause and effect. I am not sure, but I think he is basically referring to greed and fear.”

So, when looking at a chart and keeping in mind the game of psychological warfare being played out, the cause would be SM’s working of the herd to instill confusion and turned it to greed or fear. I believe this is what Wyckoff is getting at when he says: “Each of these comes out of a period of preparation…”

Period of preparation = psychological setup.

Of course, Wyckoff wasn’t simply referring to some ephemeral idea of psychology but to specific chart patterns showing the setup – which is gone over in specific detail in this lesson.

There is a lot about entries and exits here, too. They are referred to in a general sense.

Defining Trends

A big surprise. I thought I knew something about drawing trendlines. How wrong I was. It is not just about connecting some dips and rises. The dips and rises used must meet certain specific criteria. Then, once these are drawn after a trend sets in, the rest of the trend is analyzed. It is amazing how his method of laying out trendlines is not just setting a standard to follow, but loaded with reason and purpose. (With 60 years analyzing the markets and I don’t know how many teaching students and correcting their mistakes, maybe it isn’t quite so amazing.)

An uptrend channel is formed from a support line and an overbought line. Of these two, the support line is the most important. It is the clearest representation of the stock’s line of least resistance. To define a support line requires two points. These are not randomly selected. Rather, they are to be the low points of two consecutive reactions of similar importance where the second is at a somewhat higher level than the first…There are often several pairs of points that can be used to define the support line, but there is always one pair that is better than the rest.

The construction of the overbought line is tied to that of the support line. Between the two consecutive reactions used to draw the support line, there will be a rally. The point at the top of that rally is used to form the overbought line, It passes through that point and is parallel to the support line. As long as the stock remains within the boundaries of the uptrend channel, long positions are justified. Should it cross above the overbought line, there arises too much danger to take any new positions and profits already established become more precarious. This is when to sell positions or securely protect them.

And the details used to draw trendlines isn’t just about learning to draw trendlines. There is nothing basic here and drawing trend lines is not a general concept. Wyckoff is quite specific about how trends develop into overbought/oversold conditions where acummulation and distribution takes place and turns a trend into a new phase. It all fits and comes together so nicely I can only call it brilliant!

Of course, there are up, down and sideways trends. (Whew, no surprise there.) The sideways trend. or Trading Range, is most important as it is either an accumulation or distribution phase and will reveal when and which way the new trend will head. The ending of an up or down trend is very important to recognize for exiting a trade. There are specific moves in a specific order that define the end of a trend. It is in the sideways trending range that SM (the Composite Operator) shows itself with several very specific moves.

Thrusts

It is rare for a stock to move directly from the level of preparation to the objective of a move in a straight line. Instead, the objective is normally reached through a series of pushes in the direction of the trend channel, which are separated by resting spells. These pushes are referred to as thrusts. In order for an up or down move to remain alive, each successive thrust must be able to penetrate the ending point of the previous push, and add to the net progress made by the entire move. If a particular thrust is unable to make any new progress in the direction of the trend, it is a warning that the move may be very near its culmination and that the time to close out positions may be at hand.

Then comes the three prime buying/selling positions in up/down trends. This is where volume comes in to define the price action (effort vs result) by the quality of reactions and rallies within a trend. The “halfway” points are important here so throw up those fib levels on the reactions/rallies and keep an eye on that 50% line. But keep the other eye on the expansion/contraction of volume! The culmination of up/down trends ar found when price moves into overbought/oversold regions.

Trading Positions in a Trading Range

We have arrived at the exciting (dreaded) acummulation/distribution phases.

Investing or trading in established up and down trends is generally the most reliable and safest type of action. Those who wait for a trend to become clearly established, then trade in harmony with that trend, and eliminate positions when the future of the trend is in doubt are facing a much greater likelihood of a profit than those uneducated investors whose actions are strictly random in nature.

By reviewing the examples it is apparent that the amount of time a stock spends between the point that a trend becomes a clear reality and the point that atrend’sfuture is put into doubt isa minority of the total amount of trading time. This indicates that the amount of trading done is not necessarily a factor in the overall success. Fewer commitments timed more carefully produces better results than many trades based on action that is unconfirmed. This fact was proven by Mr.Wyckoff himself when he experienced some of his best results from making just one trade a month.

First a downtrend stops with two closely related points of action known as preliminary support and a selling climax.

Extremely heavy or light volume works against a continuation of the decline by starving it in the case of low volume or killing it in the case of very high volume.

Once the supply is exhausted at the selling climax, there will be an automatic rally. Keep in mind that SM starts acummulating before the end of a down trend. As they near their profit target they cover their short poitions and start acumulating long positions. Then, before they start the next mark up phase (up trend) they will test to make sure they hold all the supply and shakeout anyone still holding any supply.

Still, with all the tests, shakouts, rallys, reactions in up, down and sideways trends, it is not time to make a trade. The trade is in sight and Part 2 will bring it close enough to touch.

Some advice from 60 years of experience trading and teaching:

In deciding what type of trading to undertake, many students of the market make their first major mistake, and it can be a fatal one. It does not take too much intelligence to realize that the action of the market or a stock consists of more short term trends than long term trends. This means that there must be more potential opportunities for profit and therefore more potential profits. The logical conclusion then is to go after the short term moves. All of this is true with the exception of the conclusion. Success in any type of investing is primarily a matter of good timing. Success in short term trading, however, is a matter of perfect timing.