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Old 06-22-2013, 03:38 PM   #1 (permalink)
 
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Wyckoff 2.0


I’ve been studying the markets and trading for the last two years and I’ve decided to finally start a trading journal. For anyone interested in following I thought that my first post should be an overview of my methodology.

First – about me – I used to be a professional poker player for eight years. When the Department of Justice decided to shut down on-line poker for US players I had to hang it up. I was a 35 year old with a huge hole on my resume and no interest in working for someone. I had also heard and read that poker players tend to possess the mental and psychological skills required to become successful traders. I decided to take the plunge.

So I decided I wanted to become a day trader and I did the next logical thing. I went to the library and read every book they had on trading. A lot of it was very repetitive and most of the material didn’t resonate with me. I instinctually knew I wanted to find something that was simple and discretionary but everything I read was about indicators or patterns or Fibonacci. None of this resonated with me so I kept digging and started reading the works of traders that were successful before the computer came on the scene.

This brought me to Gann, Dow, Livermore, Andrews, Taylor and Wyckoff. Andrews’ median lines, Taylor's Trading Technique and Wyckoff all appealed to me and I began studying their original material and derivations exclusively and I haven’t looked back. (For those interested you can find Andrews’ original course here: Original Alan H. Andrews Course Material...cleaned up and transcribed.........NQoos-TradingNaked and Wyckoff’s original course here: https://cdn3.traderslaboratory.com/f...pe-reading.pdf) There are copies of Taylor's original book floating around the internet as well.

In the course of research and study I came across Timothy Morge’s site: Market Geometry - Home as well as David Weis’ material (his site is: Learn the Richard Wyckoff Method of Trading from David H. Weis). After studying Morge’s material I decided pitchforks work best for me as a day trader for finding areas to initiate a position and areas for taking profit. (I also use them on higher timeframe analysis). This helped me to settle on David Weis’ material and the use of his Weis Wave. (Here is a webinar with Weis that recently occurred: https://www.bigmiketrading.com/trade...nce-waves.html).

For me – this was it. The Weis Wave in combination with a Wyckoffian study of price action was enough for me to feel like I finally understood the markets. There is already a popular thread on Big Mike’s using a very similar methodology. (Wyckoff Speculator: https://www.bigmiketrading.com/elite...peculator.html).

I settled on one market for study (the Nasdaq futures – symbol NQ) and began to refine my methodology. I will post charts and ideas in this thread as time allows. I thought I would add a glossary of terms that will help someone who is new to Wyckoff understand how I view the market. Some of these terms were never used by Wyckoff and have come out of his students or the VSA offshoot. I will also use some metaphors that David Weis uses regularly. If you read something clever most likely I picked it up from David Weis and all credit should go to him.

The Wyckoff Method – An Overview

In the Wyckoff Method – the student is most interested in the relationships between the spread of the bars (or range - how tall a bar is from top to bottom), the close of the bar and the volume. Volume is considered an indicator of activity and a close study of volume will allow the student to see imbalances between buyers and sellers.

The student must also study the structure of the market and it is the proper use of horizontal support and resistance lines, diagonal supply and demand lines and the use of trend channels that allows a student to properly frame the market. Mr. Weis likes to talk about the “story of the lines” and without the understanding and use of these basic tools the student will hopelessly flounder. With proper lines drawn the market will come to life.

In my methodology I use a daily chart to look for areas of major support and resistance and the major trend, a two hour chart to look at the intermediate trend and support and resistance levels and a 512 tick chart with a 1.25 Weis Wave to make day trades. (The Weis Wave shows a histogram of accumulative volume on up waves and down waves. 1.25 means that the market has to have a close at least 1.25 points above/below the last high/low before a new wave is printed). There is nothing magic about 512. My charting platform is limited in its tick choices – I’m not interested in the Fibonacci sequence at all.

Why tick charts instead of time based charts for day trading? In my opinion tick charts are a great option for day traders. On a time based chart the overnight session is very long and there is generally a bowl shape to the volume during the day session (meaning highest at the open and close of the session with it diminished in the middle). Using tick charts will normalize this volume and make the wave sizes directly comparable. It will also compress the overnight session which tends to make charts much more readable.

Here is a chart for the last trading day of the NQ with naked bars. The light grey area is the overnight session. You can see the various buying and selling waves as they unfolded during the day. Green signifies an up wave or buying whereas red signifies a down wave or selling:

Wyckoff 2.0-blank-png

Now here is the same chart marked up after a day of trading:

Wyckoff 2.0-annotated-png

First – I’ve marked yesterday’s low in red across the chart. I know when I wake up and the open is close to the low that this level is likely to be an important level in today’s trading. Price will either come down and test this level, find buying and rally away in which case I will mostly be looking for longs or it will break through this level and hold in which case I will be looking for shorts. Playing off daily highs and lows is a great way to stay oriented during a day trading session.

So the market opens and trades below the last swing of the overnight session, finds some buyers and rallies to above the last swing high of the overnight session at 1. I’ve already drawn horizontal support and resistance levels across these swing highs and lows as I am only interested in trades that occur around these edges. We can see that a fair amount of buying has come in on our Weis Wave histogram. The red line representing yesterday’s low keeps me on the sidelines as I really want to see how price reacts to that level before taking a trade.

The price action where price exceeds a previous swing high before reversing is called an upthrust. When price falls below a previous swing low before reversing higher this is called a spring. These are one of my bread and butter trades. They occur all the time. I have highlighted all springs and upthrusts on this chart using grey ovals. As a side note springs tend to fail in downtrends and upthrusts tend to fail in uptrends. As I rule I try to take these trades only when they agree with the immediate trend.

After point 1 we see that on the next up wave very little buying comes in. We get a lot of downside volume and then a low volume retracement to the upthrust at 2. This would be a great place to initiate a short position after price breaks back into the range. I could have taken an aggressive short trade here but I decided to wait to see how price reacted around yesterday’s low (this would have been my initial profit target had I taken this trade).

At 2 we can also draw a trend channel. We connect the two swing highs and extend them forward. This is called the supply line and we expect that when price rallies up to this line that sellers should step in. We draw a parallel line off the low furthest from this line between the two highs and we have a nice down channel. (This parallel line is called the oversold line)

Price then breaks through the bottom of the range and finds temporary support near yesterday’s low, has a weak rebound and then falls below the red line again. At this point I am looking for a short but don’t like how far into the channel we are. Price continues to fall until it breaks through the bottom of our trend channel. At this point we consider price to be “oversold” and often expect a correction.

At 3 we get a ton of buying coming in. If price can rally above yesterday’s low I will become a buyer. But notice what happens. On the next up wave there is very little volume. Price tests the underside of the swing that broke through yesterday’s low while simultaneously upthrusting a previous swing high. We are also overbought in the trend channel. When price starts to reverse here this is an ideal place to go short. 3 shows another Wyckoff principle. Effort vs. Result. We see all of this buying effort come in but the result is an anemic rally. This gives us more weight to short trades.

If we missed the trade at 4 we get another upthrust at the supply line at 5 and a good opportunity to go short. Price continues to trade lower until we fall to 6. Here we see the down volume during the entire day session and we fall to an oversold position in the trend channel. Price moves side in a tight range for 15 minutes, takes out the low and then reverses on high volume to 7.

What is the market telling us? This large volume down with no follow through indicates potential stopping volume (large volume wave that seems to end an up or down move). When price takes out the low and reverses on high up volume we have a classic change in behavior and an spring. What occurred inside the grey rectangle is call absorption. The move from 5 to 6 got people excited to sell. When price hits 6 some bigger market players start buying into all the selling.

After 7 we see a weak rally with a fair amount of volume but no ability to hold gains. Price reverses on good volume but notice the details. Price can barely get back inside the trend channel. Price is testing the area where absorption took place. The next down wave is miniscule and price rallies up with minimal buying. The market is ready to rally. In the smaller grey square we see price one last time testing the top of the absorption range. We see very little volume which indicates all the selling has be drawn out of the market. This is a great place to initiate a long position and also to draw a new trend line.

Price rallies strongly right through the up channel until reaching a high at 8. Notice how each up wave is leading toward 8 is on less volume and that progress is diminishing. This is called shortening of the thrust and indicates that its time to pay attention as the trend might be ending. At 8 we see the market has no ability to rally above yesterday’s low and it is also an upthrust of the same level as 4. Price falls through this level and then comes back up to test it again at 9 with very low volume. This is another place one could consider initiating a short. Also notice the two dashed trend lines forming a rising wedge. This also shows price might reverse and the breaking of the lower trend line indicates more weakness. Notice also that the three bars that break yesterday’s low all have poor closes.

Lastly price falls to 10 which is an over-sold position in the trend channel, is a spring of the previous swing and is sitting on support from the absorption range from 6. All of this indicates another rally might occur and we do once again rally up to yesterday’s low before drifting lower into the close.

Here is a glossary of terms I will regularly use when annotating charts:

Absorption
Support
Resistance
Spring
Upthrust
Trend Line
Trend Channel
Supply Line
Demand Line
Overbought
Oversold
Testing
Effort vs. Result
Change in Behavior
Stopping Volume
Shortening of the Thrust
Ease of Movement
Spread
Close

Please feel free to ask me any questions you might have. I will detail my trade management in future posts.

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Old 06-24-2013, 04:05 PM   #2 (permalink)
 
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I realized I should mention all my times are Pacific Time so sorry if this confuses anyone. Opening bell is at 6:30 am and closing is at 13:15.

So pretty much the same stuff going on as Friday. I did some analysis of the daily charts and marked my 512 tick chart with the overnight low. The market moved pretty swiftly through this low giving me an initial short bias for the day. On the first upwave after breaking through the overnight low (solid red line) we see a large buying wave come in. This is the largest up wave since around 9 am on Friday. But look at the range of the bars. With a few exceptions the bars are narrow and the distance traveled upward isn't impressive. There is effort but not much bang and the next wave is minuscule. This isn't a classic low volume test of the over night low but we can't make any progress above this level. An aggressive trader might have taken a short here.

We move away easily (look at the ease of downward movement versus the tightness of the up wave) test the underside of this support level and head lower until around 7 am. We have an up wave come in with medium volume. What does this mean? When trading live its hard to know - although it usually means that there will be some sort of connection. At this point I know that the overnight low is going to be important resistance and the session low is going to act as some sort of support. We have price drift up and then reverse. We have an upthrust followed by a spring. Look that the volume in the grey box. I think of areas like this as a boxing match where the two boxers are trading jabs. There is no clear boxer with the upper hand yet. I probably should sit on my hands.

I instead go long after the grey circle following the spring. I get a nice reversal bar of my support level and I ride this up to just under the over night low for 11.5 points. I don't think its a good trade based on a few factors. We are getting a little too far into the trading range for my taste. David Weis likes to use the analogy of fishing on a lake. You don't fish in the middle of the lake you fish at the edges and I'm fishing in the middle. The volume isn't very clear (the Demand? wave gives me a slight long bias plus the spring) but its too easy to get chopped up here. A stop just below the spring means the loss won't be too painful but I doubt there is much of an edge here.

I should point at the dashed trend lines on the chart now as these are a very helpful tool. I draw the first one from the over night low and it plus the channel show a falling wedge (I'm not a pattern guy if I got the name wrong). What this shows to me is that each thrust downward is making less and less progress downward and a correction is likely. Again we see the dashed trend line heading back up to the overnight low. This line helps me to quickly take profits as its pretty clear we aren't making enough upward progress in the channel to break through this resistance level. (Notice the bunch of price). The last dashed line shows the up waves tiring ans price moves through the overnight low level. I was really expecting a reversal here. We had upward progress stalling and no sign of buying aggressively pushing through this level. I tightened up my stops before price climbed steadily higher and surprising me.

We then see supply come in at a logical place and I'm looking for a short again. (We also have an upthrust in the background). I get a no demand up wave and go short when the next down bar prints (around 2831). Notice also that this creates a failed spring which gives me even more confidence in this trade. I always pay attention to springs and upthrusts and their failing as it gives more weight to my short-term bias and training your eyes to see them can only be good. Price heads low with almost no resistance as we approach the previous low and I tighten up my stop suspecting this is stopping volume. (I'm stopped out at around 2822).

Price quickly rallies away and although I want to get long I don't see any overt change in behavior (a big buying wave) or a spring I can use to get in. A more aggressive trader might use the "no supply" on the next wave to go long. Price climbed higher and I figured I wasn't going to get in. I didn't want to play in the middle so I was waiting for the overnight low to be reached. Instead we get an upthrust with some supply coming in but then no follow through. We get a nice little spring and a no supply wave around our support level so when price started to move away I got long (around 2825). I got out at 2856.5 which was clearly the trade of the day. I also show three other places (grey ovals) where I may have made a long. The difference between these longs and the one I did take and didn't like is that we have the clear stopping volume and change in behavior up wave in the background. This extends the upside potential on average.

After I exited this trade I turned the computer off but I updated the rest of my lines before posting this chart. Don't expect these kind of winning days every day.

Wyckoff 2.0-monday-png
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Old 06-24-2013, 04:48 PM   #3 (permalink)
 
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Very nice job. I like your posting. I want to read more.
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Consistency is doing the same thing the same way all the time.
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Old 06-24-2013, 11:23 PM   #4 (permalink)
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wow, great stuff, yertle!

also, did you see the recent interview with did with gary dayton? he is a wyckoff trader i discovered thanks to some info you shared here on informedtrades. wyckoff traders may wish to check out that interview to get an idea of how some of these techniques can be applied.
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Old 06-24-2013, 11:45 PM   #5 (permalink)
 
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I did watch the video. I try to watch every video Dr. Gary Dayton and David Weis make available. They are very good instructors and although I haven't received mentoring with him - I consider David Weis to be my mentor. If you want to read the seminal work on this method of trading you should check out: Amazon.com: Trades About to Happen: A Modern Adaptation of the Wyckoff Method (Wiley Trading) (9780470487808): David H. Weis, Alexander Elder: Books

This would be a tough book for someone new to the Wyckoff Method but invaluable to any serious student.
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Old 06-25-2013, 03:49 PM   #6 (permalink)
 
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If anyone wants a good introduction to this methodology there was a webinar on Big Mike's that David Weis recently recorded. You can view it here: David Weis on Wyckoff, Support/Resistance, and Waves - YouTube

The quiz at the end might amaze you with how powerful this method can be.
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Old 06-26-2013, 02:29 PM   #7 (permalink)
 
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Old 07-03-2013, 01:46 PM   #8 (permalink)
 
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Getting caught up with posting...

Here is my chart for 6/25/13


Wyckoff 2.0-06-25-13-jpg


At the opening price sells off before quickly recovering and upthrusting the overnight high. I'm sure this move got people excited about going long. After the big up wave and the up thrust the next up wave is a classic "no demand and a perfect low risk shorting opportunity. I was still faked out at this point and sat on my hands. Once obvious supply came in I was looking for a short and found it at the next upthrust. At this point to me it looks like we might get a trend day down and I'm happy to get aboard. There is another up thrust we could have also taken and then a sizable sell off. Notice the dashed trend line showing price isn't making good progress in the down channel. I tighten up my stop and get taken out around 2848 for 10 points.

There is a quick spring and so signs of absorption but I'm still sitting on my hands. When price breaks out of the small absorption range I take a long on the no supply bar with my stop just below the low. There is another decent looking entry off a spring but I'm already long. This next wave doesn't produce much upward progress and I get stopped out at a small loss. Price moves below the spring but then rebounds. This is another attempt at a spring that doesn't produce the expected result (a new high).

At this point I decide its best to sit on the sidelines. The market isn't moving with much direction and I don't want to over-trade. We can see that price really struggles to make a new high, finally falling off on decent volume while leaving an up thrusr in its wake. This is a decent short in retrospect due to the struggling nature of the market but I would take it only if I recognized the limited downside potential (rarely after we see stopping volume and a rebound do we put in a new low).

The next few hours find price slowly coiling upward before having a decent up move with clear stopping volume and then drifting down into the close. There are no real trades here that I like because of how unevenly the market was moving. (The best looking trade would be the "no demand" up wave two waves after the the giant up wave). Notice how hard this market was to chart. Price falls out of the channel, moves in and out of the bottom of it, then surges higher. I'm happy with my decision to sit on my hands.
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Old 07-03-2013, 01:47 PM   #9 (permalink)
 
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Here is my chart for 6/26/13

Wyckoff 2.0-06-26-13-jpg

I didn't trade at all on this day. There really aren't any setups I love here. Very rangy day. The best trade in retrospect would have been the second spring I have labeled. We already saw three significant down waves without any progress to the downside. Since price didn't break through on this fourth push it would be reasonable to expect a trade to the other side of the range. One could also view the first down wave as stopping volume but usually I look for a low volume test after this kind of action.

Last note is that a nice up channel could be drawn from the second spring low and through the next swing low and it would have been very helpful had we taken this long trade.
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Old 07-03-2013, 01:48 PM   #10 (permalink)
 
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Here is my chart for 6/27/13:

Wyckoff 2.0-06-27-13-jpg

Pretty good trading for me on this day. First we have a reverse up trend channel (drawn from highs rather than lows). There is an aggressive trade at around 6:40 just after the open but I didn't take it. We have a support level and a fair amount of selling that produces absolutely no downward progress. The first up bar in the next wave takes out the closes of the previous 12 bars. This would be the place to go long. As it turns out we get stopping volume on this wave. Again we can see how price makes a new high but is not making as much progress in the channel. I generally don't trade right at the open but after I see this stopping volume I'm looking for a short.

Price does make a high (stopping volume doesn't mean price won't make a new high - its like a train applying its breaks - it still can travel for a while). I see a no demand bar followed a few minutes later but a upthrust and go short at around 2913. Price quickly moves away and then coils in a range for two hours. We see a lot of effort in two buying waves that produce no upward movement. These signs prevented me from exiting the trade prematurely. The second up wave is especially nice how it is pressing against the top of the trading range. Each time it pokes through it gets knocked back. This up thrust is clearer trade than the one I took (better defined trading range, effort with no result and an up thrust all coming together). If I had used a reverse trend channel off the two lows after the up thrust it would have also indicated this trade location. (My trend channel is sloppy).

I take profits before the close at 2901.5
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