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:
Now here is the same chart marked up after a day of trading:
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:
Effort vs. Result
Change in Behavior
Shortening of the Thrust
Ease of Movement
Please feel free to ask me any questions you might have. I will detail my trade management in future posts.