- Downside Objective Accomplished
- Bullish Price Behavior
- Preliminary Support and Selling climax
- Stronger than the Market
- Trend line Broken
- Higher Bottoms
- Higher Tops
- Base Forming
- 3:1 Reward / Risk Ratio
- Upside Objective Accomplished
- Bearish Price Behavior
- Preliminary Supply and Buying Climax
- Weaker than the Market
- Trend line Broken
- Lower Tops
- Lower Bottoms
- Crown Forming
- 3:1 Reward / Risk Ratio
Okay, we memorized the basic skeletal framework of Wyckoff's 5 Step Method, and are starting to develop each of those steps in more and more detail. Here too, we will need to memorize the basic skeletal framework of the Nine Buying and Selling Steps as listed above. We are going to be developing each of these in the same way as we are doing with the Five Steps. I am going to list them again below, but this time adding some notes that we should consider as we examine each of these tests. As a side note, these buying and selling tests will not necessarily be passed in the order given. Nor will they be passed on ever principle we will be discussing. However, for the most favorable, safest trades, all of these tests will be pasts. Additionally, you should have committed to memory the three laws that govern all market behaviors and be able to restate them. You should also know the difference between (relationship to) a Law and a Principle as we are defining them within these discussions.
Again, the three laws are principles as they are never changing, but when we use the word principles we are really talking about specific market action that expresses one or more of the laws in action, such as the principle of the Selling Climax, or the principle of Preliminary Support, etc. We want to stay away from the words "price pattern" and it's not just semantics. As our understanding grows, so will the validity of this point.
- Downside Objective Accomplished
The downside objective of the previous trading range must have been
reached. This is determined by examining the Point and Figure Charts
and coming up with some type of objective range. As the price action
moves towards that objective range, you need to start anticipating what you might see ( in a down trend you should be looking for the Preliminary Support followed by a Selling Climax.in an up trend you should be looking for the Preliminary Supply followed by a Buying Climax). The objective range does not always work out, so you need to look for other indications. In our approach, we will be putting a number of indications together to form the "Balance of Probabilities" that we will need to initiate a trade. So, when do you know, after doing all this analysis, that the trade is going to be successful? The answer to this is, you never know! There is not an approach out there that can guarantee a profitable trade.although, you may never know this from some of the commercials I have been watching on television. Every trading system or approach is about probabilities. That is why when you start to change anything about a system (leave something out, skip a step, add something), you are changing the system and in doing so, you are changing the probabilities. The Wyckoff Method has been very carefully examined and put together. What we need to do, is to adjust ourselves so that we are playing a perfect game in applying the Five Steps and in identifying the Principles that are a reflection of one or move of the three laws in action.when we do this, the probabilities will fall in line and we will start seeing profits. Anticipate being wrong in about one in every three trades when you are playing a prefect game. We will talk about this more when we discuss paper trading (the final step before real trades are made).
- Bullish Price Behavior
The price and volume must be bullish before a long position can be taken. Early in the trading range it may be difficult to analyze. However, as the trading range progresses clear patterns of volume expanding on rallies within the trading range and contracting on reactions within the trading range should be apparent. If you don't see this in your stock, look elsewhere.
- Preliminary Support and Selling climax
Preliminary Support is often difficult to detect. Often, you will only be able to identify it after the Selling Climax has occurred.and then you say to yourself "oh, that must be the Preliminary Support." Nevertheless, the clearer these principles unfold themselves to you, the better. The old saying of when in doubt do nothing, is valid in our approach. These principles should be obvious to the trained observer. If they are not obvious, find a stock where it has a history of displaying clear indications.
- Stronger than the Market
Here we will use the idea of relative strength and weakness. You might consider numbering the rallies and reactions for easy comparison. Compare the last couple of rallies and reactions of your stock to that of the market index you are using. If the market has had a Sign of Strength and a Last Point of Support within the trading range, consider stocks that have already broken out of their trading range and are possibly backing up to the Edge of the Creek. This would indicate that your stock is ahead of the market and as such, is stronger than the market.
- Trend line Broken
As long as there is a Supply line, the downtrend is intact. It is necessary for the supply line to be totally destroyed before any long positions can be taken.
- Higher Bottoms
In the beginning of the trading range, you may not see this. However, at some point you should see a lifting of the bottoms within the trading range.
- Higher Tops
As with the higher bottoms, the higher tops may not be obvious until the trading range has been in progress for some time. However, at some point, you will see higher tops.
- Base Forming
For the base, we are looking at the Figure Chart. What we want to see (calculate), is that there has been a worthwhile cause build on the chart. For Short-term traders, you would want about 10-25% move. Intermediate traders are looking for a 25-40% move. With long term traders seeking a 50% move or better. I will talk more about this, and what these numbers mean for us when we get to paper trading. But for now, if you have one hundred stocks that you are closely following, this one test can eliminate many of them from consideration. Some Wyckoff technicians will use this test first, just to bring the stocks they are looking at down to a reasonable number.
- 3:1 Reward / Risk Ratio
Again, stop placement is critical. We will go into detail with this as we move through specific examples. We want to put our stops in logical places where they are somewhat protected from being executed, while at the same time limit our risk (see money management on navigation bar).
- Upside Objective Accomplished
The upside objective of the previous trading range must have been
reached. This is determined by examining the Point and Figure Charts
and coming up with some type of objective range. As the price action
moves towards that objective range, you need to start anticipating what you might see. In an up trend, you should be looking for the Preliminary Supply, followed by a buying Climax.
- Bearish Price Behavior
The price and volume must be bearish before a short position can be taken. Early in the trading range if may be difficult to analyze. However, as the trading range progresses patterns of volume expanding on reactions within the trading range and contracting on rallies within the trading range should be apparent. This will be little more difficult than when we are analyzing bearish behavior, because the volume tends to retain much of the bullish influence as it moves through the trading range. If you don't see a detectable degree of bearish price behavior in your stock, look elsewhere.
- Preliminary Supply and Buying Climax
Preliminary Supply is often difficult to detect. Often, you may only be able to identify it after the Buying Climax has occurs.
- Weaker than the Market
Here we will use the idea of relative strength and weakness. You might consider numbering the rallies and reactions for easy comparison. Compare the last couple of reactions and rallies of your stock to that of the market index you are using. If the market has had a Sign of Weakness and a Last Point of Supply within the trading range, consider stocks that have already broken out of their trading range to the downside and are possibly backing up to the Ice. This would indicate that your stock is ahead of the market and as such, is weaker than the market.
- Trend line Broken
As long as there is a Support line, the up trend is intact. It is necessary for the Support line to be totally destroyed before any short positions can be taken.
- Lower Tops
In the beginning of the trading range, you may not see this. However, at some point you should see lower tops within the trading range.
- Lower Bottoms
As with the lower tops, the lower bottoms may not be obvious until the trading range has been in progress for some time. However, at some point, you will see lower bottoms.
- Crown Forming
For the crown, we also look to at the Figure Chart. What we want to see (calculate), is that there has been a worthwhile cause build on that chart. For Short-term traders, you would want about 10-25% move. Intermediate traders are looking for a 25-40% move. With long term traders seeking a 50% move or better. I will talk more about this, and what these numbers mean for us when we get to paper trading. But for now, if you have one hundred stocks that you are closely following, this one test can eliminate many of them from consideration. Some Wyckoff technicians will use this test first, just to bring the stocks they are looking at down to a reasonable number.
- 3:1 Reward / Risk Ratio
Again, stop placement is critical. We will go into detail with this as we move through specific examples. We want to put our stops in logical places where they are somewhat protected from being executed, while at the same time limit our risk (see money management on navigation bar).
