Richard Wyckoff was a self-confessed student of the security Markets. He was a member of several Stock Exchange firms.
He was famous in his day for being the editor and publisher of “The Magazine of Wall Street,” (formerly known as “The Ticker” magazine) which at one time had the largest circulation of any financial publication - in the world.
From his experiences as a bond dealer, trader and Investor for his own account, Wyckoff formulated certain methods of trading and investing.
Wyckoff’s first book, “Studies in Tape Reading” was first published in 1910 and his “How I Trade and Invest in Stocks and Bonds” was published in 1922.
He made his speciality in the study of volume with respect to price spread.
One of Richard Wyckoff’s methods (taken from “How I Trade and Invest in Stocks and Bonds” page 38) revealed what situations were best for making big money.
He discovered that markets had three stages:
First, an upward movement, where accumulation of stock would appear and might last for several weeks or months.
Second, markets would be in the marking up stage, where a stock was forced up by either Bullish news or aggressive buying until it reached a level where distribution would take place.
The third stage would be this ‘distribution.’
For a declining market, the opposite of this would take place.
Wyckoff ascertained that:
Once substantial accumulation (i.e. buying) has taken place by the professional money – a Bull Market would be guaranteed.
Once substantial distribution (i.e. selling) has taken place by the professional money – a Bear Market would be guaranteed.
Strangely enough, William Gann recognised this as well and traded accordingly. Gann explains his theory of accumulation and distribution very well in his book: 'Truth of the Stock Tape'.
Wyckoff also recognised the importance of the volume of stock traded and in particular the relation between the number of shares traded and price spread for that time period.
Here are some of Wyckoff’s principles:
1. Any Market moves on Supply and Demand
2. Understand volume and its relationship with the price spread
3. Weakness always appears on up-bars
4. Strength always appears on down bars
5. Trade in harmony with the parent index.
6. Always use a trailing stop loss.
7. Believe your charts and not the news.
8. Markets behave the way they do mainly because of the strength or weakness in the background
And Wyckoff points out that there are only two basic skills required to make money in the Markets:
1. You need to understand how Markets work, and how to analyze supply and demand. This requires you to look at the volume on each individual bar (which is the amount of activity going on) and its logical relationship to the price spread.
2. You must become a good trader in your own right. People do not think logically, their decision making process is taken over by emotional responses – especially in a threatening situation.
We, as homo sapiens, have evolved over the last million years or so to respond more to an emotional reaction rather than a cold logical one.
Trading the Markets triggers strong emotions. Basically, greed or fear. It’s difficult for inexperienced traders to apply cold logic in these situations, but good traders have mastered this.
Wyckoff's chart-based methodology were based on three fundamental laws. These 3 laws were:
Of course, our description above is just a brief. To get more information on this topic, refer to the various books at the end of this web page.
Richard Wyckoff used a five step approach to entering a share trade. They are:
Step #1: Ascertain the current position and estimate the future trend of the market
Should you be in the market at all?
Is the market pausing or trending? Can you see the market trend for the near future?
For this step you need to use both Bar charts and Point and Figure charts ofthe major indices (Dow Jones, FTSE 100, etc)
Step #2: Choose shares to trade that are in sympathy with the market trend
If the market is in an up-trend,choose shares that have a better Relative Strength than the market. That is, shares that increase more than the market in up-trends and decrease less than the market during down-trends.
For this step, use Bar charts of your chosen shares to compare Relative Strength against the market indices.
Step #3: Choose shares that have a "cause" equal to, or better than, your objective
Wyckoff's law of 'cause and effect' stated that the horizontal Point and Figure count was the cause and the subsequent price change was the effect. So, if you are planning on buying shares, choose particular ones that are in an accumulation phase and have built a sufficient 'cause'.
For this step, use Point and Figure charts of your chosen shares.
Step #4: Is your chosen share ready to move?
In this step, Wyckoff applies his nine buying tests and nine selling tests.
In an accumulation range, are you satisfied that supply has been absorbed? Or, in a distribution phase, are you satisfied that large supply is entering the market?
For this step, use Bar charts and Point and Figure charts of your chosen shares.
Step #5: Time the trade of your chosen share in synchronism with the market trend
About 75% of individual shares move in sympathy with the market, meaning that the odds are in your favour. We hate the phrase: 'The Trend is Your Friend' but for this step we have to give in.
For this step, use Bar charts and Point and Figure charts.
Richard Wyckoff was, and still is, a revelation. He was before his time. Having to trade from tape readings was not, in our opinion, ideal. Just imagine what he could do with today's technology at his disposal?
But, he left his legacy. Books.
Many people have succeeded in emulating his techniques, most notably Tom Williams. His 'Master The Markets' is a classic and is the sequel to his 'Undeclared Secrets That Drive The Stock Market'.
How I Trade and Invest in Stocks and Bonds by Richard Wyckoff
Stock Market Technique Number One by Richard Wyckoff
Stock Market Technique Number Two by Richard Wyckoff
The Wyckoff Methodology in Depth by Ruben Villahermosa
Wall Street Ventures and Adventures by Richard Wyckoff
Master The Markets by Tom Williams
Tom Williams spent about 50 years in the markets. First as a syndicate trader in California and latterly trading for his own account.
He spent years perfecting Wyckoff's techniques as applied to the modern market and his understanding of volume related to price spread is for everyone's advantage. He is known as the father of 'Volume Spread Analysis' (VSA) and the founder of VSA software which is now called 'Tradeguider' software.
If you want to know how the Stock Market really works, then books by Tom Williams are a must read.
The Undeclared Secrets That Drive The Stock Market by Tom Williams
This book is an easy read and for most, will be a revelation.
Most private investors give little attention to how the Stock Market really works - they think they know better. Tom Williams has broken down into simple terms exactly how the Stock Market works.
'TheUndeclared Secrets That Drive The Stock Market' explains why the market moves the way it does and demonstrates the underlying forces that are at work in the Stock Market.
A Complete Guide ToVolume Price Analysis by Anna Coulling
The main theme of this book is about volume of shares traded, and price.
The author makes a bold claim, and that is that readers of the book will be able to read the market before it moves. All investors would like to get their hands on 'The Holy Grail' of investing.
'Volume Price Analysis' is claimed to eliminate emotion in trading. We are a little sceptical about that point but overall the book is an excellent step-by-step guide to a technique that we have bought into.
The book is a good addition to any investor's collection and a great reference to a technique worth persuing.
If you want to know Wyckoff's principles about volume and price, they are laid out in this book in an easy-to-read, step-by-step style.
We admit, no one book can cover all that you need to know but 'A Complete Guide to Volume Price Analysis' goes a long way towards and would be a good addition to anyone's library.
You can get it right here:
The Definitive Guide To Point and Figure by Jeremy du Plessis
Richard Wyckoff was nothing short of a genius. He came along way before his time.
We find the subject of Volume and Price Spread fascinating. We have spent much time on the subject and had the privilege of working with the late, great Tom Williams - who knew the subject inside out and back to front.
The works of Richard Wyckoff, and any derivatives are, to us, mandatory study. But there again, not everyone is like us. But ...
...next to Warren Buffett, Richard Wyckoff is our favourite Stock Trading Legend.
The one downside to Wyckoff's teachings is that there is a learning curve. To be good at his methods, a fair amount of practice is required, but it is well worth the effort.