THE WYCKOFF METHODOr

How Professional Traders Thinkas understood byW.H.C. Bassetti

Golden Gate UniversitvFI 4985

The Five Themes ofWyckoffs work

r. Establish the present condition and sta!.rs of the marketDeduce from this analysis the probablyl immediate funtretrend /e

e. Evaluate candidates-(watched stocks)Match stock status to market status

Find strongesf sfocks in bull and weakesf in bearmarket

3. Select from the candidates those with measuredcalculated potential

4. Determine each stock's preparedness to move

S. Coordinate entries and exits with market turns

1Establish the present condition and stahrs of themarket qDeduce from this analysis the probabry immediatefuture trend /

g market classifications exist bull, bear and goat (neutral)Within each type of market and within each type ofmarket movement three phases (swings, or trends orwaves) wilt be present:

, --short, intermediate and long(We may consider these to be fraetal in nahrre)--and we may define the length we are looking for,

i.e. by the grpe of trader we analyze ourselves to be

Trends

A channel model is used to analyze trends ;

An uptrend has a demand tine and an ouerbought lineA downtrend has a sLrypIA line and an ouersold line

. A neutral or trading range market has support andresistance lines

The present trend is likely to continue (It will most likely continue if the present price is locatednear the demand line in bull trends and the supply linein bear trendsPrices will likely remain in the trend and in the channel

The trend will be cast in doubt when theoversold/overbought line is reached, at which pointsupport or resistance (read supply or demand) mightdevelop and make a change in the trend

Note:The best trading opporhrnities are also the points ofgreatest danger and also the points of least risk.

This is a trading strateg5r which overtly buys weaknessand sells strength-but only after a sophisticatedprocess of analyzing the nahrre of those forces. It looksfor equal and opposite reactions in the marketplace anddepends on eatching the rhythms of the market.

' THEUTYCKOFFWA\IE

As an aid to determining the present trend, the presentlocation, ffid probable future trend of the market a wavechart is constnrcted. For all practical purposes this is a selfconstrueted common stock ind.ex. An example of this waveindex , or miniature model of the market is the averaging ofeight stocks, for example:

Brystol Myers (Bniff)Dow Chemical (DOW)Epron (XON)General Electric (GE)

General Motors (GM)IBMMerrill Lynch (MER)Union Pacific ([INP)

2

Evaluate candidates- (watched stocks)Match stock stahrs to market stahrsFind strongesf stoclcs in bull and useakesf in bearmarket. Not a necessary step in neutral markets.

Find b3st candidates by relative strength analysis

For these stronger than the strong and weaker than weak thebest trading opporhrnities present themselves as theyapproach the extremes of their trends (or channels)--weakto top and strong to bottom

Measuring relative strength

Measureorf ranges from tops to bottoms

Compare tJrese moves (range, average) to the market and thegroup under study--determine which move farther faster

3

Select from the candidates those with measured,calculated potential

Select the issues which have built a " cause" (concept ofcause and effeet)

Point and Figure chart shows horizon buildup in a tradingrange while market is in a trading range.

I

Bristol Meyers p8d chart covers 17 boxes, and thus WMcalculates it to have a 17 point potential.

Psychology: stock has lulled traders to sleepWhile the public slept insiders, smart money may havebeen accumulating stock, or conditions may have

subtlychanged

Each stock should have its potential measured and itsobjective range measured

Ii should not be concluded that this process is infaltible.Actual conditions must be constantly reevaluated and themarket must be honored when it does not act as predicted

First of all no trade should be entered unless it represents areturn to risk ratio of g to r. And no trade should be enteredwithout a stop entered just below (or above) some identifiedsupport or resistance level

At this point the trader should knowThe stahrs of the market and its locationWhich stocks are outperforming andHow far they have the potential to move

4Deterrnine eactr stoclcs preparedness to move

Buying an;d Selting Tests

Determine each stock's readiness to move byAnalyzing bar charts and p8d chart previously selectedbybuy/sell tests

what are the three most important things about a stock?Location Location Location

' And incidentally the nahrre of the action it is involvedin

At the top of a rally and or the bottom of a reaction

F;

supply may become exhausted, ordemand may developat lower levels and overcomu ,arppty---'E 's urc''

correctiott., i1 price represent entry opporhrnities whenother critena are met

Normal corrections = go%obut may range from 99-66,noThe trader's eye should be caught be reactions of thismagnitude and suppry a.*""d?toay,t ourd be madePatience is arways required to ailow markets to trend and tofind thg wise opportunitiu, Aui a.ufop

when the market is not trending, but is.in a trading rangeThe trader should avoid commitin""ir-i" the middle of therange and should assume that tt . t uJing range willcontinue

Divide trading range into thirds or quarters and avoidmiddles ,

spring and upthrasf action a part of support and resistance

In general new commitments shourd be taken incoordination with furns in major *"rr..t trend.

5coordinate entries and exits wi& market ttrrns

Recapitulation of methodologyFind the stahrs and location of the market at presentAnd based 9l principles of uend analysis detirmine

Probably immediate fuhrre trend

Evaluate the candidates and match stock stafus and locationto market stafus and location

I

Select from the candidates those with measured calculatedpotential

Determine each stock's preparednessto move

s. coordinate entries and exits with market tums.Requires general market index, e.g. wyckoffwave

Anticipating a turn requires all three of basic lawsSupply and demandCause and effectffiort us result

As measured by A/p index(Optfmism/Pessimism) (