The Finance Book Club

8. The Use of Charts as Guides and Indicators

Wyckoff makes a distinction between tape reading and chart reading.

The ‘genuine chart player':

1. Usually operates in one stock at a time
2. Uses as a basis the past movements of that stock
3. Follows a rigid set of rules
4. Treats the market and his stock as a machine
5. Uses no judgment (unfair?)
6. Uses great discretion in regards to whether to play specific indications

The Tape Reader:

1. Operates on what the tape shows now
2. Not wedded to any particular issue
3. Can work without pencil/paper or any memoranda
4. Has a code of rules but more loosely defined than the chart player
5. His intuition/second nature evolved by self-training serves for many different situations
6. Do you follow a set of strict rules to cross a busy street? No, you use your judgment to tell you when to start and how fast to walk. That’s the position of the trained tape reader.
   

For Wyckoff the difference between the two is ‘as wide as day and night’. Not for me, but then I wish I had read this chapter when I was just starting out. However at this stage in my journey I think I understand the differences better than I would have when I started, and so maybe it's good that I'm reading it now. One mistake I have been making is to treat results of a system based on a single chart as the likely results that would be experienced trading on a diverse selection or selecting from market leaders, etc.

1. Still, tape readers can use charts to ‘reinforce memory’.
2. The figure chart is one of the best mechanical means of detecting accumulation/distribution. And it shows points of resistance on big swings.
3. Despite this, Wyckoff says “I have yet to meet the man who has made money trading on a figure chart over an extended period.”
4. The reason is that it seems easy but real conditions are much trickier.
5. The chart gives the direction of coming moves. The tape says when.
6. Stocks move in synchrony, but also, one stock may hold up the market or be the reason it’s getting clobbered.

The advantage of tape reading over chart playing is that the tape reader sees everything going on, while the chart player’s vision is limited. A single chart might give a buy indication, but if accumulation or distribution, concealed in other issues, is completed, his stock will break quickly and badly.

 

1. If a tape reader wants a guide he should keep a chart of the average daily high and low of ten leading stocks. Wouldn’t this just be a daily chart of the S&P500/DJIA?
2. Wyckoff refutes this saying it’s more reliable than the Dow averages which only consider the closing bid of each day, and don’t represent the day’s actual fluctuations. But futures/CFD charts show you every detail of the day’s average movements, surely? We have made some progress, however glacial, in the science of Finance.
3. A composite chart (daily) is of no use to the tape reader who scalps and closes out everything each day. But it would benefit those who read the tape for 5-10 point moves. That trader will trade only with the trend as shown by the chart, because no individual stock trend can be ‘pushed to completion’ in the face of an adverse general market.
4. When a stock sells ex-dividend, change the scale so the stock will show the same relative position as before the dividend. If a stock is 138 before the dividend which is 2 percent, and sells 136 ex-dividend, the 138 line becomes 136.
5. The proficient tape reader will want to discard all mechanical assistance because it interferes with his ‘sensing the trend’. Also keeping charts distracts from attention that should be paid to the tape.

“The full tape cannot possibly be charted.”
I'm not sure. What do you think?

9. Daily Trades vs Long Pull Operations

1. When demand outstrips supply prices leap
2. When demand is satisfied prices come to a standstill and hang at one level waiting for new info/events
3. Even the most accurate of readings can be nullified by random daily events
4. The tape reader must be nimble, detect changes quickly and be ready to switch their position and go with a newly formed trend.
5. Wyckoff gives an example of an operator who was on the wrong side of the trend twice in one day but still ended up ahead.
   1. The trader basically buys 100 Union Pacific, sees the rally falter
   2. Sells 200 and then notices short covering
   3. Buys 200 and the market shows resilience but low volume, and the market quiets down and again the rally doesn’t hold
   4. Sells 200. This puts him net short 100.
   5. After reaching a certain price, the market drives back up. He buys 100.
   6. Then buys another 100 at a higher price. Net long 100. And then it is ‘easy sailing’.
   7. The net profit for the day is $102.50 on 387.50 gross profit, including his 135 in commissions.
      

6. Success in trading is chiefly a question of reducing and eliminating losses, commissions, taxes and fees
   1. Now Wyckoff analyzes this trading history to see if better judgement might have been used
   2. The first trade was probably inside buying. There was no trend at that point.
   3. He needed to wait for a clearly defined trend.
   4. When a stock holds steady within a half point radius it is not a turning point but a halting place. A new move in either direction may begin.
   5. The first sharp move was down so his first trade should have been short. He would have saved himself a trade and its expenses.
   6. The second loss hinged on ‘one of the finest points in the art of tape reading”; distinguishing a rally from a genuine trend change.
      1. One way to do this is calculate where a stock is due to go after it makes an upturn
      2. A normal rally is from ½ to ⅔ of the decline.
      3. If a rally falls short we can be more certain the decline is still on
      4. Small lots or gaps in price are evidence of ‘hollowness’ of a rally
      5. Since Wyckoff detects all of this in the first long rally he sees no reason for the tape reader to have covered his shorts at first.
      6. However he cautions that it’s very difficult to say what anyone would have done under the same circumstances
      7. Studying losses and mistakes with a view to benefiting in the future is good practice

7. Attached Image (click to enlarge)

   
   
8. Overconfidence
9. Tape readers can trade in ‘much larger units’ than those using arbitrary stops (for sure?)
10. They will seldom take over ½ a point to a point loss, because they are buying close to the pivotal point or line of least resistance.
11. Small losses should not lead to overtrading
12. Resting the mind allows judgement to clarify
13. Dull days are beneficial this way
14. The big money in tape reading is made in very active markets
15. 20-50 pt moves in the big leaders

Wyckoff muses on one of my favorite topics:
“Is it better to close trades each day, or hold through reactions and if necessary, for several days or weeks in order to secure a large profit?”

1. The answer depends somewhat on trader temperament and individual qualifications
2. Wyckoff expects that the tape reader who has been reading so far would find it hard to operate only for long swings
   1. Because they would have to let 20-30 opportunities pass by for every one that is acceptable
   2. The percentage of losing trades would still be considerable

3. Attached Image (click to enlarge)

   
   
4. Long-swing traders on the other hand must handle themselves differently
   1. They need more distance/perspective

5. Theoretically there’s no reason a trader can’t do both types of trading but they must be kept separate, or risk destroying the effectiveness of both
6. Clean House or not to clean house?
   1. Do I have a good reason for thinking X will sell down five points before up five?
   2. Small reaction or big shakedown?
   3. Bull swing still active?
   4. Rally in decline?
   5. It takes strong will/clear head to do both
   6. So the real tape reader may prefer a clean slate at 3pm every day
   7. Risks are limited; needed capital is lower

7. Trading in an office environment exposes the trader to undue influences
8. Speculation is a business and it must be learned.

10. Various Examples and Suggestions

1. Wyckoff says ‘recent observations and experiments’ have convinced him that you can’t guess the extent of a move by the initial price move.
2. Many important swings begin in a modest way.
3. The operator, therefore, should aim to catch every important swing in the leading active stock. He admits this contradicts some of his earlier advice about only selecting opportunities for wide swings.
4. To do this, act promptly when a stock “goes into a new field” (?) or gives an indication. Follow wherever it leads.
5. Don’t try to catch every ‘wriggle’ however. A 1.5 point reversal on light volume in a 3 point rise is just a natural reaction, not a change of trend.
6. The expert operator will move his stop to prevent reactions from taking away all his profits.

Stages of Stock Market Movements

1. A market has seven life stages similar to the seven stages of a man’s life.
2. The tape reader aims to get in at infancy and get out at old age. There is usually a sign that an age has ended. Wyckoff gives the example of Union Pacific in June 1909. When buying demand ceased the momentum fizzles out.
3. New ages ‘may have [their] birth’ during ‘great pressure or weakness’.

The importance of Volumes

1. When volume ‘comes out in thousands instead of hundreds”, this is evidence of a new move starting, but not necessarily in the direction in which it starts.
2. Go with the trend, but exercise ‘great caution’ until the trend is clearly defined and the stock breaks its former limits with increasing volume.
3. ‘Abnormally large volumes’ within a small radius is evidence of manipulation. It’s meant to attract buyers disguising the ‘hand of the operator’.

Stop Orders

1. The Tape Reader operating for a ‘fractional average profit per trade or per day’ cannot afford to let a point’s profit turn into a loss, or fail to secure some portion of the profit against future loss. So creative use of stop orders will come into play with experience.

 

1. Trying to scalp both sides of the market is ‘confusing’. ⅘ times you will make some foolish mistake. (In my first year of trading I would have regarded this as condescending, but now I agree 100%. It’s not worth it. Pick one side and scalp towards it, if you must scalp.)

“Act so as to keep the mind clear, the judgment trustworthy.” - Dickson G. Watts

 

1. If you must be long and short of two different issues, close one out before going the other way.
2. Your mind should be made up about direction so that when the time comes you have only to act, not think.

Getting In

1. By a process of elimination decide which side of the market and which stock affords the best opportunity.
2. Get in at the start of a movement or wait for the first reaction after the move.
3. Know where the stock should reach on the reaction and judge by the way it acts whether the impression is confirmed or refuted. If the trade acts contrary to expectations, abandon it.
4. A bull move should show support and volume increase.
5. Reactions should show a smaller volume than advances.
6. Upward swings should be of longer duration and reach new high levels.

Advantages of Tape Reading

1. “Only known method” that gets in at start, keeps you in the move and gets out when it’s over
2. It has made fortunes for the ‘comparatively few’ who have tried it. (who?)
3. Experience makes this an art.

11. Obstacles to be Overcome - Possible Profits

1. The mind should be free to concentrate, no feelings of having to get something done within a certain time
2. The game will be no more stressful than dominoes when emotions are controlled
3. If anything interferes with this attitude, the trader had better suspend operations and find the cause - for example,
   1. a series of losses.
   2. Trading too often - only take the ‘choicest opportunities’
   3. Anxious to make a record, to avoid a loss, to secure a certain amount - this warps judgment - a hen needs peace, quiet, and food to make eggs

4. Buy or sell because ‘it’s the right thing to do’ not to make a profit or fear of making a loss
5. When the market drifts without a trend, the percent of losing trades will be high, sometimes the market is unsuited to tape reading
6. Brokerage may be giving poor service; execution should not be over two minutes

Wyckoff has instructed his broker not to use any discretion to try to do better on his prices. They are to act instantly at the offered price and report back.

 

1. Trade only in amounts that will not interfere with your judgement
2. If you are upset by sequences of losses, reduce to ½ or ¼ volume
3. If there is some external/physical problem that may reduce mental alertness it’s best to bring the day’s work to a close.

Some readers (me!) will think it futile to aim for a fractional average profit per trade when there are many full points to made by holding through days and weeks. However it’s not how many points are made but how many points are made net (of losses). And holding for longer periods admits of the chance to make larger losses as well.

 

1. Tape-reading reduces profit-making to a manufacturing operation.

Wyckoff shows how a starting $1000 can be turned into $10,000 in 250 trading days (just over 1 year?) with an average profit of 12.50 per trade while adding 100 shares for every additional $1000 in capital. The results depend on making no more than ⅛ more than is lost each day. The margin should be depleted no more than ‘a few’ points before he makes up his losses and more.

No, it’s ten months only. Did the stock market used to trade on Saturdays? That’s a hell of a thing not to know.

12. Closing the Trades - Suggestions for Students

 

1. Knowing when to exit is the most important part of a complete transaction.
2. Wyckoff noticed that a large percentage of his losing trades came from failure to close at the culmination of the ‘immediate trend’.
3. He gives the example of a trade in New York Central. The market was in a bull trend so he was only looking to buy but the immediate action of Reading and Steel was correcting. When the slide in those two stocks stopped, he gave the order to buy NYC at 137 ¼. In ten minutes it was at 139 bid for 5000 shares.
4. He should have sold then as it was that particular advance that he foresaw. He also notices a ‘spectacular bid which looked like bait for outside buyers’. This was also a sell signal. He knows the stock is due to react (retrace) from this point even if it eventually goes higher. Then, when the reaction had ‘run its course’ he could get in again, or if it didn’t stop sliding, go short. Wyckoff doesn’t tell us how this ended, but we can guess he let the profit become a loss, or let most of it slip away.
5. By getting in at the start, and getting out when they end, the Tape Reader will in most cases fail to get the all of the moves in the stock for the day, but instead get many small profits, and the result probably will be better than sitting through reactions.

Changes in Leadership
The Tape Reader must stay in the leading stock, so sitting still through a retrace is not in keeping with this. During the day, there may be several different leaders, and the tape reader should aim to shift from one to the other as they come to the front.

There is a big difference in mental attitude between someone who feels compelled to get out of something and one looking for a chance to make a fresh trade after having won some money.


Necessity for Study

1. Wyckoff advises reading everything. (and here you are!) Even if you only find a single idea in a whole book it was worth the price.
2. Wall St. is crowded with men who want to make money but cannot be persuaded to study it from a practical business standpoint. This means hours of hard work and “Mr. Speculator is laziness personified.”
3. “Before you can make a success of Tape Reading you must acquire a broad fundamental knowledge of the market.”

 

1. The market variations are too numerous for any two situations to recur. So a simple set of rules cannot be formulated that can handle all situations.
2. The subject of Tape Reading, is therefore, practically inexhaustible. Which makes it interesting to the man who has the ‘study habit’.
3. No one who is worth the fee is willing to teach the art of trading or Tape Reading, because their time is better spent trading.

 

1. Many novices get ‘cold feet’ after a string of losses, and quit, right when they should ‘dig in harder’.

A Trading “Character”

1. Learn the art
2. No amount of reverses can discourage
3. Eliminate, fear, greed, anxiety
4. A difficult proposition, but the greater will be the reward for those who master it.
5. Tape Reading is hard work.

Clemmo17

Thanks for your work.

The Time you save your readers with your books recensions is invaluable.

Because Time is our most precious Capital

Absolutely Well said

Thanks for the kind words everyone. I hope I'm guiding you towards better outcomes, if not actual wisdom. It's always hard to know for sure though.

13. Two Day’s Trading

Wyckoff provides a trading log for a couple of days of trading.

-picked, probably, but either way it's anecdotal evidence. The inclusion of such things is good for book sales, but probably not very instructive.

1. However it should be noted - all trades use a ⅛ or ¼ close stop, and most often were mental stops.

14. The Principles Applied to Wider Savings

This is indeed a second edition, and this chapter is ‘new’.

1. Wyckoff says the ‘character of the trading’ has changed since the outbreak of ‘The European War’ (WW1). Despite this nothing had to be rewritten for this edition.
2. Wyckoff comments on the fractal nature of swings, although he doesn’t use the word ‘fractal’. “The same elements will be found in a drop of water as in the ocean and vice versa.”

But the hydrodynamics of an ocean and a drop of water are very different.

1. The most substantial moves are the ones with the most ‘preparation’ (longest ranging)

This contradicts something else he said about swing durations not being foreseeable.

1. ‘Preparation’ for the ‘principal’ movements in the market will often take several months. This may be preceded by a decline, during which large operators acquire stock, and they may even ‘precipitate’ this decline to pave the way for accumulation.
2. Big operators need foresight to sell enormous quantities of stock. Foresight means studying technical and other conditions.

But does foresight = forecasting? My experience is big operators aren't better at forecasting, but then I don't have much insider experience.

1. All fundamental factors are incorporated into price

And that's the end of the book. Wonderfully concise by modern standards, and I'll bet, though I don't know for sure, it was not a feature of his later books.

Conclusions
There is something of the universal in this book that reminds me of ‘Reminiscences’ but unlike that book, for some reason this one I can’t fully trust. The impression that the reader gets after finishing this book is that here’s a scalper’s bible and we can use what we know to great effect having finally learned what’s important and what’s worth ignoring. Wyckoff makes it seem easy.

Too easy. Even when he warns us that it’s hard work, we get the distinct impression that it really isn’t. Because now we know how to trade intraday.

If Al Brooks was the hyper-detailed guru of individual bars, Wyckoff is his polar opposite, stripping the entire process to its bare essentials, needing only a couple of charts, if that.
But what have we learned, really? What sticks in the mind after it’s all done?

1. Trade a few leading issues using real money in trending markets
2. Use a tight, but mental, and somewhat vaguely defined stop
3. Use volume and sharp moves to detect the initial trend after a range
4. Wait for the market to move first, proving the trend
5. Use point and figure charts if you must
6. Get out at the first sign of danger, move stops to protect profits
7. Be willing to reverse on a dime, and don’t use a rigid set of rules that would neuter your discretion
8. Close up shop every day

That’s about it, isn’t it? And, hey, maybe that's enough. Maybe that's all there is to it.

This is not a very technically detailed book, and that's what makes it so readable, but at the same time it makes it somewhat ‘wiggly’.
If we don’t have any success with this ‘method’ what can we blame? There are not enough definite statements to form a solid opponent against which we can joust.

I suspect, even if there was a way to reproduce the ticker tape experience, and to trade exactly as it’s outlined in this book, which is to say to scalp profitably as a day trader, that after a century, these simple methods are just not going to work, or work as well, if they ever did. The markets have to be able to stop this kind of steady drain otherwise a savvy, predatory group would make business impossible.

On the other hand, I could be dead wrong. I’m really game to try if I can figure out how. And in fairness to Wyckoff he does warn us that we need to read more, and use experience to refine our game.

The good news is some obstacles to trading this way have also been somewhat lessened in the modern era with discount brokers. I just think they must have found a way to counter this type of operator or they would not be able to offer services. Someone has to pay for the profits of the daily volume-providers. Pay for flow is likely one way of offsetting the costs?

Then again, some obstacles have not gone away and Wyckoff hardly addresses them, one of which is the difficulty and added expenses and risk of shorting stocks. There’s no reason we couldn’t apply his methods long-only, but it would mean not trading for the most part during a bear market. And again, maybe that's for the best.

I would love to test this out, and if anyone trades this way now (with stocks) please let’s hear from you, or if you know a thread here on the factory or elsewhere that I can read, I’m in your debt.

Next: Swimming With Sharks by Joris Luyendijk

footnotes

Swimming with Sharks

After getting about 1/3 of the way through this book I realize it's really not a book about trading or traders, but the attitudes of the 1% towards the the world they control.

It's about
- a culture of silence and fear within banks/investment banks
- extreme short-term thinking
- people as disposable objects
- perverse incentives
- the brotherhood that exists between big dealers
- finding scapegoats for the 2008 crisis
- how the current form of capitalism is more like socialism for the rich than actual capitalism, where theoretically nothing should be 'too big to fail'. "Capitalism without failure is like catholicism without Hell."

Basically it's about major problems (and possibly strangleholds) of capitalism from the viewpoint of an outsider.

It's interesting but not relevant to our quest. If you're curious about the book but don't want to read the whole thing you can get a very good sense of it from this article by the author who lists the top 10 quotes he gathered during his interviews.

https://www.theguardian.com/commenti...s-banking-blog

For now I'm going to move on to "Trader Vic Methods" by Victor Sperandeo.

Preface & Ch. 1

1. Vic has 1200 finance books in his library
2. Most of them have good ideas
   1. 2% of them are ‘superior’
   2. But most of them have a common problem
   3. They sell an approach that relies on a basic, poorly-tested method
   4. Other books are so specific that years of prior experience are needed to understand them

   
   

3. Newcomers waste ‘countless’ hours learning by trial and error and re-inventing the wheel
4. Vic has a 70.7% return over 10 years with no losing years - fairly impressive
5. Vic integrates odds, TA, statistical probability, economics, politics and psychology
6. Most market players only use 1-3 of these, Vic uses them all
7. Learning method - choose a goal, observe, read the teaching of skilled professionals
8. Let go of the quest for glory
   1. Vic never entered a trading competition
   2. Never gambles more than he can lose

   
   

9. Knowledge alone is no guarantee of success
10. Book assumes prior knowledge - written for aspiring professionals
11. Mixes market playing (short-term price moves) with value plays (buy and hold), but is more of a market player
12. Acquiring knowledge - the easy part
13. Putting the knowledge together and making it work - difficult
14. The stock market has become a ‘guaranteed’ investment vehicle with 15 up years, and only 3 down since 1974 (book was published in 1993)
15. This ‘no lose’ psychology will eventually cause the greatest losses ever seen since the 1930s
    1. 'Good luck' in the 1990s says Vic, because we are going to need it.
       

    
    

16. The 1990s:

SPX500 - what value forecasting? However in fairness to Vic, it looks like the big bull trend didn’t get started until 1994 or 1995, a whole 2 years of waiting.

Chapter 1

 

1. The Secret of the Gamboni
   1. A story about a private poker game with a strange house rule - ‘a Gamboni’
   2. A newcomer to the game has a great hand but falls afoul of the weird rule because he doesn’t know about it
   3. The second time however he gets the same weird hand and expects to rake in a big win
   4. However the other house rule is only one Gamboni can be played per evening, and the newcomer also didn’t know about this second house rule
   5. The moral of the story/gag is ‘if you want to win you’ve got to know the rules’.

   
   

2. There are 3 trends
   1. Short-term; days to weeks
   2. Intermediate-term; weeks to months
   3. Long-term; months to years

   
   

3. 3 types of traders
   1. Traders - trade short-term trend
   2. Speculators - trade medium-term trend
   3. Investors - trade long-term trend

   
   

4. The book is for mainly for speculators and Vic tells us the term should not have any negative connotations
   1. Vic plays all 3 trends
   2. The wild volatility of modern markets makes buy and hold foolish

   
   

5. Vic’s ‘apprenticeship’ was 11 years long (1966-1977)
6. Gambling is taking risks when odds are against you
7. Speculating is playing odds
8. Approached his career by observing successful men in the field and reading everything he could find about financial markets
9. Tape reading
   1. The infant that grew up into technical analysis
   2. Pattern recognition is unconscious rather than conscious
   3. Watch a group of 10-40 stocks, constantly memorizing prices, previous high and lows, and volumes
   4. Gain awareness of the speed and rhythm of the tape movement, the sound of the ticker, repeating price and volume patterns
   5. An ‘intuitive’ feel for the market
   6. Advances in computer technology have made tape reading a dead art (Called it)
   7. All the intuitive knowledge is now at everyone’s fingertips
   8. Tape reading required an aptitude that isn’t needed or practical anymore
   9. Trading is as a consequence open to a wider field
   10. The one part of tape reading that still holds
       1. Be confident that you’re right but recognize that the market can prove you wrong
       2. You are right until proven wrong
       3. Trade by rules that take precedence over feelings
       4. Ask at what point the market will prove you’re wrong
       5. Nothing should stop you from closing out when that point is hit
       6. No matter how many books talk about this it’s still hard for people to do

       
       

   
   

10. Don’t give or take tips, basically
11. He begins to ask some pertinent questions that one wonders how he wasn’t asking the whole time:
    1. What exactly is a trend?
    2. What is its nature?
    3. How long does it last?
    4. How low or high does it go?
    5. What’s the nature of a correction?
    6. How long does it last?

    
    

12. He doubles his studies with the work of Robert Rhea (Dow Theory)
13. He defines, measures and classifies trends and corrections by extent (amplitude) and duration (time) to try to find what can be defined as ‘normal’
14. He ‘reduces’ the data using statistical analysis and makes his biggest profit ever on a call that uses this study
15. He warns that this period of study was costly to his personal relationships as he basically worked all day and studied all night
16. The bottom line is measured in overall happiness, not dollars
17. Vic mentions the rates he pays while working off the floor makes his trading impractical, he loses 13% ‘most of it commissions’.
18. Program trading begins to affect the trend and he has to dissolve his fund
19. Be aware of government intervention - Fed Funds rate, central banks (boy this is really jumping around)

Chapter 3

1. Most great traders have ‘blown out’ at least once.
2. Overtrading bad
3. Preservation of capital good
4. Consider potential losses before wins
5. Trade only when the odds are in your favour
6. Don’t invest in takeover stocks and junk bonds in late market trends
   1. However it’s worthwhile near bear market bottoms (but how do you know???)

   
   

7. A good speculator/investor should be able to catch 60-80% of a trend
8. Vic’s money management advice
   1. If you had $50k to trade
   2. First position <= 10% of the total so $5000
   3. Limit losses with stops so that no more than 20% of that is at risk - so $1000 max loss, in other words, 1-2% of risk capital
   4. When you lose that (of course you will) reduce your next trade to $4000 and limit losses to $400-$800 range
   5. If you made $2000 on the first trade, then bank $1000 and increase the next trade to $6000
   6. This reduces capital at risk by 20% and increases actual risk capital by the same amount
   7. This will make ‘a lot of money’ assuming he gets 50% of his calls right
      1. The best players only get 30-40% right, Vic admits
      2. So is it still profitable?
      3. Yes - a ‘respectable living’ if you get only ⅓ right.

      
      

   
   

9. The size of a move has to be big enough to be able to set ‘spots’ to limit losses and take profits
   1. The smallest moves for intraday trading S&P500
      1. For stops is 3-5 ticks
      2. At least 15-20 ticks of upside potential

      
      

   2. “If he were interested in an intermediate move”, then it would be 1-3 points risk versus 3-10 points (but is he?? He just said that was the smallest!)

   
   

10. Never give back more than 50% of a profit
11. Vic goes through a sample trade

1. October 9 high-364.50
2. Immediately preceding sell-off low-349.85; the probable reward point.
3. Potential support on the way down; resistance on the way back up.
4. August 27 high-359.85; the level to watch for a break.
5. Support established in the sell-off prior to August 27; a potentially good place to set stops when prices broke through it.
6. Another tangible support point.
7. The likely reward point if trading October 13 through the 16th. Once prices broke through this level, it would become a good place to set stops.

Why is this chart numbered in reverse? Added reader challenge?

Chapter 4 - Dow Theory

This chapter is all about Vic's understanding of Dow Theory, which I now realize is mainly about 'econometrics'.

1. The work of Charles Dow, William Peter Hamilton, and Robert Rhea
2. Rhea emphasized that it’s an “aid” and not a substitute for understanding fundamental market conditions
3. Vic is a big believer in Dow theory but there are warning signs.
4. Like saying the theory fell into disrepute after falling into the ‘wrong’ hands.
5. Still, Vic claims it allowed him to catch 74.5% of expansion rises and 62% of recession declines from confirmation price to market peaks or bottoms.
6. No other forecasting method can boast such an enduring or consistent rate of success, says Vic
7. Vic gets his interpretation of the theory straight from Rhea who tells us we have to accept it ‘without any reservation whatsoever’. Danger! Danger! Science doesn’t demand respect or devotion. It earns it.
8. The principles/hypotheses of Dow
   1. 1. The movement of the daily averages is susceptible to manipulation
      1. To a lesser extent so is the secondary trend
      2. However the primary trend cannot be manipulated except by ‘Acts of God’ and Vic adds, Acts of the Fed. (which is manipulation, surely?)
      3. Both Dow and Rhea believe the claims of manipulation are overdone and mainly a result of sore losers.
      4. Vic admits that program trading and institutional trading can accelerate and deform the trend

   2. 2. The averages discount everything, the Dow Jones Rail and Industrial averages are all the information that’s in the market
      1. The market is not like a balloon blowing in the wind, it represents the efforts of serious men to move prices to where they should be based on future events
      2. All ‘well-formulated’ indices have the same character
      3. The combined actions of all investors and speculators produces a tendency to expand profitable ventures and diminish unsuccessful ones. This means there is little ‘good money after bad’.
      4. If market participants failed to correctly predict business activity there would be no sustained bull trends (really?)
      5. Vic admits that properly ‘discounting’ means that a convergence of different opinions are at work but the averages show a ‘predominance of opinion’.

   3. 3. The theory is not infallible. Neither are people. Mistakes are made but they are corrected quickly.

9. The theorems
   1. 1. There are 3 movements of the averages, any of which may be in progress at one time
      1. The most important is the bull/bear trend, the primary trend; lasts for years
      2. The secondary reaction is the most deceptive, 3 weeks or ‘many’ months
      3. The intraday trend lasts for days or weeks
      4. These trends may all be moving in opposition at the same time
      5. The primary trend is of utmost importance to the investor
      6. The secondary trend is of utmost importance to the speculator
      7. However they are both important to both types
      8. The short-term trend is of importance only to the trader
      9. The investor might use the secondary reaction to make profits that he can use when price resumes the trend at the turning point of the correction
      10. The speculator wants to ride the intermediate trend in either direction
      11. Program trading and faster info dissemination has increased the volatility of the intermediate trend
      12. Therefore ‘buy and hold’ is now questionable at best

   2. 2. Primary Movements: Knowing the long-term primary trend is the essential minimum requirement for speculation and investment; anyone who gets this right can make a decent living given ‘at least minimum prudence in timing specific market selections’.
      1. There is no way to predict with certainty extent or duration
      2. It is possible to ‘characterize’ primary movements and secondary reactions statistically using historical movements as a database
      3. Rhea had only 30 years of data, now Vic has 92 years; he says the distribution remains the same
      4. This means that sophistication, knowledge cannot erase the influence of psychology on the markets
      5. It is ‘highly probable’ that market movements will fall within a limited range of their historical extent and duration medians
      6. Beyond these medians, the risk grows

   3. 3. Primary Bear Markets: A long down move interrupted by important rallies (where we are now, I’d suppose)
      1. Caused by various economic ills
      2. Continues until stock prices have thoroughly discounted the worst
      3. 3 phases
         1. Abandonment of inflated stock hopes
         2. Selling due to decreased business and earnings
         3. Distress selling of sound securities

      4. The important rallies in industrials/transports never penetrate the previous bull market top or intermediate highs
      5. The economic ills are usually government-caused

10. Key characteristics of bear markets
    1. Mediant extent is a 29.4% decline from the previous bull high with 75% of all bear markets declining 20.4% to 47.1% (we’ve already seen 50%)
    2. Median duration of a bear market is 1.1 years (we’re at 10 months?) with 75% of all bear markets lasting between 0.8 and 2.8 years.
    3. A bear market usually begins with a test of the previous bull high on low volume, followed by a sharp decline on higher volume (it all fits)
    4. After an extended bear swing, secondary reactions are sharp advances, followed by decreasing activity, and a ‘line’ that marks slower declines to new lows

Do you see a ‘line’?

 

1. The confirmation of a bear market is the point where price declines below the past bull market correction. This would give an approximate date of 2022-01-19 for current times?
2. Intermediate bear market rallies are usually inverted V shapes with high volume at the low and low volume at the high.
3. At the end of the bear period the market seems immune to further bad news and pessimism, price reaches an equilibrium and eventually the market begins making higher highs and lows. Then a speculative buy is warranted.
   Attached Image (click to enlarge)

   
   
4. 4. Primary bull markets; a broad upward move, longer than two years.
   1. 3 stages
      1. Improved business conditions, increased optimism
      2. Stocks react favorably to improved earnings
      3. Rampant speculation and inflation

   2. Higher highs and higher lows

5. Key characteristics of bull markets
   1. Median extent is a 77.5% increase from the previous bear market low. (I don’t understand this. How can a bull move be less than 100% of a previous bear move? My rough calculations show that the 2008-2022 bull market was a 450+% rise against the 2008 drop. If you consider 2015 to be a bear market then it’s more like 900+% because the dip then was so shallow. Does he mean the first move gets to ¾ of the previous bear trend before the first reaction?)
   2. Median duration is 2.33 years. 75% of all bull markets in history have lasted more than 657 days (1.8 years) and ⅔ have lasted between 1.8 and 4.1 years.
   3. Beginnings of bull markets are indistinguishable from the endings of bear markets
   4. Reactions are sharp, with high volume starts and low volume lows
   5. Confirmation of the trend when price breaks above the last bear market correction high

6. 5. Secondary reactions:
   1. A decline lasting from 3wks to 3mos.
   2. Decline from 33% to 66% of the price move gained after the last reaction
   3. Often mistaken for the start of a bear trend for obvious reasons
   4. Determining when an intermediate move is ‘important’ is the hardest part of Dow theory (and trading!) and damaging to the highly leveraged speculator
   5. Evaluating this decision requires looking at
      1. Volume relationships
      2. Statistical probabilities
      3. Sentiment
      4. Economic outlook
      5. Fed policies
      6. ‘Many other’ factors

   6. Reactions less than two weeks are ‘minor’ and should not be confused with intermediate moves. Vic counts only 9/694 (1%) moves < 2 weeks that should be counted as intermediate
   7. The Fed raising margin requirements would cause a minor reaction
   8. California falling into the ocean would spur a ‘major’ reaction
   9. Distinguishing between minor and secondary reactions is ‘somewhat subjective’, the only subjectivity according to Vic
      
      A seductively scientific theory, based mainly on measurements, and data, allowing for little subjectivity. It shares this with cyclical analysis. However the curious reader is warned to drink deep or taste not. As Mandelbrot believed but was unable to completely prove, variance can potentially be infinite. Knowing the 'median' duration of a move only tells you the median time of your suffering, and knowing the median extent of a move doesn't tell you if your stop will get hit, only roughly how often.
      
      Also I feel obliged to mention if you want to see an elegant version of using 3 trends to make trading choices you should read Parisboy's thread.
      
      

By the way, I forgot to mention, (because I forgot) that Sperandeo is interviewed in 'Market Wizards'.

I realized it when I got to the next chapter and he talks about the Technical analyst who ate tuna fish for lunch and had frayed shirt sleeves! I know that guy because I've been that guy. I don't want to be that guy ever again.

Chapter 5

1. Most people don’t know the true nature of a trend
2. A bull trend is when price makes higher highs and higher lows
3. A bear trend is when price makes lower lows and lower highs
4. By definition to do this each new high or low must break the high or low of a previous peak or trough
5. Price is always either trending or ranging (Vic says, ‘making a line’)
6. Ranges usually happen at intermediate trend tops and bottoms
7. Markets are always waiting, consolidating, or trending.
8. This corresponds to 4 phases in which the market always finds itself
   1. Accumulation
   2. Distribution
   3. Trending up/down
   4. Consolidating

9. The difference between waiting/consolidating
   1. Waiting happens after a sudden price move and profit-taking
   2. Consolidating happens when there is uncertainty

10. Volume considerations should never be the primary - figures are usually only available for the stock market

Chapter 6 - Merits and Hazards of Technical Analysis

This chapter pays for the whole book because it’s not about TA at all. It’s about the behaviour of different market players. I haven’t seen market mind games described this clearly (or at all) anywhere else, but I am fairly sure it’s right because we can still see the effects of ‘tide-watchers’, ‘manipulators’, and ‘purists’.

Also - sorry about the formatting in this one. I don't know what happened, and I'm not feeling well enough to bother fixing it. Covid or some abominable variant has attacked my house once again. Just one of the many hazards of letting children live in your house.

 

1. Vic doesn’t dismiss TA entirely, because he’s made money with it, but he’s no fan of Edwards & Magee
2. The story of ‘Leo’ the technical analyst who can never give Vic a straight answer about buying or selling. He eats tuna sandwiches for lunch and wears frayed shirts. His method is clearly not working.
3. TA can always offer multiple explanations
4. Technicians come in 3 major groups

1. Tide Watchers
   1. Locals in the pit exchanges
   2. They are trying to gauge the daily trend
   3. Apart from watching for significant news they watch for any local breaks of a high or a low as a sign of support/resistance, and if those breaks fail, they reverse course.

   
   
   
   

1. 
   

   Previous day’s close is support if the market opens higher, and resistance if it opens lower.

2. 
   

   In lieu of any other reference point, 00 (“evens”) serve as resistance or support. In this case, support.

3. 
   

   Prices test support of previous day’s close.

4. 
   

   “Evens” become resistance.

5. 
   

   Prices test “evens” support, plus previous day’s support.

6. 
   

   Prices test resistance established at point 4.

7. 
   

   Market “gaps” open on positive news regarding leading economic indicators.

8. 
   

   Initial high near opening becomes resistance.

9. 
   

   Prices test resistance and then break out on high activity to new highs for the day.

1. 
   

   Tide Watchers make up the bulk of floor traders (and now? Are they the bulk of day traders and day trading algos?)

2. 
   

   Their impact must be observed on the short-term trend

3. 
   

   They can move a stock a few points either way with nothing but their own interactions

4. 
   

   The shrewd floor trader will take a flyer and buy few shares of XYZ to gauge reactions. If sell orders come in, he ditches it and if buy orders come in he buys more.

5. 
   

   Large orders from ‘outside’ can squelch the short-term trend at any time

6. 
   

   The last ones to get in are at most risk, just like in a pyramid scheme

7. 
   

   The character of Tide Watcher activity can be used as a ‘key indicator of the consensus of opinion’ on the Street.

1. Manipulators
   1. When individual people manipulate the market it’s ‘unfair’
   2. When institutions do it, it’s just fine
   3. They use huge buy and sell programs to manipulate price in the short term
   4. They rely on tide-watcher psychology for their success
   5. The pension fund example
      1. Suppose a pension fund wants to liquidate $100M of stock
      2. This sale is going to drive market indexes lower
      3. Why not profit from this?
      4. When it’s quiet, around 2PM they start to sell 1000-1500 contracts to get prices moving down; they take a $200M short position, double the amount of the cash stock position
      5. Around 3:10PM they begin scale selling stocks, about $10M every five minutes, finishing with one large block sale at the close.
      6. This generates short interest on the floor and prices move down
      7. The futures price moves down
      8. Tide watchers ride the crest and accelerate the move in both cash and futures
      9. The institution loses some money on their stock sale from selling on the way down
      10. However it’s ‘more than compensated’ by the gain made by closing a double-sized short position in futures. The margin for futures is only 5% but for stocks it’s 50%. The upside potential is 10x greater.
      11. The next morning, the tide reverses and knowing in advance the effect of its massive involvement, the institution makes a ‘handsome profit’ for itself and its clients in both markets, and in both directions, plus commission fees.
      12. “It’s a nice racket.” (I assume this is still legal? How does this not get carried away?)
      13. This type of program trading introduced a level of uncertainty in intraday movements that never existed before the 1980s.
      14. “Before programs you never saw a sell-off last more than 1 or 2 hours without some kind of rally. You also very rarely saw the kind of spikes in either direction as you see them now. Because the institutions deal in such huge size, and because the public has fled the markets, when you day-trade the S&Ps now, it feels like you are performing with a gun at your back. At any moment a program manager can pull the trigger, and the market roars against you before you have time to get out with just a small loss.”
      15. Short-term trading today is a ‘crapshoot’.
      16. Buying or selling large blocks of stocks or futures (or forex!) at the market in the presence of a program is simply foolish.
      17. When change is due, those that change first usually profit the most
          
          

      
      
      
      

   
   
   
   

2. The Purists
   1. Some analysts believe on a formal, theoretical basis that price is everything, and markets are deterministic
   2. Notably R.N. Elliot, Krondodiov, and the ‘unthinking followers’ of Edwards & Magee, and Dow
   3. They ‘presume a metaphysical inevitability’ to price movements as though they were determined by the dictates of fate, God, or evolution, or some other universal force (cycles, planets!)
   4. “Any attempt to forecast the future by rigorous cycle theory, or by strictly mathematical means totally ignores the subjective nature of market activity.” (How I wish I’d read these words back in 2016! Of course, it makes perfect sense now. It’s easy to be misled, and intelligence is not a defence, as we have learned from other authors.)

   
   
   
   

What a chapter!

I'm beginning to feel a bit better. I have to start taking better care of my health. As so many trading books tell you - focus on health and relationships. What good is money if you're not around to enjoy it?

Chapter 7 - Where Fortunes are Made - Identifying a Change of Trend

1. The fastest and least risky way to make a fortune is to identify a change of trend in a market as early as possible, enter, ride it, and close out before or just after the trend reverses
2. While buying lows and selling highs may be impossible to do consistently, it is very possible to catch 60-80% of many intermediate and long-term moves
3. How to draw a trendline
   1. Pick your timeframe (long, intermediate or short)
   2. For an uptrend
      1. Draw a line from the lowest low up to the highest minor low point preceding the highest high such that the line does not pass through prices in between the two low points

I don’t think there is any material difference between these two lines. Do you? Their slope is marginally different. You really think the trend is going to turn as soon as price breaks a previously unbroken line? Or to put it another way, suppose we used the second (“wrong”) trendline and waited for price to break it. Do you think our trade will turn out very differently if we used the ‘correct’ line?

 

1. Vic likes this method because it is simple and accurate. Producing a slope similar to a linear regression.
2. The 3 changes that define a change in trend:
   1. 1. The trendline is broken
   2. 2. Price stops making higher highs in an uptrend or lower lows in a downtrend. The previous peaks or troughs are tested but not exceeded.
   3. 3. In an uptrend a previous minor selloff is broken downwards, in a downtrend, a previous minor rally is broken upwards.
   4. After all 3 of these occur it’s equivalent to the Dow theory definition

1. Trendline is broken
2. The previous high is not broken
3. The previous minor low is broken
4. So this is a confirmed change of trend from up to down.
   

I like the simplicity and precision of this, and since I haven’t done this in a long time. Let’s see how often this method can correctly anticipate a change of trend, shall we?

Hello

The above is extremely important / doing that myself!

Cheers / Mos

Good on you, Mos!

There can only be positive benefits in terms of mental clarity/discipline also.