Tape Reading and Active Trading

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Division 2

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A COURSE OF INSTRUCTION

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TAPE READING AND ACTIVE TRADING

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C O P Y R I G H T 1932

R

ICHARD

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WYCKOFF,

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York.

TABLE OF CONTENTS (“ ~. 1 2 2 2 2-A 5 3 4 4 5 5 6 7 8 9 10 11 12 12 12 12 12 1: 12 12 12 1$? 12 12 12 12 12 P -“ 1 1 3 4-A 1 1 1-A 1 3-A 1 8-A 1 1 1 1 1 1 1 2 ~ 3 4 4 4 5 6 7 8 9 9 10 11 INTRODUCTION JUDGINGTHE IMMEDIATETRl#fD Buyingand SellingWaves Wave Chart of the Leaders BUYINGAND SELLINGWAVES - PART II

HOW TO LINK THE WAVE CHART WITH THE STOCK IN ‘WHICHYOU iWE TRADING

A VerticalLine Chart and ContinuousLine Chart TRM)INGAREASAND HOW TO PROFITBY THNM

TradingArea of AuburnMotors THE TAPE READINGCHART

Tape ReadingChart of J. 1. Case

HOW TO SPOTTHE BUYING AND SELLING POINTS WITHIN A SMALL FRACTION

JUDGING STR$NGTHOR.W3AKNESS

HOWTO KEEP PERCENTiiGEIN YOURFAVOR TRADINGON INITIALACTIVITY

mGING THE MARKETBY TESTSAND RESPONSES THE BEST STOCKSFOR ACTIVETRAI)lNG

STOP ORDERSAND OTHER VITAL POINTS Jud@ng XQur Ftficimcy

Tradingin UniformLots Dow-Jone$Averagefl Tradingon Paper Trade at the Market

Put a Time Limit cm Your Trades

Qualificationsof a SuccessfulSpeculator lhvmrAsk Advice

Fallacyof Averaging CapitalRaquired

How Prc)fitsAccumulate Where to Trade

Choiceot Brokers Studyyour Losses

SEC. P. 12 12 Cs 1

w

1

Cs

3 Cs 5 Cs 7 Cs Cs 1? PractiaePersistently CHARTSTUDIES

Amwriad Telephoneat Bottomof Reaction AmericanTelephoneat Top of Rally

Allied Chmical at Bottomof Reaction Allied Chmicd at Top of ~ly

J. 1. (laseat Bottomof Reaction

00URSE J@du Ction. section1. UMiM the #Mlrt● section3. Trading &QML% section4. TaneReading gi&$.i& ~. cop~igllt1932

SUMMARYOFTHERICHARD D. IOFINSTRUCTIONIN TAPE READING

Generalprimiples involvedin the minor fluctuations.

WUXOFF

AND ACTIVE

tradingto

TRADING.

take advantageof

Basing judgmenton impartialanalysisof avai.lab~efactg insteadof ill advisedimDUJPeSa

How to internrettam actio~and learn to makeYO1.W OWll &Q&3mn cknt d%$cidon~ with a high degree of accuracy. How to constructend~terrm% a Wave Chart.

The selectionof’stocksthat refli]ct.loadorshinand have o=Q~~~~ c CIIWAI.LtYL

How to detecttheminor price surgesand estimatetheir significance.

How to recognizethe symptomsof a reversalof the trend. How to employthe barometricquality of the Wave Chart in judgingthe trendof the individualstockwhordnyou are trading.

How to operatein harmonywith the Law of Supplyand Dwand. The general significanceof c,tradingarea and the exception-al tradingopportunitiesit may offer.

How to judgewhethera stockin a tradingarea becomes b~~ ish OX’bearish.

How to decidewhen to trade close to the dangerline with relativelysmall risk.

Correlationof price movement,volumeand time.

How to interpretthe fractionalprice changesand the var-iationsin volumeduringminor fluctuations.

The logical1imitatims of risk and readjustmentof stop QZ!@Xk

How to recognizeconditionswhermlnderthe riskmaY be 1Lmited to a $Mlaufr~ction.

and EQJFJdU Section6.

iiwmiml

or Section7. S63ction9. section 10. Best Stocks For Active Trading, Section11. 2 -- -.

How to so~.tthe buying and sellinglevelswithina small fraction.

How the marketis _nun&y 1 Eivinrinformatia~to those who COIlgoad the ~

HoW to avoid over$txa the market.

How to WQ MD Y@+lra d what to do at the turningpoints. Recognizingthe evidencesof technicalstrengthor weakness. Whet constitutesa normal rally or rco.ction,and why.

How you may @NelQn Your jUMment so thnt accumulatingsymptoms of strengthor weaknessbecome recordsof subconsciousmemory rad resultingd~ciaons areV’htud.lY intuitivcl,

How to ld.mi~,roducqand elhin atq the risk. How to Lnsur@Your PM’ its,

How to developa tradingpolicywhereinrisks are consistent with probableprofits.

The generalsignificanceof incrensedLctivitY. How to interpretchangesin the degreeof activity. The imnortance of volume wxzes in tradingzones and followingth$ formationof an apex.

HOIJthe operatortests the technicalconditionof the market. How the individualtradermay secure,withoutexpense,the ben-efit of the large operators tests of the market’sstrength. Lines of resistanee; how to recoznize them and profit

o..ccordingly.

How to observewhen the marketis in an overbou~htor oversold condition.

How The the How

to recognize evidenceof manipul~tion.

significnnccof the market’sresponseto news items having elementof surprise.

to selectthe best stocksfor fictivetrading. Recognitionof changingleadership.

The importanceof uverngeprice r:mgemd its relutionto

flo:~tingsupply.

-3-Use of Stop Orders. Section 12. Miscellaneous Vital Points. Section 12. Chart Studies.

The advantage of familio.ritywith the chief characteristics of leadingj active issues.

HOW and when to use stop orders.

The scientific location and road.jus+,mentof stop orders.

Substitutes for stop orders. Judging your efficiency.

Consistent trading policies.

h’lh?rr)r~t~t~on of the averages.

Testing your trading ability without monetary risk.

~b~arketorders vs. limited orders.

Limiting the duration of a trade.

How to avoid the dangers of ill-advised ad~ice and tips. Dangerou~ pitfalls and kiov~ to avoid them.

HOIWto select your broker and judge his efficiency.

Tape reading charts of leading active stocks and tP.eir interpretation.

Typical trading maneuvers illustrated, wiih comentsj suggestions and explanations.

How to recognize the termination of a reaction, and the subsequent buying signals.

How to recognize the termination of a rally, and the usual indication of impending reaction.

How to use the combination trading chart and wave chart of barometric letadcrs.

Copyright 1952 by Richard D. Wyckoff t

TAPE READING AND ACTIVE TRADTNG

For the three to five-point moves

with risk limited to

one-half to one-point

The majority of those who follow our Method devote an hour

day, more or less, to studying and planning their campaigns. But we have learned that an increasing number wish to trade in the market

continuously, either in their brokers’ offices or in private offices

of their own, equipped with a ticker and other facilities. From these

traders we have received many requests for further detailed information

on Tape Reading; and as the technique of active trading from the tape

is different from that outlined in the first part of our Course, we have prepared the following to meet the requirements mentioned.

This Division of our Course of Instructionj like the First

Divi-sion, is based on judgment of the technical position: Supply and demand

--support and pressure.

No news, earnings or other corporate or fundamental statistics

are considered; we use only tho~e which relate to the factors: Price

Movement, Volume and Time.

The active trader who is a Tape Reader is concernedonly with

the immediate*rendof the smallmoves in the murket. This trend can be detectedby this Method soon a.i%er~hc openingof the Stock Exchangeat ten o~clockdai~g It may changefrom bQUsh to bmrish, or vice versa$ and reverseitselffrom one to three times duringe.wh day’s session.

We instructsuch tradershow to followthese trends,changing or reversingtheirpositionsas often as the marketaffordstradingoppor-tunities.

In most instancestradesare closedout the same day they are made, but i??thereare strongreasonsfor carryingany stockovernight, this may be done.

Detailedinstructionsare given as to the best stocksto choose and the exact time to make commitments,based on methodsformulatedand successfullyemployedfor over twentyyears of tradingand advisorywork.

Stop ordersare placedon every trade,from one-halfto one point away from the buyingor sellingprice. These stopsmust be constantly watchedsnd moved as quicklyas the marketpermitsin order to reduce risk, then protectprofits.

This form of tradingdisregardsthe long trend of the market, as well iisthe intermediatetrends. It takes instantadvantngeof the technicalralliesand reactionsthat promiseto yield a profitin the same stockmarket session,on eitherthe long or the short side of the market.

-M * *

Tape Readingis tho art of determiningthe immediatecours~or trend of prices from the actionof the marketas it appearson the tape of the stock ticker. It mims to detectthemows that are Lik@y to occur

in the next few minutes or hours; gettingin when they begin and getting out when they culminate.

It requiresactivityand flexibilityof mind; readinessto change or reverseone’s opinionquickly;slso nerve,poise,decision,promptness, courageand absoluteindependenceof judgment.

Its purpos~is to derivean averageprofitfrom a seriesof trades. By keepingthe risk down t~ a minimumand constantlystrivingto reduceit; by clevermsmipul.ationof stop orders,a net profitover comiwission~,taxes and lossescan be realized.

All commitmentsare temporary-- their durntionis ited to hours. They areintended to take advantage of the

ate fluctuations. with this (andwork for your preferto go home

Method you, as a trader, search for your

usuallylim-

small,[email protected] profithare and ~-- today. In mo~;tcasesyou will witha clesm sheet -- with no commitments orI either sideof the market. Thus v:hen you start trading nuxt morning your mind is clear for new impressions;your judgmentis unbiasedby reasonof your neutralposition.

At each mo.rninglsopeningyou make sensethe trend;’decideon the best stock,

a swiftanalysisof the market; and if conditionsare favorable, you make your commitment. Then you watch the marketfor a confirmationor contradictionof the correctnessof your position.il.1.so for the

psycholog-ical. moment for noving stops, closingtrades or crowding stops so close to the market price that you leave the way open for n furtherprofit,or you are closedout on stop at a smallfractionfrom the extremehigh or low.

Tradingthus, you are afforded several times as many

ities in these small swingsw you would have if you wz~itedfor the more importantswingsof ten to thirtypoints.

If a trade does not make good at once, you closeit out, whether it standseven or at a smallloss. You will never tradewithouta stop, for your risk must be kept down to a minimum. You will never take a big loss. Youwill never be tied up. You can claan house in an instant. And you can stay away from the tickeras often tandas long m youwish.

This form of tradingis entirelydistinctand dlffcrentfrom that describedin the other Mvi.sionof our Method,which aims to secure profitsfrom the ten, twentyand thirtypoint swings. It meets the re-quirementsof thosewho wish to trademoreor less constantly.

Includedin this Divisionof the Courseis a plan for charting the detailedtransactionsin certainstocksas they appearon the tape, bywhich you can sense the immediatetrend;figurethe exactpointsfor placingyour stop ordersand where ta move them to reducerisk when the marketgoes in your favor. It showsyou how to C1OEWyour tradesthe same day at the most advantageousmomentsby watchingthese Tape Read-ing Chart indicationsand gettRead-ingout near the extremepointsin the advancesand declines.

Under tlzisMethodyou might take new positionsfrom one to three times a day, dependingupon the activityof the market. It is the nearestappronchyet devised,so far as I know, to tradingon the floor of the StockExchange.

But the most importantadv,ontageof a combinationof Tape Reading end tradingfor the longor swingsis that it will aid youin

increasingyour profitsin this way: Sections11 and 12 of the First Divisionof our Courseshow how to determinewhich stocksshouldmove

three tc five pointsin a certaindirection. You apply the Tape Reading Methodin makingyour trade :ltthe most favorablenoment,and the poGi-tion you then take with a small risk of one-halfto one point may later developinto Position2 on the long side,or Position4 on the short side, and in{dicutea run of ten, twentyor thirtypointsin your favor. By thus tradingwith a fractionor a point originalrisk and letting your profitrun into the many pointsindicatedin your forecastof the probabled3.stancein points,you will greatlywiden your marginof profit. For this reason,these Tape Readinginstructions,combinedwith our lcmger-swingplan will materiallyenhancethe profitpossibilitiesin both Divi-sionsof the Course.

,

JUDGINGTHE IMMEDIATETREND.

For this purposewe use a Wave Chart,made up of the price of five of the most activeleadingstocks. The pricesof these are added togd+her,and plottedon a sheetof cross sectionpaper,with the time scale at the bottomof the verticallines, and the price scaleat the left, correspondingwith the horizontallines. Specimensheetfollows.

All movementsin the market are made up of alternatingbuying and sellingwaves. We judge the strengthor weaknessof the market by the distancein pointsand fractionsrecordedby thesewaves;we combinethis distancewith the lengthof time each wave takes to run its course.

In studyingthe distanceand durationof esch wave, if the buy-ing waves are longerin durationand travelfartherthan the sellbuy-ing waves,we get an indicationthat the immediatetrendis upward. If the sellingwaves exceedthe buyingwaves in time and distance,the immediatetrend is downward. Wheneverthe buying and sellingwaves seem to offset each other ond no material.strengthor weaknessis

in-dicated,the immediatetrendis in doubt. Our positionshouldthen be neutral.

Selectthe fiveleading stocks. At the openingof the market add the pricesof their first sales,includingthe fractions,which shouldbe added in eighths. Put a mark at the price representingtheir total at the properplace on the price scale and on the 10

tical line. Next wretchfor eithernn upward or downwardswing to ex-haustitself.When it smns to stop,put u dot on the chart at the propertime and price leval. Xf the market thenreverms its direc-tion this prows that tiw po$$tionof the dot is correct. If it goes on in the sa@@ direction,chmmgethe dot until the movementagain hesi-tates and sh~w~ siguoof a reversal.

Them watch the new wave until it seems to cam to an end. Place the dot, TM marketwill confirmcm contradictyour estimateof that turningpoint. And so on until you are thoroughlyfomilinrwith judg-ing and recordjudg-ingthe start,durationand finishof each successivewave.

The ~mmediatotramdis Lndicatodas soan as one buyingand one sellingwave havo been complwtmd. You then know on which side is the most power -. the buyingor the sailingside. And all you have to do is to go with that tiido.

But you must alwayshe on the lookoutfor a changein this immedi-ate trad. It is likelyto chmge its directionfrom one to three times in n singleEMZlswion.Thio is how you datectthe change: In an up trend, when the selung wavoa begin to increasein time and distancesor the buyingwavw mhorten. E$$heror both willbe an indicationof a change in the immediatetrend. Apply the sam reasoningto a dom trend. Watch closelyfor these chamgesfor they tell youwhen to buy and sell;when to get long or short;when to close your presenttrade and reverseyour position. IhU’therdetailsare on thQ chart,Page4-A.

Rmmber you have nothingto do with the other trendsof the market-- d.thar the long trendor tlw intermediateswingsof 10 to 30 points. The latterswingsare the basis of the First Divisionof this Coursein Sto@kMarket Sci.ancaand Technique. Tradingfor such wings is .anentirelydiff’orentproposition,reqwiringless time and attention, Copyright1932 by Rial%mxlD. Wyakoff l% Sect&on2 Page 2

but havh$ uatmg 2 m Wtv$eC1’kmr’t

AJtht$qgh the buying or tl’mmmdag WLWQB &ay M $nmic$snt on certaindays to carry the marketin e certaindirectionuntil th~ close, this does not man that it will eontimm to dc so the next day. And it do%n not fnmn that yOU $hotidWLmy

Tomorrowf 8 trendwilldofim its~f

any tmdtxi overnightfor in the sameW~. Lnd it to go into tommrow~B ses$iomwith any stockson hand unlem

this rmwn.

is best not threeis acme extrmrdintqf reason

in

the action of the market. Such a rcmon wouldbe, for example,a strongdmmkapmnt of power Mar the beginningof what looks like an %mportAntbull or km swing,$mlicated~ increasingactivityand

volm in a @ten direction~with scamdy any pointsof llesitntion,or ralb$ or reac$im$ ZM the mm may be. In such instonces,a long pmition, for exmpla$ might be allow$xito run with R frequentraisingof stops so that a tmdo originallymd~ with a half to one point stop might run into mvmal or many pointsand thu$ ixmrmso the net averageof profiton all yo@ tra$wlfor the month. Full advantageof such a situationmy be

taken by them who understandcw IWthod of +awUnfgfor the largar stings

and cm forecm% the probablemmiimrof anc$Ba tradeis Xnadoon $dW Str(wagth of @A$ well may from the startingpoint,

points certainstocksshouldmove. dimctiarm hmd.n, and its price and imdicate&,accmding to the othat Mvisim of our Methodsthat it will probabLydmmlop a move of

M to 30 pm!.ntsethe traderU.owflhia profitto run accordingto instruc-tiOXiS, and lmg#!profitsshouldrm~t.

The Wawo Chart twdwm Tape Reading. Afteryou have used it for a while,you ~ not need it. Yom aye and brain will seo and record Copytight1932 w E4idmrdD. Wgckoff TR Section2 Page3

the wave you have

CM&t too quicklyand do not mpoct intuitionto come until had long wpmienca and much practice.

***

Tho five leaders$hculdalwaysbe repr~sentativeof tho market. At timeswhm a leading rail hu~ considerableeffectit shouldbe in-cluded. At other times a ut$ll,ty,like ConsolidatedGas, might coae to the front;it shouldtak~ the place of somo other leader solong as this ColditicmLmate. Selwtion of tlwse leadersmay btilikenedto ob-sm’wingtho pullingpower of a &oup of five horses: If you ware driving

t?nwh a group amd you naticmione horse laggingin tae tr~aeasnd another [email protected] ahead of the rw$t, you would at once decidethat the fcx’mr shouldba [email protected] that the Iattw is the real leader. Apply this roason$ngin Ice@ping your fivm leaders amcmg tho most reprosmtative of all the stock~in the mark~tin their abilityto influencethe rest of the list. Keep weiglxtngthe$Q from day to day. Wood out poor ones, which mmns those that haw lost theirinflucance,or have becometoo in-activeto be included.

**-W

Chart of the previousday shouldbe beforeyou when so that yw get the relationof todaytsmarket to that of ywterday.

-4

\

BUYINGAND SELLINGWAVES (’IhelVaveChart-PartII)

In the First Divisionof our Courseof Instruction,Section 4, we presentedPart I on the use of the Wave Chart. The materialin Part I di~cussasin somowhatgreaterdetailthe instructionsset forth in TR Section2 of theSecond Division;therefore,it may be substi-tutedfor this last-namedSection. Or, if you prefer,you may remove Parts I and 11 from theirpresentbindersand place thornin a separate loose-leaffolder. You will then have a completetext book on the theory of the Wave Clurt as I have developedand expandedit.

On pages 7 to 9 of Part I, I showedyou how to interpretthe Wave Chartfrom the standpointof pricemovement,durationof each buy-ing and sellbuy-ingwave, andcomparf.i.tive supportor pressure. The follow-ing illustrationwill show in more detailhow to apply the additional factorsof volumeand activityto your analysisof the smallwaves.

Fl

335 340

FIG.1

In this illustration(Figure1), it will be seen that volumeand activity both shrinkto very small proportionson the littlebuyingand sellingwaves from 10 olclockto 1:40 P.M. The day starts with a smallrally which is promptlyfol-lowed by a smalldip. Bulls and bears are evidentlywell matchedat this point. After the first dip (Period2), the bulls try to put pricesup, but they fail to at-tract a following,as shown by the failure

<

of activityto increase. Demandpeters out aroundthe 11:00 A.M. top. A small dip in the fourthperiodbringsout very little stockon the downside,however,and thisencouragesthe bulls to try again. Qncc more they fail to attrscta follow-ing. Note how the rally in period5 dies out aroundthe two previoustops. So now, the bears endeavorto break the deadlockby offeringstocksdown (Period6) until 1 ofclock. This man-euver meets no bettor success. Activityfails to increaseon the down-side, however,and a tentativelybullishsignalis givenby the evidence of supportaroundthe morninglow.

At this point the markethas come to a completestandstill. Everythingnow dependson the abilityof one side or the other to rouse a following,eitherby breakingdown the supportlevel or by pushing pricesup throughthe forenoontops. When the bears fail at 1 o!clock,

it is the bulls~turn to try their strengthagain, This time, dexmd is a little stronger. Prices rise a littlebit above the previoushighs and activityincreasesa trifleas they advance.

If we are tradingfor the short swings,this is our cue to pre-pare for action. If activityfalls off on the next sellingwave, we may expectthe bulls to becomeaggressive. We do not have long to wait. Prices sag a bit in the next fifteenminutw but the activitydies out completelyon the dip. This is the cue we have been waitingfor. It tellsus that the supplywhich held the bulls back on previousrallies has been absorbedon the small earlierreactions. Therefore,T7e step in with confidenceand buy. Weare promptlyrewardedby a sharp rise in Period 9.

Any questionas to the validityof this upward move is settled by the sharp increasein activityas pricesrise throughthe previous tops. Shortlyafter 2 o~clock,the bulls rest momentarilybecause,at this point,the averagehas risen to a level where stocksencountered supplyon the precedingFriday and Saturday. (Not shown.) Evidently this supplyhas also been disposedof, becauseactivitypromptlyshrinks on anothertemporarysell-off, Since there is obviouslyno pressureyet and few offeringsto be taken at this level,we stay long and wait for the bulls to push on again as they try for a higherobjective. This they attainjust before the close.

In this and the exampleon page 7, Part I, we have consider-ed the Wave Chartisusefulnessprimarilyfrom the standpointof short-swing tradingoperations. For your analysisof the intermediateand longerterm movements,you will find it helpful.to constructa OXV+

point figure chartfrom the Tape Readings.

This will permityou to bring all of the principlesset forth in Sections10-12-14-16and 17 of the Main Divisionof our Courseto bear upon youranalyses of the Wave Chart, The charts,pages 5 to 8, with ex-planatorynotes,make clear how this is done.

The additionalillustrationson pages 9 and 10 show how to mount the daily Wave Chartsto form a continuousrecordso you may comparethe actionday by day with [email protected] indicationsdevelopingon the one-point figure chart.

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LEADERS

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I

390

FRI. ALJ~.2.~ _{f“lo1’4.AuG,28}

— 385

Tl+u. AuG .24

Illustratingzone of distribution:inabilityto absorb supply and deveJqment of weakness. (Comparewith one pointfigurechwt at A, page 5).

o

s’

0.

Cdg;

_o

₀ On

--’-711M

F’”T”z’

THLJR. NOV2,1933 1 1 _I TUES.OCT.31, 1933 WE D.NCIV. I, J933

Illustratingzone of support,abilityto absorbofferingsand developmentof strength. (Comparewith one point figurechart at K, page 8).

HOW TO LINK THE WAVE CHARTWITH THE STOCK IN WHICH YOU ARE TRADING.

The Wave Chart being based on the actionof the five leading active stocksis completein itselfifyou wish to trade in all five at once and whenevera turn is indicated. But in the beginningit isbest to trade in only one stock.

Observewhich of these five leadersappearsto followmost closelythe mings on the Wave Chart;or perhapsthere may be some other stocknot includedin your five leaderswhich,by observation and experiment,you find is betterfor this purpose. This will de-pend upon the kind of stocksthat make up your five leaders. You might,for example,includeAuburn,which would give the groupa differentaspectthan if it were not included;or a rail like Union Pacificwould again chmgc the textureof your averages.

When you find a stock suitedto your purpose,study closoly its behaviorunder all conditions;watch the characterof its man-ipulation. Duringthe studyperiodmako differentkinds of charts of it, such as a verticalline chart,a continuousline chart,(seo Page 1-A) and a combinationof figureand volume chart,which will be describedin anothersection. Any and all of thesewill aid you in becomingacquaintedwith the peculiaractienof that stock so that you can tradein it to betteradvantage.

i

A VERTICAL LINE CHART and

A CONTINUOUSLINE CHART

?s

I

volume

in

Thousands of shares

‘1 may June

WMtlm for studyor @real practim, plot its moveson the Wve Ck% TM price scaleQf this #rtmk shouldbe entmed on the right side af tha sheet;cm tk left the pric~ male of the five 141MMMPB.

Mow study tk action of your one stockin combintktioa with the ahangwi b th imwlievte trend as slum on tho Wave Chart.

YOU iwy find that $t is d$##@@m~its trend-Ctly when ti averagm ckwqe. If this colMJl%MM,you will!know $lst whezlto buy and add. it. But you may f’iudit is working exactly tha @ppo@it@: wham the Wave Chart turnsupwardyour stookmy begin to get weak. Trti@ acmmdimlgky.Or you q olwmm that your 6tcmkraacbeaits kming pointsbeforeor titer the tivw atoclmIn tkm mmm@s. You do mot care w)mt it does DO long as you Ieam its habitsand turn them into profits.

Now that you have the idea, it dopmk cm the amuuntof studyand praaticeyou put inta it. ?lhwtyou see on tha Wave Chart is the WO-@ out of theh3W Of *PP* and Demand. ‘fk$t(?= ~S a moving pict~reof a cross sectionof the market,designedby me for this very purpose-- to helpY($U @ ~~fit~ QUt of **~ * * tape. Mm tallRo$t of yoqr Oppor’tmiti!m.

TRADINGAREASAND MOWTO

From observationyou know how of mu’row rangesof

msnt for most peGple for Mg profitswhen many short swingsto

3 to 5 points.

FROFZTBY THEN.

ofton stocksgetinto periods These are times of

discourage-who um on the wrong side, or who are looking the marketaffordsonly mall profits. There are one long one. Let us seo how we can derive profitsfrom the3 to 5 point moves.

Keep Q verticalline chart showingthe dailymovementsof any of the well-khownaveragws,such as Dow-Jones,SthndardStatistics,

?kw Iork l!ime$,New York Herald-Tribune.. whicheveris publishedin

ycmr local daily newspaper. Use those to indicztewhen the marketis in a trading@ea or whetherit is moving to anotherlevel,upwardor Clownwmd. You do not care which way it goes, or when; but you need these avorage$for a broad pictureof the market-- as an indication of the variouacurrents

mediateor lo~g trends. th~se are the whirlsor

end eddies.The The eddieBam the quiet water

currentsare the small,inter-the tradingareas. In streams betweenrapids.

Your vwtical line chart of these averagesshouldalso show the volumeof the day$s trading— the total salesfor the day. This is very importat becauseit aids in formingyour judgmentof the prevail-ing trend. Your individualstock chart should.also show the volumeof the day?s tradingin that stock,50 that you may observewhetherthis volumeinw’emawsor decreaseson the advancesand declines. Increases

swve to [email protected] the bullishnessor bearishness. Decreaseswarn you of R probablereversalin direction, I could elnborateon this --mite a b~ok> in fnctjht there it iS iKI ~ nutshell. Do not let its brevitydisguim its value.

When you see the runn?agcw!workingback and forth over a trad-ing area,you till genmnlly find your individualstockdotrad-ing the same. Not always,however. All stocksdo not move alike,ss you know. Your zavarage~may be in a tradingzone und other stocksmay have small,medium or wide wings withoutaffectingthese. Your stockmay not be included in the+averaga$;whetherit is or not, rememberyou are tradingin q X and not in the averages.

The upper and lower boundariesof thesetradingswingsrepresent the points (at the tops) where supplyovercomw demandand (at the bottoms) where demand exceedssupply. Unless the actionof your stockindicates

(by method$we shall.explain)that it is going out of its presenttrad-ing range,youm purchasesshouldbe mado aroupclthe bottomsof these short swingsand your sales~long or shart~around.the tops. This seems a simplething,but very few people can do it. That is becau8ethey have not had the properinstruction,or thqy have not studiedand practiced it. We will showyou how to do this accordingto our Tape ReXiingChart — the most perfeatmethod that, ao far an we know, haa ever been dwised for thosewho tradefrom the tape, in an office,or on the floor of the

StockExchange. If one is a mmbcr of tho Exchangeand cun trade from the tape on thtifloor, this will be found ,allthe more valuable. It is qlained in Saction5 of this Divisionof the Ccur8e.

Mmntinc conaidorthe positionof a singlestockwith its move-ments plottedon the !&we Chart,and in connectionwith its location

in

it#3trading area. lf it it3 0- b@tVJW#Ek 30 @Ud 35 ~ ShC@d

glvs incmcu!k%g atlmtiom to its bwy$mgopportawaitim a$ it approaches

30,and its su~ m it n8arS 35. ‘lhidtdcms not mean that you are to buy or EoU at or near $hcm paints, Imt that you are to watoh out for CMUMMMfor profit inticati by the action of your atmk on the WaveCkrt, ax@ on the Tapa Ramiing Chart referred to above. You nevar know, whena atmk appmacbw the upper or lower level$ d’ a trading rangs vkthar, this time, it will go on through; so you do not take a poaition until you have all the f’mts awmmbhd, i.Q., transferred frm tha tape to yaur WaveChart and your Tape Reading Chart.

* * or Mttom is a small turning point, and even a small

one maydevelop into one that is important.

TRADINGAREA OF AUBURNMOTORS

DURINGMAY AND EARLYJUNE,1952 ILLUSTRATEDIN LINE CHARTFORM

SHOWINGACCUMULATION IN PRWARATIONFOR AN ADVANCE.

CONFIRMATIONOF TREND

X INDICATEDBY THE CORRESPONDING TAPEREADINGCHART

w

50

APRIL /WA Y ~UfVE

THE TAPE REAl)UW

It iEltwanty-fivayears since

WART.

I first began to fmocaW the owing movemmts of the mrket from its own actionas it appearedon #* tape of the stock ticker. M&ny mmorendawere mcessary at the bqinnirig, bwt

duced q notm

tim possible.

as I developedef’f’ioimcyin this art, I graduallyre-and chartsto a minim, wheneverI found

sim@ifica-It &$ one thing to learn to read the tape and to develop therefromonors $@mnt md intuition,andanother to teach other peoplehow W do it, makingeverythingperfeotlyclear and practical. I have dooid~dthat tho ~wsiestway form to teach and for you to learn Tape R8ading

dmw’ibed bdOW. ThisChart Vohm and ‘l%m in

is by mmns of the Tape ReadingChart whichis

CQIUIXLIMWthethree wkttil

fttctow

PriceMovexmmt, moh a ww that a tradercan see at a glancejust what a certa$nstockis doing?howit

tions;the valumeof-a; the

cldmm?;the proportionof tha rallies

aats on the rallies and

retac-progressof the advancesand de-ad rmotdms to previousswings) the lines of! mpply and dmand; the best

M6MUM of d63C$dillgwhen toU!OV9 stops fact, combimm, on one page, most of Tape Reader.

It cm be kept on a sheet of oblomgin

(33p&i#rt

the

locationfor stop orders;the how far, etc. This Chart,in’ indicationsrequiredby the

cross ewtion paper. If this be -- of th five leadersand of a

single stick-- can be kept on the same sheet,so that a complete pictureof the marketmay be had in combination with tho Tape Reading Chart. If severalindividualstocksarecharted on separatesheets in this form, the WavQ Chartcan be recordedon a sheetof transparent paper,half this sire, so that It can be laid over any individualstock chartin oral@ to see how that stockis actingin comparisonwith tha five haders.

Let UEIstudy the the specimen~heetwhich

Canstrnctionof follows. This

this Tape dmuld be binderand kid besidethis text in order fully to

placations. Tho Chart has a price scaleat the left. The full figures ReadingChart from taken out of the understandthe

ex-are in one column and the fractionsin the next. The figuresrecorded

in

the chart are

price, When the in at the proper

the totalnumber of sharesdesltin at each fractional price chsnges,the volumeat the newprioe is filbd level on the chart. WNn a prhe is skippeda cipher is @nt@redat the fract$onwherethre were no sales. Now watch this point very carefullybocau$eon it

in making W9 kind of a chart;it get it clearlyintoyour mind your sale at a certainprice,you enter

#are 18

Cohmn.

Imtz’$”at

blank space at the pH3pW

dependsyour gettingthe right start is simpleenough,but ifycna do not chartwill not be correct. After a the next sale in the w _ u level,above or below,in that same But if that spacesabove or below,be filled,you make the the next vacant space~~-. This will b~ perfectly clearwhan you go over the folkowingdetailedexplanation.

Your Chart,recordingthe movementsof J. I. Case beginsat 10 A. M. with total saibsd’ ’300sharesat 4.0, This %)0 mi$hth8Ve

been made

Cqlymq$lt

up og severallot~; so long aa scalescontinuedat that price

thay were added togetherand recordedall at once men the mice than~ed, Not until tnen do you know that tharewill be no uore sales at that price for the moment.

The ne$ctsale is 100 at 40-1/4. As thcxwwere no sales at 40-1/8, a cipheris enteredat the 40-1/8level,and the figure1 is enteredon tha 40-1/4 I.inB.Now you have three figuresin the first column— 9 on the40 level;O on the 1/8 level and 1 on the 1/4 level.

The nsdctsale is 40-1/8,only 100 shares;next 200 at 40. These two figuresmust go in the secondcolumnas the first column5.sfilled on those two levels;next sale 40-1/8 (100);then 200 at 40-3/8 (O on the 40-1./4level);then 100 at 1/2; no salesat 5/8; a totnl of 2100 at 40-3/4; none ati$o-’7/8~ 200 at 41.; norm at 41-1/8;200 at 41-1/4;200 at 41.-3/8. All these item@ were recordedin the third columnbecausethe advance continuedstre4.ghtup to 4.3.-3/8withouta singlefractionalreaction.

The next tremmction is 100 at Q, so in the fourthcolumnwe must anter O on the 41.-l./4and 43.-1/8levels. Next s~.e 100 at U-U8* As the spaceabove the previoussole is alrenclyoccupiedby u cipherwe must enter thib in the next column,and when the followingsale takes pkaca at u it goes just below the previoussale -- in the same column. with that exphnation as to how to startkt?cping& chart of’this kind~ which is redly Q l/8-pointfigurechart,combiningvolume and price movoment}I WW proceedwith the instructionsas to how this cmt shouldbe used in actualtradingand forecasting.

On JaKNW’Y19, 1932, Case opens at 40. Our positionis neutral. Wewish to make n tradoon eitherthe long or the short side as soonr-s

the stock sham a tendency. Letus as~ume that the indications on the Wave Chart sow after tlds opining were bullish, but that we wish to wait until the stock itself has givsn some sign of a definite tendency. There may be an opening bu%ge M.rt this may not be its true direction, 00 we shall wsit until the indications are definilm enough to promise a worth while swing. We allow 1/2 a point for commissionend taxes,so

it is best not to go into a trade points. If we had the background would know be~terjust whare this

that dots not promisethree to five of the previousdsyls trading,we

stock stands;but startingfrom scratch, Wemust wait ~til the stocktellsUS what it is probablygoing to do

be-fore we make a commitment.

In learningto read these charts,it is best to cQver with a sheetof paper most of the chart,sxposingone columnat a time ~ drawingthe sheet “t the right. In this way there is 10ss temdamcy to form judgmqptson the basis of what alreadyap~)earson the chart. This Methodnqy be followedin a studyof all forms of charts,care being takennot to see the goncralformationin detailbefore study is at at begun. After the @-1/~; 100 at opening — 900 Aares at 40--l/8; 200 at 40; 100 at 40-1/8; 40-1/2; and a total of 2,100 at 40-3/4. Then

the tape shows 100

200 at40-3/8; 100 200 at &l; 200 at . 4=/4; 200 at &3/8 -. R riseof 1-3/8 from the opening. Tho re-actionrecordedby 100 sharessellingat 42.marks for the presentthe boundarylineof that tradingrange of 1-3/8 for the day so far. We

do not wish to take a positionuntil the stock clearlyindicatesthat it is going out of that range. TO tradewithinit might not giveus enoughroom to turn aroundin, and PW

Comght 1932 by Richard D. Wyckoff

l/2-point for overhead.

Next thetape records 10(3 at &l-1/8 j 100 at @; 300 at &l-1/8; 300 at 43.;300 at 41-1/8j 100 at 41-1/4;200 at 41-1/8;100 at 41-1/4.

The tradingrangehas narrowedto 1/4 of a point; we are still in doubt. Next sale is 3000 at 40-3/4-- a sign of weakness, becausetherewere no salesbetwaen43.-1/4and 40-3/4;this indicates@ thin market. Next 900 at 40-5/8;800 at 40-1/2;500 at 40-3/8;300 at 40-1/4. Those sales total 35OO shaxes,all takenwithinthe range of 40-3/4down to @-1/4. Here is same a%rength,but it may mean only temporarysupport. The chart must tell us what the insidersare tryingto do with their stock. Are they supportingit becausethey want to sell at higherprices,or do they r@wXlywant to acquirea lot of the stock? They take 900 at 40-1/2,mak-ing@ aroundthat level; then 300 at 40-5/8;WO at 40-7/8;and 1000 at 43. That is 6,OOO mhareaon the way down to 40-1/4and up to Q. That doss not look Mke tnqhg for the sake of accumulation.If they really wantedthis stockthey wcWd not have bid up for it; they would have put it down. So here is our indicationthat the pool is tr@ng to sell and not to buy. We form a tentativelybearishattitudeand wait for the marketto confirm,cancelor reverseit.

The biddingup proceeds~400 at 41.-l/8;600 at 41-1/4;1.400at 41-1/2. Now the price stundsat a new high for the day which has the appearanceof an artificialbulge made by the pool in order to attract outsidebuying, It required8400 shams to be takenin order to advance the stock l-1/& points. This is not bullishbecauseof the way they did it; tkrefore, bearish. Unless this stock goes on upward and its volume increasesas it advancos$we are lookingfor a chanceto go short.

The tape next records700 at &L-3/8and 400 at 41-1/2;then

400 at &b3/8. So far the rise is checked. Tk pool or someoneis tryingto sell,for tha tape sqm $00 at 41-1/4;then 100 at Q and 400 at 40-7/8, Thisis ahalf-wayreactiorIfollowingthe bulge from 40-1/4 to 41-1/2. Thik reactionconfirmsthe checkingof the rise and narrowsthe tradingrange to 5/$ -- between40-7/8and 41-1/2. We

shouldgo with the stockwhan it goes out of that range;that is, we shouldsell it short on a bulge,andaworing to get as high a price as possibleso as to keep our risk dowm to a minimum. Remmber that we are tradingnow with a 1/2 to 1 point stop end it would be betterto lose opportunities,becausethere are plentyof them, than to be so eager to trade that we take an a risk largerthan the dove.

There $s a rallyof 3/8 on a single100 sharesat 41-1/4. It looks llke a m@c-up ~ the specialist,or an odd lot house My#mg to Won up. Another100 at 4&l/8, them 600 at Q. The stockis heavy. W look for a rally on which to sell. This is confirmedby the next

sale 700 at i&3/4, which is lJ8 under the previouelow; then MOO at 40-7/8j200 at Q; 100 at &l/8 -- decreasingvolumeon the rally. - w a m _ Q M ~d we get & for it. we ~t a l-point stop at 42 [in$icatedby an S) in the 42 space. 300 sharesmoreare sold at that pkice~makingit 400, followedby 100 at 40-7/8snd 800 at 40-3/4.

The chartnow has a slab-sideddownwardformation,made by sever-al lemming tops. A rally to 41.1/4occurs cm light volume,confirming the prwious b$arishindic~tion. Someoneelse tries to sell.300 and gets Q fox’it, folkowedby 100 at @-7/8. The l/4 point rallywhich follows at &l/8 is the weak~atya%. Then comes 300 at Q; 200 at 40-3/4;100 at i@-5/8-- a now fractionallow on the down ting sinceit made 41-1./2, Mtt30 dwmnd at the low level. (lhddo the stockis bid up 5/8 snd

1300 shareschangehands at41-1/4.It looks artificial,particul.mly when a quick slump to 40-5/8follows. Now observe1/8 point rally to

4&3/4ja returnto the40.5/8low on 100; anotherweak rallyup to @ (n lower top)3 then t!m real slumpbegins.

When the stockreaches40-1/2we reduceour stop to 41-1/2--our risk is only 1/2 of a point now, for overhead.

There is only one rally of 1/8 on 100 sharesat 40-3/8. Then a new ).OWat 39-3/4;anoth~rrally of 1/8 on 400shares to 39-7/8; thena new low at 39.1/2.Note that the volumeincreasedon the down side. There were only mall lots sold in the upper 40s. More sub-stantiallots were sold mound 40 and under. Add the salesat 39-3/4 acrossthe page horizontallyand you find they

these takingsare not sufficientto absorbthe dip to a new low -- 11OG at 39-3/8. When this * to40-1/$.

are 4400 shares. But supply,as provenby a Ocxmrs~-QJ&

The declinecontinuesanother3/4point with a total of 2300 at 39, and a low level of 38-5/8,then 200 at 38-3/4;200 at 3~7/8; 100 at 38-3/4;600 at 3g-5/8;then a 1/4point rally to 38-7/8. Note that offeringsare gettingvery thin here; that is, the volumemound this levelis light. When the stock again dips to 38-5/8,we bring our stop down to 39, becausewe do not want it to rally even 1/8 above the

38-7/8levelwithouttakingour profit. and we must not let that profit get awe.y with a clean sheet. Thereis a rally to at 38-3/4;@O at 38-7/8and 500 at 39.

have our profitfor th~ day.

Our initialrisk was 1 point,or

Copyri@t 1932 by RichardD. Wyckoff

It is gettingtoward3 otclock from us if we went to go home 38-7/$on 100 shares;then 100

Thiscatchesour stop emd we

1-1/2 allowingfor overhead.

‘dewere able to reducethat risk to 1/2 point,then reduceit to nothing--the flat pride (meaningnothing--the price at whichit was sold);nothing--then to 40-1,/8 which assureda ‘7/8 grm!$ ptofit;then to 39, which was 3/8 from the day’s low, at which price the trade was closodwith a net profitof 1-1/2 points.

There is a little stockfor sale on the closingrally but we get no cue fnomit for the next dayls sassion;M fnctjwe would rathernot carry any impressionshone with us as we preferto have am unbiasedopinionwhen the marketopens in the morning.

***

Note: A numberof other chartsand interpretationsof this kind will be found in the Chart Studies,followingSection1.2. Additional studias will be added later on. Many detaihd instructionsin ChartReadingare includedin Mvision 1 of this Course.

—. _——

—-—-i

TAPE READINGCHART

OF J. 1. CASE JAN. 19, 1932 In FigureChartForm ShowingEach l/8 Point Mow ‘WithVolumeat Each Price UNIT OF VOLUME= 100 SiARli3

HOW TO SPOT THE BUYING WITHIN A SMALL

AND SELLINGPOINTS FRACTION.

Numerousexampleeas to how this shouldbe done are found in the explanationsof the Tape ReadingC!harts.But there are some fine pointswhich may be made a littleniore

this: V/emust learn to anticipatethe high dayismoves by assemblingin our minds,and factorsthat point to a certainconclusion,

clear. One of theseis and low spotsin the

from the chart,all the and if this conclusion is justifiedat what we believeto be the rightmoment,it becomes a commandto lx%de. Thus it will be seen that there are two important steps: making the diagnoaisand actingupon it.

The marketis cdnt$nuallygivinginformationas to its tech-nical.position. It does this throughthe Wave Chart,which fdrmsyour background,and forecaststho immediatetrend. It givesfurtherin-formationas to the particularstockin which you are tradingif you will plot a Wave Chart of that stockon the sane sheetwith tha Wave Chart of the five leadingstocks.

all the littledetailoif you will stockon the same sheetas the two

In additionto the above,you get keep the Tape ReadingChart of that Wave Charts. With these three and your eye on the tape you am well equipped.

Thus fortifiedtherewill be no reasonto buy on bulgesand sell on wmk spots;for$ in this form of trading,these are not oppor-tunities to m&e profitsbut to make lossQs. If you sell on weakness with a short stop you increaseyour chances of havingthat stop caught.

But if you form a beariehconclusionand mit for z bulge on which to tie your position,the chancesfavor a profit. All such technique must be takeninto consideration.You must mieavor in everymy to increasethe percantagoin your favor.

Ono of the nest importantways of doing this is to learn to do

your buyingon what I call the drive down; that is, duringa selling wave end at ju$t about a minutebefore this wave ands -- while the pressureis on~ not wha you see it hesito.to,but a minutebefore that,beccuscit takes a minutefor your order to get into the crowd and be executed. (If it ttakosmore than th:.~ton the average,your brokeris slow or he has too much businesson hand to give you the right executions.)

Sellingon the driveup is just as important. Most of the bulgesin a stackare made by pools, specialists,manipulatorsand floor tradersto induceoutsidersto buy. If you lenrn to spot these play$,you have all thwe interestsworkingfor insteadof againstyou.

Take advantageof the pl,ablictstendencyto buy on bulgesand sell on wwkneas by doing the reverseof this. It is better to get out too soon than to overstay. The publicusunllyoverstays.

Watch the Y?aveChart for your cue. If you expectto buy, and the five leadersare showingan up trend for the time being,wait for the sellingwave. Look back and see how long the previousdown wave lastd; judge~ that and the actionon the tape about how far this down wava will go, Watch the Wave Chart of the individualstockycJuare trad-ing in, almo the Tape Readtrad-ingChart for volumes,comparativestrengthor weakmss, and 41 the other technicalpointsmentionedin chartinter-pretation. Learn to combineall these variousLndicationainto a sound

conclusion,and when you hmve made it, time your momentwhen you give the order,just as you time to hit a golf ball correctly.

stroke;that is, the your strokein order

Watch for the pausesthat mark the end of the buyingand sell-ingwaves. They indicatethat theforces that producedthe wave have cmhaustodthemselves. For a mouentor two, even in a fairlyactive market,the tiokeris quiet. These are like periodsat the end of paragraphs;a naw phase of the tapetsstoryusuallyfollows.

V?hena stockhesitatesit notifiesyou that it has lost its momentumin the directionin which it has been traveling. YOU should

then quicklymnke up your ruindwhetherit is advisableto buy or sell or move your stop order. Any halt may be the final turningpoint that move. If you have studiedthe First Mvision of this Course know how to judge the distancewhich a stock shouldmove, you are

in and well fortified;you can more easilydi6tin@sh the haltingplacesfrom the probableturningpoints. There are more haltingplaces than turning points. The periodsof hesitationusuallyindicatea reversalof

temporarytrend. They also oftenmark the beginningof a nsw trading area. Every move startsat the end of a previousmove. If there are indicationsth~t the comingmove will be important,take advantageof it. If there are no such indications,let it pass.

Alwaysbe expectinga change. Be constantlyon your guard and ready to closeyour trade at the first sign of danger. (See illustra-tionsin the Tape ReadingCharts.)

Even WBen you have moved your stop close to the marketprice for your ~tock,t~ to do betterby sellingon a strongspotor buying on w%ahmas if yow reallydesire to closeyour trede.

When am upwardor dawnwwd move is losing aoraeof its forceit willbe indicatedby a shorteningof the upwardor downwardthrustsas shownon the T@e ReadingChart.

Never Xes,chfor a stock axceptin some caseswhere you are pyra-midingand have a substantialprofiton paper. Even at such times there is frequentlyan opportunityto buy on CLreactionafter a break through on the up sidesor a rally followinga break throughon the down side.

JUDOXNG

We do not

Sl%WWTHORWSAKWWSBY

subscribeto thethf30~ equalin the Stockmarketbecausev#Jhave in a prmcticalway. Even if it were trne see how one couldmake any money there~. gainedby watchingthe half-waypointson for judgingst#engthor weakness.

m

w

WAY

poINTS.

that actionand reactionare

rarelyfound it to work in the stockmarket,we But there is advsntage

out do not to be rallies

When a stockadvancestwo pointsand then may be calleda normalreaction;but if it reacts givm us an indicationof strength. If it reacts thereis sn indicationof weakness. Used in this

and reactionsas a basis

reactsone point,it less than a point,it more than a pointP ways with the

half-way point as a sort of measuring stick, we can really derivean advantage This is provenby the numerousexamplesexplainedin the text acccmqmny-ing our Tape Raadacccmqmny-ingCharts.

Other signswhich may be includedunder this head are those ex-treme caseswhere,after a movement

direction,Q reversemovementtakes all of the precedingmove. A stock greaterthan the sellingpower;but

of say threepointsin a certain place to the extentof all or nearly

A

advancesbecausethe buyingpower is if it does not hold this advcwe: if itimmediately reversesand loses all or most of what it has gained,this tellsus that ~omeoneet once took advantage of the strengthand sold the ‘ stockback to its starting point by offering more shares than the buyers

were willing tO accept.

The saxw illustrationmay be appliedto a raid or drive down of say threepo$ntsmore or less, folhwsd ~ a recoveryof practically tie same amount. This iB a sign of strengthbeoausethe reboundshowed that thare was more Wam@h than weakness. This sign is more bullish than bearishbeqausethe sellers,hming spent their force,are met and ovwx%xneby the buyars,who, at the momentof completionof the recovery?

,., are in a comparativelystrongpodtion. They have takenall offerings on the way down and whataverstoodin their way on the advance. The floatingsupply~s thus reduced;unless furtherofferingsappearhigher up that they are not MJM.ng to take,the way is then open for a still further advance.

Study and learn all these technicalpoints. Considereve~-thhg that appearson the tape as an evidencaof supportand I.Mting power,or pressureand sellingpower. Continuallycomparethe strength of theseforces. Use all th~ judgmentand reasoningpower at your

command. Endeavorto improveyour judgmmt by constantstudy and prac-tice. Strive to lift your Judgmmt from commonplaceto good;from good to better;from betterto excellent.

When your judgmentha~ becomeexcellentthroughyour own efforts mkwmborthat

tion; so that psycholckgiml

you can carryit to a higherpoint by trainingyour intui-after a while you wLLl get the pulse of the marketand the momentfor tradingdown to such a fine point that you can form conclusionswithoutconsciousreasoning. You can learn to act on theseintuitiveconclusionsamd tha go back and chackup your recsons in order to find out how good your intuition$@ becoming.

MM TO KEEP A PEWEMTAGEIN YOURFAVOR.

This is accomplishedchieflythroughthe IMtation, reduc-ticm andd.iillh~tiOtlaf risk. That swum: (1) You must immediately

place a stop order as soon w each n~ trade is executed. (2) You mast move thie stop to reduceyour risk as soon as the marketwill. permitwithoutendangeringthe life of your trade. (3) You must furthermove the stop so as to covor the price at which the trade was made, end(4) you must move your stop still furtherwheneveryou have a chanceto insurethme~ a part or most of your profit. These four steps are vital to this form of trading. Unlessyou carry them out cold-bloodedly-- withouthope or fear -- and persistentlyand. with determination,you will greatlyreduceyour chancesfor success.

Baaed on your intentionof tradingfor the swingsof 3 to 5 pointsthat occur in a dny!s session,or perhapstwo or three days in succession,your risk is kept down to a smallpercentageof your pros-pectiveprofitby placingstop Orders1/2 to 1 point awey; but %fyou shouldfail to use these stopsin the way indicated,you are positive-ly incraesingthe percentageof your risk.

At 1/2 point r$sk and 3./2point for commissions and other over-head?you can bo wrong tw$ce out of threetimes if you realizeon the third trade a profitof three points. Your two losseswould be 1 point each,or a tdal. of 2 points,includingoverhead;the third trade would carry an overhoadof 1/2point, making 2-1/2. Hence your net profit

would be 1/2 point on the three trades~ On a W30ratical.1 point risk with you are wrong twicefor 1 point each time,

a 5 point objective,if that would be 2 pointslost. Ii’your profit on the third tradewere

duct the two losses (2 points)and the would total 14/2 points,making 3.1/2

5 points,you would have to d+ overheadon three trades,which pointsdebit and 5 pointscredit; a net of 1-1/2 pointson the three trades;or an averageof l/2-point on each trade.

We do not claim that you cen make cut and dried transactions like this, but we emphasizethe point that you must keep your los~es plus overheadin such proportionto your profitsthat you will have a [email protected] the good. This whc)leplan for activetradinginvolvosbuy-ing right and sellactivetradinginvolvosbuy-ingright,and lettactivetradinginvolvosbuy-ingtradesrun in your favoruntil you observetechnicalindicationsthat they have gone as far as you can reasonablyexpecton the strengthof

whichyou startwith anticipationof severalpointsand help your average

On the other hand,your risk

your diagnosis. Thus many a trade a pc~intor two profitmay run into profitfor the week or month.

is strictlylimitedfrom the start; it is ~evor increased. It is frequentlydecreased. Many timesyou can plug a profitwith a stop order so that it cannotget away from you. Thereinlies your expectationfor success. You aim at n largerprofit than loss in every trade. You keep a percentagein your favor.

Rememberthat we have by this methodeliminatedall guessing; all tradingon tips, hopes,hunches,hearsay,news, information, sta-tistic; snd that we are tradingon the basis of stockmarkettechnique which has its rootsin th~ law of suppQ and demand,the only real funda-mental on which a copyright1932w sound methodmy be Richard D. Nyckoff based. ‘J%section8 Page 2

TRADINGONINITIAL ACTIVITY.

Deciding upon thestock in which to trademay sometimesbe

done tQ adventage by letting the marketitself tell you that here is an opportuni~.

You watch the tqpe. You have no commitments. of the five leadersis beforeyou, on a sheetof chart

Your Wsve Chart paper. You make mentalnote of the pricesthat are flowingacrossthe Tape or Translux. You wait for impressions.

Suddenlyyou notice a certainstock gettingactiveon the up or down side. If it is movingin harmonywith the trend of the five leaders,you immediatelytake a positionin it, long or short,with a stop1/29 3/4 or 1 point awqy. Then you go back over the tapeand make a Tape ReadingChart of it from the openingor from somer@uonabh dis-tance back. Ii’the high and low pricesare on the quotationboard be-fore you, you ean mark theseon the left side of your chartas a guide to the dayts r&nge;then if you have a verticalline chartof that stock inyour collectionyou cen see where it stands;whetherit is in a narrow tradingrange,or movingout of it on the up or the down side,heading towarda new level.

Your incentiveto tradeis due to the fact that this stockwhich has been idlingalongin a very narrowrange and with smallvolume,is now becominga~tive. ‘l’hisactivitymmn~ that somebodyis gettingbusy in it and

Copyri$lt

you infer that he may be in pomswmion of informationlikelyto

M’lLwrm sup$dy m dummd or that its t$dkmiml positionis suchthat

theyWlleve theyc-anmoveAt to aao4#mxMval ad realisea profit.

You, thereforq,hop m th@ etm!kmd Ad% along with whoever iS

en-glnm%ng the Imve. ‘l!hw you hmre him workingfor you. You are

tak-ing a ride, M to spedq m a qmz%al train charteredand pUd for by

mmane @lse.

Your Mpe ReadingGhartwill give you all tie details. You mu

judgenot onl# by what he does but & what he dom not do, for it must

be yuurfirst precmut$m to see that he is not makinga false move %n

the appositedirectiontowmd whid he intendsto melm his P*. That

ia$ he may be pl- a downwing, eo M first bids the stockup a

po$mt or twc in order to attracta followingof buyersto whom he can

13ella largerquantity-- -eitheron the my up or beginningat the top

and mZIAng it back. If he intendsto bull tho stockhe may drive it

dawn first soas to CMMII out the stop ozdersbelow ond mcum all the

stockhc can find aroundthe2017 kvel. Hence you must be on your guard

tith your stop order for it ia ymr only protectionagainsta sudden

revoraaland a big 10SS.

If, hawever,the aperatm is reallybull$ngthe stock (or

bear-ing it, ae the case my be) d raullygoes on with the deal the my he

startedit, your stop order is safe, so long aQ you do not gd it up too

close to the price of the @ock so that you are kickedout on a small

reaction. Keep your stop at a safe distance- on the wl aidebelow

the bottom of the last dip, and on the bear aide above the top of the

lad rdly$ until the timo uppmmlm for 404ng the trade.

Watch jnmr !l%p Re_g -t, W watch th@ trend of the five

lmdera to mako sure * we not iticatimg a turningpdnt in the dayss

thn Iwy bwk again

WMIMWlws on the

Y@lM!”

thwl

to

buy Cmb

on

the

Im3aom

ttw

th$m *8 that the C)permtor will h faaaof indlomt$onsthatthe marketis d@Nrmry,ho wi2Aprdtdity do just what I

probably not

con-about to sell am tailingym

a~

@W his #tQok a suddan6*; themsell.Out sll he Carl80 86 to ZW3UW Ms line and thus providepurohmingpoworaroundthe low point

of

tha! Ooming Reading

Cha?t

These

dip. You follow hi$ IM3W8 closdy andwhen your Tape #!MlJV3he $a bW@JI~ th#M bSCk, buy -6 baok.

paintain tradingare bwed on standardpracticeamong

-pert floort@@Qrs, pml managersand other importantoperaknwwho knowthe game. If youexpectto make money,you mustnot tradothe way the publicdoes; yQU mwt wb marelybuy, sit andhope, Youmust @ $n and out at th right moments,tradingthe way warlmt

tach-nieiam do.

It mwt be your codxnt aim to refine and poli~ ywr jud~ mont w that you will be able to keepyourulndclearand unbiasedand

firm

yet flexible+Hsverbacomoprejudicedin fmm of tiemarket, forif you do you will b like a ship that to &hwQ on high tido and is strandedthere.

vw topqwxw for tradingopportunitieson initialc&Av-@t yOUr OQMWUd a k??$erwmborOf V@l%iCC.~~ine ChWtS This doesnot moan thatyou willhaw to makethe dmily Qntriea on a large r’mmbn yartmlf al? through your .cmim?mt, for yow

Next he tmtw out Steel, Tdepbne or Can in tho sam my. He gat~ some foULowingin Cam, a littlein Telephoneand nothiiigmuch in

Stiel. Them he triesout the utikL~ group and gets a Mttie more em-courqp#m@ltOP the bull side,

From $his seriesd? teatshe now knows maxwe the marlmtby bullingCan. liefeell?lout

that he can b~st

ad-theother stocks that

sometimesr~spondti the loadarshipof Can so as to get help or at laaat supportfrom othor Bectionsof the market. He f2nds a little mbre

gcml

most

avoids hand.

rmponse in other industrialsend wlwm he has these sizedup he ahead and bulls the ones that show the N3st rwqxmse -- Want seem to inflw$ncethe rest of theLh3t.

Olwwre that he followsthe bullingthe rails Mcauao he He dm$ not want to take big

his way; Sonmlne elm am 40 that.

Une of least resistance. He would there hAve to play a luno

~OCk8 Of StO&@ I?hi&h standin

He advamcss$ha ones that are easi-est to put up while requitingthe mnlhst purchmes on MS part. After a while the mnallMl&s which he has producedW MS testingopm’ations, followed~ the mom activobiddingup of a Mm@@rnumbarof stocks,m-ccnlregefloor tradmraand the publicto get in on tho bull aide. Am

ixmwasing mwber of stiochadvame on expandingvolumeand a buU mlmg

of sub~tantialproportionsis under wqy.

The C. O, furtherencowagaJsthis bullishness~ helphg along wharovorhe O*. If he w#s ca%ain stQckBor groupelsgging,he will send a brokerinto those crowdsto bid them up. If wealmcssbrwdcsat anywhere, he WJJJ1give support. As a good generalhe is alwaysemdaam-ing to hold & $inesagairwt attaok and to advauaehis front Mnes (tops) as far as he @mm.

Supptase the bull $vting has nowWan runningfor severaldays and after d.%ingup the situation~ a swi3s of tests,he finds that the

buyingpower has temporarilybecome somewhatexhaustmd;that is, most of the peoplewho could bo influcmcedto go in and buy imve done so; they csnnotwend that same money twice nnd thereis a scarcityof otherbuyers to take theirplaces. Demandhas shrunk.

Ho rlOQ#SU@i$?Y Wi’WtWcX’ the marketwill take; hc WIUS fill ho cxin around the top of the swing and on the way down. If the rise in the cwra~s has amountedto 10 points,he may keep on sellinguntil it has declined6 points;then

not by biddingup thasQ stocks

he may begin to but takingthem

buy back what he has sold --as they nre offered. Out of 1,000 sharesofferedat ,atort.ninpri,cehe may take 600 or ’700

l~i~v-ing 300 stillofferedsnd the marketunchanged. His reaccumulationis not apparent. Tho marketis stillhecvy althoughhe is buyingback on the reaction.

After a while he absorbsmost of the floating abouthalf way back from the top. The sellingpower

supplyat a level is now lessening; in fact,he is unable to buy back all ho wants; so he drives several stocksdownwardto weakenthe market so he can completehispurchases

on the reaction. These drivesare also his txxjts.Whilo these stocks are weak, othorsadvancea littleas a resultof his raisingbuyinglimi-ts. Thus the averagesare scarcelyaltered. Peoplewho are bearish point to the few weak stocksand decidethat the marketis goingmuch lower. They make some

to buy more. He takes With the bears

ventures on the short side. These help the C. O. their offarings.

makingno progressand no more stockpressing for sale, the market is now in a position technically’ known as Itsold out!!