Richard Wyckoff trading Methods

By | September 6, 2012

Richard Wyckoff, like Jesse Livermore, was a Wall Street stock trader in the early 1900s. Wyckoff’s first job in 1888 was as a 15-year-old stock runner on Wall Street. By the age of 25, he had his own brokerage office. He also published his own market magazine and advisory newsletter.He studied the stock market investing methods of famous traders to develop his own approach. Richard Wyckoff methods were formulated into three laws of tape reading and well known books.

Wyckoff’s basic trading methodology was to chart price, volume and their relationships over time. He would then search for “turning points” in the stocks or markets. He also grouped stocks into sectors and then charted the sectors. He called these “wave charts.” Wyckoff believed that stock price action consists of waves of buying (or selling) that last just as long as they can attract buyers (or sellers). When that following is exhausted, the wave stops and a counter-wave begins. His theory is not unlike the Elliott Wave theory. Importantly, Wyckoff’s method in determining critical turning points was based not on mathematical formulas, but on investor psychology.

Below are some valuable “nuggets” I gleaned from the two books above. Many of these nuggets are direct quotes from Wyckoff, himself.

  • “Anyone who buys or sells a stock, a bond or a commodity for profit is speculating if he employs intelligent foresight. If he does not, he is gambling.”
  • Wyckoff’s goals were to select only stocks that move soonest, fastest and farthest in bull or bear markets. He limited losses and let profits run.
  • “Stock market technique is not an exact science. Stock (and commodities) prices are made by the minds of men (and women).” Mechanical trading methods or mathematical formulas cannot compete with good human market judgment.
  • Whenever you find hope or fear warping judgment, close out your position.
  • Being in the market at all times is not the key to profits. Being in the market when there is a clear, unconfused technical signal, and the trader’s judgment is not swayed by emotion, was Wyckoff’s method for trading success.
  • “I have yet to find a man, in or out of Wall Street, who is able to make money in(markets) continuously or uninterruptedly. Like anyone else, I have good and bad periods.”
  • “Success in trading means excess of profits over losses. If anyone tells you they can almost be invariably successful, put him down as trying to impose on your credulity.”
  • “While I have made it a practice to limit my risk in most cases, I can trace most of my principal losses to my failure to place stop orders when the trades were made.”
  • “Whenever a (market) situation is not entirely clear to me, I find I can clarify it by putting down on paper all the facts, classifying them as favorable and unfavorable. In thus writing it down on paper, I not only have time to reason out each point as I go along, but when I get it all down it can be looked over an analyzed to much better advantage.”
  • “People are successful in business because, while they make mistakes at first, they study these mistakes and avoid them in the future. Then by gradually acquiring a knowledge of the basic principles of success, they develop into good business men. But how many apply this rule to investing and trading? Very few do any studying at all. Very few take the subject seriously. They drift into the market, very often get ‘nipped’ as the saying is, avoid it for a while, return from time to time with similar results, then gradually drift away from it, without ever having given themselves a chance to develop into what might be good traders or intelligent investors. This is all wrong. People go seriously into the study of medicine, the law, dentistry, or they take up with strong purpose the business of manufacturing or merchandising. But very few ever go deeply into this vital subject (of trading and investing) which should seriously be undertaken by all.”

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