RICHARD D. WYKOFF - MY SECRETS OF DAY TRADING IN STOCKS
THERE is a widespread demand for more light on the subject of Tape Reading or the reading of moment by moment transactions in a stock.
Thousands of those who operate in the stock market now recognize the fact that the market momentarily indicates its own immediate future, and that these indications are accurately recorded in the market transactions second by second, and therefore those who can interpret what transactions take place second by second or moment by moment have a distinct advantage over the general trading public.
Such an opinion is warranted, for it is well known that many of the most successful traders of the present day began as Tape Readers, trading in small lots of stock with a capital of only a few hundred dollars. Joe Manning, was one of the shrewdest and most successful of all the traders on the floor of the New York Stock Exchange.
A friend of mine once said: "Joe and I used to trade in ten share lots together. He was an ordinary trader, just like me. We used to hang over the same ticker." The speaker was, at the time he made the remark, still trading in ten-share lots, while I happened to know that Joe's bank balance -- his active working capital -- amounted to $100,000, and that this represented but a part of the fortune built on his ability to understand the tapes’ secrets and interpret the language of the tape. Why was one of these men able to generate a fortune, while the other never acquired more than a few thousand dollars day trading?
Their chances were equal at the start of their pursuit as far as capital and opportunity. The profits were there, waiting to be won by either or both. The answer seems to be in the peculiar qualifications of the mind, highly potent in the successful trader, but not possessed by the other. There is, of course, an element of luck in every case, but pure luck could not be so sustained in Manning's case as to carry him through day trading operations covering a term of years.
The famous Jesse Livermore used to trade solely on what the tape told him, closing out every-thing before the close of the market. He traded from an office and paid the regular commissions, yet three trades out of five showed profits. Having made a fortune, he invested it in bonds and gave them all to his wife. Anticipating the 1907 panic, he put his $13,000 automobile up for a loan of $5,000, and with this capital started to play the bear side of the market, using his profits as additional margin. At one time he was short 70,000 shares of Union Pacific stock. His whole lot was covered on one of the panic days, and his net profits were over a million dollars!
By proper mental qualifications we do not mean the mere ability to take a loss, define the trend, or to execute some other move characteristic of the professional trader. I refer to the active or dormant qualities in his make-up. For example: The power to force himself into the right mental attitude before trading; to control his emotions: fear, anxiety, elation, recklessness; and to train his mind into obedience so that it recognizes but one master - the tape. These qualities are as vital as natural ability, or what is called the sixth sense in trading. Some people are born musicians, others seemingly void of musical taste, develop themselves until they become virtuosos.
Jacob Field is another exponent of Tape Reading. Those who knew "Jakey" when he began his Wall Street career, noted his ability to read the tape and follow the trend. His talent for this work was doubtless born in him, time and experience have proven and intensified it. Whatever awards James R. Keene won as operator or syndicate manager, do not detract from his reputation as a Tape Reader as well. His scrutiny of the tape was so intense that he appeared to be in a trance while his mental processes were being worked out. He seemed to analyze prices, volumes and fluctuations down to the finest imaginable point. It was then his practice to telephone to the floor of the Stock Exchange to ascertain the character of the buying or selling and with this auxiliary information complete his judgment and make his commitments.
At his death Mr. Keene stood on the pinnacle of fame as a Tape Reader, his daily presence at the ticker hearing testimony that the work paid and paid well.
You might be urged to say: "Yes, but these are rare examples. The average man or woman never makes a success of day trading by reading moment by moment transactions of the market." Right you are! The average man or woman seldom makes a success of anything! That is true of trading stocks, business endeavours or even hobbies! Success in day trading usually results from years of painstaking effort and absolute concentration upon the subject. It requires the devotion of one's whole time and attention to - the tape. He should have no other business or profession. "A man cannot serve two masters," and the tape is a tyrant. One cannot become a Tape Reader by giving the ticker absent treatment, nor by running into his broker's office after lunch, or seeing "how the market closed" from his evening newspaper. He cannot study this art from the far end of a telephone wire. He should spend twenty-seven hours a week or more at a ticker, and many more hours away from it studying his mistakes and finding the "why" of his losses.
If Tape Reading were an exact science, one would simply have to assemble the factors, carry out the operations indicated, and trade accordingly. But the factors influencing the market are infinite in their number and character, as well as in their effect upon the market, and to attempt the construction of a Tape Reading formula would seem to be futile. However, something of the kind (in the rough) may develop as we progress in this investigation, so kind an open mind because we have many secrets, tricks and tips to reveal that are not in the pocket of the average day trader.
What is Tape Reading?
This question may be best answered by first deciding what it is not.
The Tape Reader aims to make deductions from each succeeding transaction - every shift of the market kaleidoscope, to grasp a new situation, force it, lightning-like, through the weighing machine of the mind, and to reach a decision which can be acted upon with coolness and precision. It is gauging the momentary supply and demand in particular stocks and in the whole market, comparing the forces behind each and their relationship, each to the other and to all.
A day trader is like the manager of a department store; into his office are submitted hundreds of reports of sales made by the various departments. He notes the general trend of business - whether demand is heavy or light throughout the store, but lends special attention to the products in which demand is abnormally strong or weak.
When he finds it difficult to keep his shelves full in a certain department or of a certain product, he instructs his buyers accordingly, and they increase their buying orders for that product; when certain products do not move he knows there is little demand (or a market) for them, therefore, he lowers his prices (seeking a market) to induce more purchases by his customers.
A floor trader on the exchange who stands in one crowd all day is like the buyer for one department in a store - he sees more quickly than anyone else the demand for that type of product, but has no way of comparing it to what may have strong or weak demand in other parts of the store.
He may be trading on the long side of Union Pacific stock, which has a strong upward trend, when suddenly a decline in another stock will demoralize the market for Union Pacific stock, and he will be forced to compete with others who have stocks to sell.
The Tape Reader, on the other hand, from his perch at the ticker, enjoys a bird's eye view of the whole field. When serious weakness develops in any quarter, he is quick to note the changes taking place, weigh them and act accordingly.
Another advantage in favour of the Tape Reader: The tape tells the news minutes, hours and days before the newspapers, and before it can become current gossip. Everything from a foreign war to the elimination of a dividend; from a Supreme Court decision to the ravages of the boll-weevil is reflected primarily upon the tape.
The insider who knows a dividend is to be jumped from 6 per cent to 10 per cent shows his hand on the tape when he starts to accumulate the stock, and the investor with 100 shares to sell makes his fractional impress upon its market price.
The market is like a slowly revolving wheel. Whether the wheel will continue to revolve in the same direction, stand still or reverse depends entirely upon the forces which come in contact with its hub and tread. Even when the contact is broken, and nothing remains to affect its course, the wheel retains a certain impulse from the most recent dominating force, and revolves until it comes to a standstill or is subjected to other influences.
The element of manipulation need not discourage anyone. Manipulators are giant traders, with deep pockets. The trained ear can detect the steady "chomp, chomp," as they gobble up stocks, and their teeth marks are recognized in the fluctuations and the quantities of stock appearing on the tape. Little traders are at liberty to tiptoe wherever the food trail leads, but they must be careful that the giants do not turn quickly on them. The Tape Reader has many advantages over the long-term investor. He never ventures far from shore; that is he plays with a close stop, never laying himself open to a large loss. Accidents or catastrophes cannot seriously injure him because he can reverse his position in an instant, and follow the newly-formed stream from source to mouth. As his position on either the long or short side is confirmed and emphasized, he increases his line, thus following up the advantage gained.
A pure tape reading day trader does not care to carry stocks over night. The tape is then silent, and he only knows what to do when it tells him. Something may occur at midnight which may crumple up his diagram of the next day's market. He leaves nothing to chance; hence he prefers a clean sheet when the market gong strikes. By this method interest charges on margin are avoided, reducing the percentage against him to a considerable extent.
The Tape Reader is like a vendor of fruit who, each morning, provides himself with a stock of the choicest and most seasonable products, and for which there is the greatest demand. He pays his cash and disposes of the goods as quickly as possible, at a profit varying from 50 to 100 per cent on cost. To carry his stock over night causes a loss on account of spoilage. This corresponds with the interest charge to the trader.
The fruit vendor is successful because he knows what and when to buy, also where and how to sell. But there are stormy days when he cannot go out; when buyers do not appear; when he is arrested, fined, or locked up by a blue coated despot or his wares are scattered abroad by a careless trackmen. All of these unforeseen circumstances are a part of trading and life, in general.
Wall Street will readily apply these situations to the various attitudes in which the Tape Reader finds himself. He ventures $100 to make $200, and as the market goes in his favour his risk is reduced, but there are times when he finds himself at sea, with his stock deteriorating. Or the market is so unsettled that he does not know how to act; he is caught on stop or held motionless in a dead market; he takes a series of losses, or is obliged to be away from the tape when opportunities occur. His calculations are completely upset by some unforeseen event or his capital is impaired by overtrading or poor judgment. The vendor does not hope to buy a barrel of apples for $3 and sell them the same day for $300. He expects to make from nothing to $3 a day. He depends upon a small but certain profit, which will average enough over a week or a month to pay him for his time and labour.
This is the objective point of the Tape Reader - to make an average profit. In a month's operations he may make $4,000 and lose $3,000 - a net profit of $1,000 to show for his work. If he can keep this average up, trading in 100 share lots, throughout a year, he has only to increase his unit to 200, 300, and 500 shares or more, and the results will be tremendous.
The amount of capital or the size of the order is of secondary importance to this question: Can you trade in and out of all kinds of markets and show an average profit over losses, commissions, etc.? If so, you are getting proficient in the art of tape reading. If you can trade with only a small average loss per day, or come out even, you are rapidly getting there. A Tape Reader abhors information and follows a definite and thoroughly tested plan, which, after months and years of practice, becomes second nature to him. His mind forms habits that operate automatically in guiding his market adventures. Practice will make the Tape Reader just as proficient in forecasting stock market events, but his intuition will be reinforced by logic, reason and analysis.
Here we find the characteristics that distinguish the Tape Reader from the Scalper. The latter is essentially one who tries to grab a point or two profit "without rhyme or reason" - he doesn't care how, so long as he gets it. A Scalper will trade on a news tip, a look, a guess, a hear-say, gossip - on what he thinks or what a friend of a friend of friend says.
The Tape Reader evolves himself into a ‘trading machine’ which takes note of a situation, weighs it, decides upon a course and gives an order. There is no acceleration of the pulse, no nervousness, no hopes or fears concerning his actions. The result produces neither elation nor depression: there is calmness before, during and after the trade.
The Scalper is a car without shocks, bouncing over every little bump in the road with rattling windows, a rickety motion and a strong tendency to swerve into oncoming traffic.
The Tape Reader, on the other hand, is like a fine train, which travels smoothly and steadily along the tracks of the tape, acquiring direction and speed from the market engine, and being influenced by nothing else whatever.
Having thus described our ideal Tape Reader in a general way, let us inquire into some of the pre-requisite qualifications.
First, he must be absolutely self-reliant and self-determining. A dependent person, whose judgment hangs on the advise or passing words of others will find himself swayed by a thousand outside influences. At critical points his judgment will be useless because he has not been able to exercise his ‘judgment muscles’ – they are weak from inactivity! The professional day trader must be able to say: "The facts are in front of me; my analysis of the situation is this; therefore I will do this and this."
Second, he must be familiar with the mechanics of the market, so that every little incident affecting prices will be given due weight. He should know the history of earnings of the stocks he is trading and financial condition of the companies in whose stock he is trading; the ways in which large operators accumulate and distribute stocks; the different kinds of markets (bull, bear, sideways, trending, etc.); be able to measure the effect of news and rumours; know when and in what stocks it is best to trade and measure the market forces behind them; know when to cut a loss (without fear or depression) and take a profit (without pride and puffery).
He must study the various swings and know where the market and the various stocks stand; he must recognize the inherent weakness or strength in prices; understand the basis or logic of movements. He should recognize the turning points of the market; see in his mind's eye what is happening on the floor of the exchange.
He must have the nerve to stand a series of losses; persistence to keep him at the work or trading during adverse periods; self-control to avoid overtrading; an amiable and calm disposition to balance him at all times.
For perfect concentration as a protection from stock tips, gossip and other influences which are rampant in a broker's office he should, if possible, seclude himself. A small room with a ticker, a desk and private telephone connection with his broker's office are all the facilities required. The work requires such delicate balance of the faculties that the slightest influence either way may throw the result against the trader. You may say: "Nothing influences me," but unconsciously it does affect your judgment to know that another man is bearish at a point where he thinks stocks should be bought. The mere thought, "He may be right," has a deterrent influence upon you and clouds your own judgments; you hesitate and the opportunity is lost. No matter how the market goes from that point, you have missed a beat and your mental machinery is thrown out of gear.
Silence and concentration, therefore, is needed to lubricate the day trader’s mind. The advisability of having even a news feed in the room, is a subject for discussion. The conclusion is that ‘news’ is ‘news’; the recording of what has already taken place, no more, no less. It announces the cause for the effect that has already been more or less felt in the market. On the other hand the tape tells the present and future of the market. Money is made in Tape Reading by anticipating what is coming - not by waiting till it happens and going with the crowd.
The effect of news is an entirely different proposition. Considerable light is thrown on the technical strength or weakness of the market and special stocks by their action in the face of important news. For the moment it seems to us that a news feed might be admitted to the sanctum, provided its whisperings are given only the weight to which they are entitled.
To evolve a practical methodology – one which the trader may use in his daily operations and which those with varying proficiency in the art of Tape Reading will find of value and assistance - such is the task we have set before us in this manual. We shall consider all the market factors of vital importance in Tape Reading, as well as methods used by experts. These will be illustrated by reproductions from the tape. Every effort will be made to produce something of definite, tangible value to those who are now operating in a hit-or-miss sort of way.