RICHARD D. WYKOFF - MY SECRETS OF DAY TRADING IN STOCKS
Various Examples and Suggestions
RECENT trading observations and experiments have convinced me that it is impracticable and almost impossible to gauge the extent of a move by its initial fluctuations. Many important swings begin in the most modest way. The top of an important decline may present nothing more than a light volume and a drifting tendency toward lower prices, subsequently developing into a heavy, slumpy market, and ending in a violent downward plunge. If it has been moving within a three-point radius and suddenly takes on new life and activity, bursting through its former bounds, he must go with it. I do not mean that he should try to catch every wiggle. If the stock rises three points and then reverses one or one and a half points on light volume, he must look upon it as a perfectly natural reaction and not a change of trend. The expert operator will not ordinarily let all of three points get away from him. He will keep pushing his stop up behind until the first good reaction puts him out at close to the high figure. Having purchased at such a time, he will sell out again as the price once more approaches the high figure, unless indications point to its forging through to a new high level.
The more we study volumes, the better we appreciate their value in Tape Reading. It frequently occurs that a stock will work within a three-point range for days at a time without giving one a chance for a respectable-sized ‘scalp’. Without going out of these boundaries, it suddenly begins coming out on the tape in thousands instead of hundreds. This is evidence that a new movement has started, but not necessarily in the direction first indicated. The Tape Reader must immediately go with the trend, but until it is clearly defined and the stock breaks its former limits with large and increasing volumes, he must use caution. The reason is this: If the stock has been suddenly advanced, it may be for the purpose of facilitating sales by a large operator.
The best way to distinguish the genuine from the fictitious move is to watch out for abnormally large volumes within a small radius. This is usually evidence of manipulation. The large volume is simply a means of attracting buyers and disguising the hand of the operator. A play of this kind took place when Reading struck 159 3/4 in June1909. I counted some 80,000 shares within about half a point of 159 - unmistakable notice of a coming decline. This was a case where the stock was put up before being put down, and the Tape Reader who interpreted the move correctly and played for a good down swing would have made considerable money.
We frequently hear people complaining that "the public is not in this market," as though that were a reason why stocks should not go up or the market should be avoided. The speaker is usually one of those who constitute "the public," but he regards the expression as signifying "every outsider except myself." In the judgment of many the market is better off without the public. To be sure, brokers do not enjoy so large a business, the fluctuations are not so riotous, but the market moves in an orderly way and responds more accurately to prevailing conditions. A market in which the general pubic predominates the purchase of individual stocks represents a sort of speculative "jag" indulged in by those whose stock market knowledge should be rated at 1/8’s.
Everyone recognizes the fact that when the smoke clears away, the Street is full of victims who didn't know how and couldn't wait to learn. Their buying and selling produce violent fluctuations, however, and in this respect are of advantage to the Tape Reader who would much rather see ten-point than three-point swings. To offset this, there are some disadvantages. First, in a market where there is "rioting of accumulated margins," the tape is so far behind that it is seldom one can secure an execution at anywhere near his price. This is especially true when activity breaks out in a stock which has been comparatively dull. So many people with money, watching the tape, are attracted by these apparent opportunities, that the scramble to get in results in every one paying more than he figured; thus the Tape Reader finds it impossible to know where he is at until he gets his report. His tape prices are five minutes behind and his broker is so busy it takes four or five minutes for an execution instead of seconds. In the next place, stop orders are often filled at from small fractions to points away from his stop price-there is no telling what figure he will get, while in ordinary markets he can place his stops within ¼ of a resistance point and frequently have the price come within 1/8 of his stop without catching it.
Speaking of stop orders, the ways in which one may manipulate his stops for protection and advantage, become more numerous as experience is acquired. If the Tape Reader is operating for a fractional average profit per trade, or per day, he cannot afford to let a point profit run into a loss, or fail to "plug" a larger profit at a point where at least a portion of it will be preserved.
One of my recent day's trading will illustrate this idea. I had just closed out a couple of trades, in which there had been losses totalling slightly over a point. Both were on the long side. The market began to show signs of a break, and singling out Reading as the most vulnerable, I got short at 150 3/4. In a few moments it sold below 150. My stop was moved down so there couldn't be a loss, and soon a slight rally and another break gave me a new stop that insured a profit. A third drive started, and I pushed the stop down to within ¼ of the tape price at the time, as it was late in the day and I considered this the final plunge. By the time my order reached the floor the price was well away from this latest stop and when the selling became most violent I told my broker to cover "at the market." The price paid was within ¼ of the bottom for the day, and netted 2 5/8 after commissions were paid.
I strongly advocate this method of profit insuring. It is also a question whether, in such a case, the trade had better not be stopped out than closed out. When you push a stop close behind a rise or a decline, you leave the way open for a further profit; but when you close the trade of your own volition, you shut off all such chances. If it is your habit to close out everything before market close daily, the stop may be placed closer than ordinarily during the last fifteen minutes of the session, and when a sharp move in the desired direction occurs the closing out may be done by a stop only a fraction away from the extreme price.
This plan of using stops is a sort of squeezing out the last drop of profit from each trade and never losing any part that can possibly be retained. Suppose the operator sells a stock short at 53 and it breaks to 51. He is foolish not to bring his stop down to 51¼ unless the market is ripe for a heavy decline. With his stop at this point he has two chances out of three that the result will be satisfactory: 1) The price may go lower and yield a further profit; 2) The normal rally to 52 will catch his stop and enable him to put the stock out again at that price; 3) The stock will rally to about 51 ¼, catch his stop and then go lower. But he can scarcely mourn over the loss of a further profit. If the stock refuses to rally the full point to which it is entitled, that is, if it comes up to 51½ or 5/8 and still acts heavy, it may be expected to break lower, and there usually is ample time to get short again at a price that will at least cover commissions.
There is nothing more confusing than to attempt scalping on both sides of the market at once. You might go long of a stock which is being put up or is going up for some special reason, and short of another stock which is persistently weak. Both trades may pan out successfully, but in the meantime your judgment will be interfered with and some foolish mistakes will be made in four cases out of five. As Dickson G. Watts said, "Act so as to keep the mind clear, the judgment trustworthy." The mind is not clear when the trader is working actively on two opposing sides of the market. A bearish indication is favourable to one trade, and unfavourable to the other. He finds himself interpreting every development as being to his advantage and forgetting the important fact that he is also on the opposite side. If you are short of one stock and see another that looks like a purchase, it is much better to wait until you have covered your short trade (on a dip if possible), and then take the long side of the other issue.
The best time for both covering and going long is on a recession that in such a case serves a double purpose. The mind should he made up in advance as to which deal offers the best chance for profit, so that when the moment for action arrives there will he nothing to do but act. This is one great advantage the Tape Reader has over other operators who do not employ market science. By a process of elimination he decides which side of the market and which stock affords the best opportunity. He either gets in at the inception of a movement or waits for the first reaction after the move has started. He knows just about where his stock should come on the reaction and judges by the way it then acts whether his first impression is confirmed or contradicted. After he gets in it must act up to expectations or he should abandon the trade and get out of it immediately. If it is a bull move, the volume must increase and the rest of the market offer some support or at least not oppose it. The reactions must show a smaller volume than the advances, indicating light pressure, and each upward swing must be of longer duration and reach a new high level, or it will mean that the rise has spent its force either temporarily or finally.
Tape Reading is the only known method of trading which gets you in at the beginning, keeps you posted throughout the move, and gets you out when it has culminated. Has anyone ever heard of a man, method, system, or anything else that will do this for you in Wall Street? It has made fortunes for the comparatively few who have followed it. It is an art in which one can become highly expert and more and more successful as experience sharpens his instincts and judgment and shows him what to avoid.