RICHARD D. WYKOFF - MY SECRETS OF DAY TRADING IN STOCKS
Obstacles To Be Overcome - Potential Profits
MENTAL poise is an indispensable factor in Tape Reading. The mind should be absolutely free to concentrate upon the work; there should be no feeling that certain things are to be accomplished within a given time; no fear, anxiety, or greed.
When a Tape Reader has his emotions well in hand, he will play as though the game were dominoes.
When anything interferes with this attitude it should be eliminated. If, for example, there be an unusual series of losses, the trader had better suspend operations until he discovers the cause.
The following are the Tape Readers 7 Commandments:
1. Do not overtrade ! One may be trading too often. Many opportunities for profit develop from each day's movements; only the very choicest should he acted upon. There should be no haste. The market will be there to-morrow in case to-day's opportunities do not meet requirements.
2. Eliminate anxiety! Anxiety to make a record, to avoid losses, to secure a certain profit for the day or period will greatly warp the judgment, and lead to a low percentage of profits. Tape Reading is a good deal like laying eggs. If the hen is not left to pick up the necessary food and retire in peace to her nest, she will not produce properly. If she is worried by dogs and small boys, or tries to lay seven eggs out of material for six, the net proceeds may be an omelette. The Tape Reader's profits should develop naturally. He should buy or sell because it is the thing to do - not because he wants to make a profit or fears to make a loss.
3. Don’t trade when the market isn’t acting right! The market may be unsuited to Tape Reading operations. When prices drift up and down without trend, like a ship without a rudder, and few positive indications develop, the percentage of losing trades is apt to be high. When this condition continues it is well to hold off until the character of the market changes.
4. Get a broker you can trust! One's broker may be giving poor service. In a game as fine as this, every fraction – every second counts. Executions of market orders should average not over one minute. Stop orders should be reported in less time as such orders are on the floor and at the proper post when they become operative. By close attention to details in the handling of my orders, I have been able to reduce the average time of my executions to less than one minute. The quickest report obtained thus far required but 25 seconds. A considerable portion of my orders are executed in from thirty to forty seconds, varying according to whether my broker is near the phone or in a distant crowd when the orders reach the floor and how far the identical "crowd" is from his 'phone.
5. Do not leave orders to the discretion of the broker! Make your orders clear and firm. Do not say, “Try to sell better than the bid and let me know what happened” – say, “Sell at the bid price and report instantly!” He cannot “do better" than the momentary bid or offered price. Ordinarily it is expected and is really an advantage to the general run of speculators to have the broker use some discretion; that is, try to do better, providing there is no chance of losing his market. But I do not wish my broker to act like that for me. My indications usually show me the exact moment when a stock should be bought or sold under this method, and a few moments' delay often means a good many dollars lost. With the execution of orders reduced to a matter of seconds, I can also hold stop orders in my own hands and when the stop price is reached, phone the order to buy or sell at the market. Results are very satisfactory as my own broker handles the orders and not the specialist or some other floor broker.
6. Keep alert, calm after losses! The Tape Reader should be careful to trade only in such amounts as will not interfere with his judgment. If he finds that a series of losses upsets him it is an easy matter to reduce the number of shares to one-half or one-quarter of the regular amount, or even to ten shares, so that the dollars involved are no longer a factor. This gives him a chance for a little self-examination.
7. Stay physically and mentally fit! If a person is in poor physical condition or his mental alertness below par for any reason, he may be unable to stand the excitement attending the work. Dissipation, for example, may render one unfit to carry all the quotations in his head, or to plan and execute his moves quickly and accurately. When anything of this kind occurs which prevents the free play of all the faculties it is best to bring the day's work to a close.
Some of my readers may think it futile to aim for a fractional average profit per trade when there are many full points per day to be made by holding on through days and weeks and getting full benefit of the big moves. Admitting that it is possible to make many more points at times, there is a risk of losses corresponding to the profits and the question is not how much we can make, but how much we can make net. Tape Reading reduces profit- making to a manufacturing basis. To show how the nimble eighths pile up when their cumulative power is fully employed, I have prepared a table representing the results of 250 trading days, starting with a capital of $1,000. It is assumed that the Tape Reader has reached that stage of expertness where he can average one trade a day and a profit of $12.50 per trade, and that as fast as $1,000 is accumulated he adds 100 shares to his trading unit. These results depend solely upon the Tape Reader's ability to make more than he loses per day. There is no limit to the number of shares he can trade in, provided he has the margin. If he is at all proficient his margin will not be depleted more than a few points before he makes up his losses and more. He is not pyramiding in the ordinary sense of the word; he is simply doing an increasing volume of shares as his capital expands. All progressive business men increase commitments as fast as warranted by their capital and opportunities. What a profit 1/8 of point per day would amount to in 250 days if profits were used as additional margin:
100 Shares at $12.50 Per Day = $1,000.00 in 80 days
200 Shares $25 $1,000.00 in 40 days (Etc)
300 Shares $37.50 $1,012.50 27
400 Shares $50.00 $1,000.00 20
500 Shares $62.50 $1,000.00 16
600 Shares $75.00 $1,050.00 14
700 Shares $87.50 $1,050.00 12
800 Shares $100.00 $1,000.00 10
900 Shares $112.50 $1,012.50 9
1000 Shares $125.00 $1000.00 8
1100 Shares $137.50 $962.50 7
1200 Shares $150.00 $1050.00 7
GROSS $12,137.50 in 250 Days
Less Tax & Commissions -$1,942.00
Net Profit $10,195.50
Assuming that there are about three hundred Stock Exchange sessions in the year, the two hundred and fifty days figured represent five-sixths of a year, or ten months. From that time on, having struck his gait, the Tape Reader can, without increasing his unit to over 1200 shares, make $900 a week or $46,800 a year.
One trader who for years has been trying to scalp the market and who could never quite secure a profit, reports that his first attempts at applying these rules resulted in a loss of about $20 per trade. This he gradually reduced to $12, then to $8, finally succeeding in throwing the balance over to the credit side and is now able to make a daily profit of from $12 to $30 per 100 shares. That’s only an example of small traders. A medium size traders goal should be to make $150 to $350 per 1000 shares. This is doing very well indeed. I have no doubt that profits will continue to increase as experience increases.
Some people seem to hold the opinion that as the profits desired are only 1/8 average per trade one should limit himself in taking profits. Perhaps I have not made myself clear. I buy and sell when I get my indications. In going into a trade I do not know whether it will show a profit or a loss, or how much. I try to trade at a point where I can secure protection with a stop from ¼ to ½ point away, so that my risk is limited to this fraction plus commission and tax. If the trade goes in my favour I push the stop up as soon as possible, to a point where there can be no loss. I do not let profits run blindly but only so long as there appears no indication on which to close. No matter where my stop order stands, I am always on the watch for danger signals. Sometimes I get them away in advance of the time a trade should be closed; in other instances my "get out" will flash onto the tape as suddenly and as clearly defined as a streak of lightning against a black sky. When the tape says "get out" I never stop to calculate how much profit or loss I have or whether I am ahead or behind on the day.
I strive for an increasing average profit but I do not keep my eye so much on the fraction or points made or lost, so much as on myself and keeping alert. I endeavour to perfect myself in resolute calmness and precision, quickness of thought, accuracy of judgment, promptness in planning and executing my trades, foresight, intuition, courage and initiative. Masterful control of myself in these respects will produce a winning average - it is merely a question of practice.
To show how accurately the method works out in practice, I will describe one recent day's trading in which there were three transactions, involving six orders (three buying and three selling). The market didn’t go one-eighth against me in five orders out of the six. In the sixth, the stock went 5/8 above the selling price at which my order was given.
Here are the details: I had no open trades at the market’s open bell. Kansas City Southern, which had been intensely dull, came on the tape 2600 at 46 3/4. I gave a buying order and before it could reach the "post" the Tape said 46 7/8 and 47. The stock rose steadily and after selling at 48 5/8 and coming back to 48 1/2 I gave the selling order. It did not touch 48 5/8 again.
The next trade was in Reading. I saw that it was being held in check in spite of its great strength. The stock had opened at 158. After a certain bulge I saw the reaction coming. When it arrived, and the stock was selling at 157 1/2, I gave the buying order, and got mine at 157 5/8. It immediately rose to 158 3/4. I noted selling indications and gave the order while the stock was at that price on the tape. It did not react sufficiently to warrant my picking it up again and later went to 159 3/8, which was 5/8 above my selling indication.
Southern Pacific suddenly loomed up as a winner and I bought it at 135. It promptly went to 135 1/2. The rest of the market began to look temporarily over-bulled, so I gave my order to sell when the stock was 135 1/2, which proved to be the highest for the day, making the fifth time out of six orders when my stock moved almost instantly in my favour.
This illustration is given as an example of the high percentage of accuracy possible under this method of trading. I do not pretend to be able to accomplish these results except occasionally, but I am constantly striving to do so in a large percentage of my trades. If one makes 2 3/8 points one day and loses 2 points in the next two days, he is 3/8 ahead for the three days, or an average of 1/8 per day. He may have losing and winning streaks, get discouraged and lose his nerve at times, but if he is made of the right stuff he will in time overcome all obstacles and land at the desired goal.