RICHARD D. WYKOFF - MY SECRETS OF DAY TRADING IN STOCKS
Closing The Trade
THE student of Tape Reading, especially he who puts his knowledge into actual practice, is constantly evolving new ideas and making discoveries which modify his former methods. From each new elevation he enjoys a broader view; what were obstacles disappear; his problems gradually simplify.
We have previously defined Tape Reading as the art of determining the immediate trend of prices. If one can do this successfully in the majority of his trades, his profits should roll up. But recognizing the trend and getting in at the right moment is only one-half of the business. Knowing when to close a trade is just as important if not the most important part of a complete transaction. At a certain point in my trading, I became aware that a large percentage of my losing trades resulted from failure to close at the culmination of what I have termed the immediate trend.
An example will make this clear: New York Central was on a certain day the strongest stock in a bull market that showed a tendency to react. The pressure was on Reading and Steel. My indications were all bullish, so I couldn't consistently sell either of the latter short. I was looking for an opportunity to buy. The market began to slide off, Reading and Steel being the principal clubs with which the pounding was done. I watched them closely and the moment I saw that the selling of these two stocks had ceased, gave my order to buy New York Central, getting it at 137 1/4. It never touched there again, and in ten minutes was 139 bid for 5,000 shares. Here I should have sold, as my buying indication was for that particular advance. Especially should I have sold when I saw the rise culminate in a spectacular bid which looked like bait for outside buyers. Of course the stock might have gone higher The main trend for the day was upward. But for the time being 139 was the high point. I knew the stock was due to react from this figure, and it did, but at the bottom of the normal reaction selling broke out in fresh quarters and the whole market came down heavily. The result was that my profit was only a fraction of what it ought to have been. This is the way the trade might have been made: I should have sold when 139 was noisily bid, and when the reaction had run its course, picked it up again, provided indications were still bullish. If they were not I would have been in the position of looking to get short instead of waiting for a chance to get out of my long.
Having reserved in the early part of this book the right to revise my views, I will here record the claim that the best results in active Tape Reading lie in recognizing the moves as they occur, getting in when they start and out when they culminate. This will in most cases cause failure to get all of the moves in the one most active stock for the day, but should result in many small profits, and I believe the final results will exceed those realized by sitting through reactions with any one stock. There is a very wide difference in mental thought processes between the man who feels compelled to get out of something and one who has money to invest and is looking for a chance to make a fresh trade. The start and finish of a small move is best illustrated by a triangle - the narrow end representing the beginning, and the wide end the termination of the move. The width in an upward move would appear like this:
and a downward move like this:
These figures denote the widening character of a move as it progresses and are intended to show how volume, activity and number of transactions expand until, at the end, comparatively active conditions prevail. The principle works the same in the larger market moves; witness the spectacular rise in Union Pacific within a few sessions marking the end of the August1 1909, boom.
After closing out a trade the tape will tell on the following reaction whether you are justified in taking the same stock on again or whether some other issue will pay better. Frequently a stock will be seen preparing for a move two or three swings ahead of the one in which it becomes the leader. This is a fine point, but with study and practice the most complicated indications clarify.
And now a word about you – you who are endeavouring to turn day trading to practical account. The results which are attainable depend solely upon the YOU. Each must work out his own method of trading, based on suggestions derived from these suggestions or from other sources.
It will doubtless be found that what is one man's meat is another's poison, and that no amount of "book learning" will be of any use if the student does not put his knowledge to an actual test in the market. It is surprising how any familiarity with subjects relative to the stock market, but seemingly having no bearing upon Tape Reading, will lead to opportunities or aid in making deductions. And so when asked what books will best for supplementing these suggestions, I should say: Read everything you can get hold of. If you find but a single idea in a publication it is well worth the time and money spent in procuring and studying it.
Wall Street is crowded with men who are there in the hope of making money, but who cannot be persuaded to look at the proposition from a practical business standpoint. Least of all will they study it, for this means long hours of hard work, and Mr. Speculator is laziness personified. Frequently I have met those who pin their faith to some one point, such as the volumes up or down, and call it Tape Reading. Others, unconsciously trading on mechanical indications such as charts, pretend to be reading the market. Then there is a class of people who read the tape with their tongues, calling off each transaction, a certain accent on the higher or lower quotations indicating whether they are bullish or bearish.
These and others in their class are merely operating on the superficial. If they would spend the same five or six hours a day (which they now practically waste) in close study of the business of speculation, the result in dollars would be more gratifying at the end of the year. As it is, the majority of them are now losing money. It is a source of satisfaction, however, that these suggestions of mine which, I believe, are the first practical articles ever written on the subject of Tape Reading, have stirred the minds of many people to the possibilities in the line of scientific speculation. This is shown in a number of letters I’ve received, many of them from traders situated in remote localities. In the main, the writers, who are now carrying on long distance operations for the big swings are desirous of testing their ability as Tape Readers. No doubt those who have written represent but a small percentage of the number who are thus inclined. To all such persons I would say you can make a success of Tape Reading but you must acquire a broad fundamental knowledge of the market. A professional singer who was recently called upon to advise a young aspirant said: "One must become a 'personality' - that is, an intelligence developed by the study of many things besides music". It is not enough to know a few of the underlying principles; one must have a deep understanding.
To be sure, it is possible for a person to take a number of the "tricks of the trade" herein mentioned and trade successfully on these alone. Even one idea which forms part of the whole subject may be worked and elaborated upon until it becomes a method in itself. There are endless possibilities in this direction, and after all it matters little how the money is extracted from the market, so long as it is done legitimately. But real Tape Reading takes everything into account - every little character which appears on the tape plays its part in forming one of the endless series of "moving pictures". In many years study of the tape, I do not remember having seen two of these "pictures" which were duplicates. One can realize from this how impossible it would be to formulate a simple set of rules to fit every case or even the majority of them, as each 5 day trading session produces hundreds of situations, which, so far as memory serves, are never repeated. This goes on to suggest further that charts and chart ‘pictures’ are merely guides and cannot be relied upon to form judgments of the market at the moment you need it to.
The subject of Tape Reading is therefore practically inexhaustible, which makes it all the more interesting to the man who has acquired a habit of study. Having fortified himself with the necessary fundamental knowledge, the student of Tape Reading should thoroughly digest these suggestions and any others which may be obtainable in future. It is not enough to go over and over a lesson as a student in elementary school does, driving the facts into his head by monotonous repetition; tapes must be procured and the various indications matched up with what has been studied. And even after one believes he understands, he will presently learn that, to quote the words of a certain song, "You don't know how much you know until you know how little you know". One of my instructors in another line of study used to make me go over a thing three or four times after I thought I knew it, just to make sure that I did.
I should say that it is almost impossible for one who has never before traded from the tape to go into a broker's office, start right in and operate successfully. In the first place, there are the abbreviations and all the little characters and their meanings to know, the abbreviations of the principal stocks; it is necessary to know everything that appears on the tape, so that nothing will be overlooked. Otherwise the trader will be like a person who attempts to read classic literature without knowing words of more than four letters.
It is a common impression that anyone who has the money can buy a seat on the Stock Exchange and at once begin making money as a floor trader. But floor trading is also a business that one has to learn, and it usually takes months and years to become accustomed to the physical and nervous strain and learn the ropes. Frequent requests are made for the name of someone who will teach the Art of Tape Reading. I do not know of anyone able to read the tape with profit who is willing to become an instructor. The reason is very simple. Profits from the tape far exceed anything that might be earned by charging tuition fees to his students. It’s simple economics. In addition to the large operators and floor traders who use Tape Reading in their daily work, there are a number of New York Stock Exchange members who never go on the floor, but spend the session at the ticker in their respective offices. Experience has taught them that they can produce larger profits by this method, or else they would not follow it. The majority of them trade in 5000 share lots and up and their business forms an important share of the daily volume. A number of so-called semi-professionals operate on what may be termed pure ‘intuitive’ tape reading. They have no well-defined code of rules, methods or strategies and probably could not explain clearly just how they do it, but they "get the money" and that is the best proof of the pudding. The existence of even a comparatively small body of successful Tape Readers is evidence that money making by this means is an accomplished fact and should encourage you.
One of the greatest difficulties which the novice has to overcome is known as "cold feet". Too many people start and dabble a little without going far enough to determine whether or not they can make a go of it. And even those who get pretty well along in the subject will be scared to death at a string of losses and quit just when they should dig in harder. For in addition to learning the art they must form a sort of trading character, which no amount of reverses can discourage nor turn back and which constantly strives to eliminate its own weak points such as fear, greed, anxiety, nervousness and the many other mental factors which go to make or unmake the profits in this business. Perhaps I have painted a difficult proposition. If so, the greater will be the reward of those who master it. As stated at the beginning, Tape Reading is hard work. There seems no good reason for altering that opinion.