RICHARD D. WYKOFF - MY SECRETS OF DAY TRADING IN STOCKS
Getting Started In Tape Reading
WHEN embarking on any new business enterprise, the first thing to consider is the amount of capital required.
To study Tape Reading "on paper" is one thing, but to practice and become proficient in the art is quite another. Almost anyone can make money on imaginary trades because there is no risk of any kind - the mind is free from the strain and apprehension that accompanies an actual trade; fear does not enter into the situation; patience is unlimited.
All this is changed when even a small commitment is made. Then his judgment becomes warped, and he closes the trade in order to get mental relief. As these are all symptoms of inexperience they cannot be overcome by avoiding the issue. The business-like thing to do is to wade right into the game and learn to play it under conditions that are to be met and conquered before success can be attained.
After a complete absorption of every available piece of educational writing bearing upon Tape Reading, it is best to commence trading in ten share lots, so as to acquire genuine trading experience. This may not suit some people with a propensity for gambling, and who look upon the ten-share trader as being afraid and a 'babe in the woods'. The average lamb with $10,000 in capital wants to commence with 500 to 1000 share lots - he wishes to start at the top and work down. It is only a question of time when he will have to trade in 50 share lots – having lost the majority of his capital in large trades. To us it seems better to start at the bottom with 50 shares. There is plenty of time in which to increase the unit if you are successful. If success is not eventually realized you will be many dollars better off for having risked a minimum quantity. It has already been shown by experience that the market for odd lots (100 shares or less) on the exchanges is very active, so there is no other excuse for the novice who desires to trade in round lots than greed-of-gain, or a get-rich-quick mentality. Think of a baby, just learning to walk, being entered in a race with professional sprinters! In the previous chapter we suggested that success in Tape Reading should be measured by the number of points profit over points lost.
For all practical purposes, therefore, we might trade 10 share lots, were there no objection on the part of our broker and if this quantity were not so absurdly small as to invite careless execution. 50 shares is really the smallest quantity that should be considered, but we mention shares simply to impress upon our readers that in studying Tape Reading, it’s better to keep in mind that you are playing for points, not dollars. The dollars will come along fast enough if you can make more points net than you lose. The professional billiardist playing for a stake aims to out-point his antagonist. After trading for a few months don’t consider the dollars you are ahead or behind, but analyze the record in points. In this way your progress can be studied.
As the initial losses in trading are likely to be heavy, and as the estimated capital must be a more or less an arbitrary amount, we should say that units of $5,000 would be necessary for each 50 share lot traded in at the beginning. This allows for more losses than profits, and leaves a margin with which to proceed. Some people will secure a footing with less capital; others may he obliged to put up several units of $5,000 each before they begin to show profits; still others will spend a fortune (large or small) without making it pay, or meeting with any encouragement.
Look over the causes of failure of most businesses and you will find the chief causes to be: 1) Lack of capital, and 2) Incompetence. Lack of capital in Wall Street trading can usually be traced to over-trading. This proves the saying, "Over-trading is financial suicide." It may mean too large a quantity of stock being traded, or if the trader loses money, he may not reduce the size of his trade to correspond with the shrinkage in his capital.
To make our point clear: A man starts trading in 50 share lots with $1,000 capital. After a series of losses he finds that he has only $500 remaining. That’s on 10 points on 50 shares, but does he reduce his orders in shares? No. He risks the $500 on a 50 share trade in a last desperate effort to recoup. The stock loses 10 points and he’s out $500.
After being wiped out he tells his friends how he "could have made money if be had had more capital." Incompetence really deserves first place in the list. Supreme ignorance is the predominant feature of both stock market lamb and seasoned speculator.
It is surprising how many people stay in the Street year after year, acquiring nothing more, apparently, than a keen scent for tips and gossip. Ask them a technical question that smacks of method and planning in trading and they are unable to reply. Such folks remain on the Street for one of two reasons: They have either been "lucky" or their margins are replenished from some source outside of the markets. The proportion of commercial failures due to Lack of Capital or Incompetence is about 60 per cent. Call the former by its Wall Street cognomen – Overtrading - and the percentage of stock market disasters traceable thereto would be about 90 per cent. Success is only for the few who really want the work (not the glory), and the problem is to ascertain, with the minimum expenditure of time and money, whether you are fitted for the work.
These, in a nutshell, are the vital questions up to this point:
Having decided to proceed, the trader who is equal to the foregoing finds himself asking, "Where shall I trade?"
The choice of a broker is an important matter to the Tape Reader. He should find one especially equipped for the work: who can give close attention to his orders, furnish quick bid and ask prices, and other technical information, such as the quantities wanted and offered at different levels, etc.
The broker most to be desired should never have so much business on hand that he cannot furnish the trader with a verbal flash of what "the crowd" in this or that stock is doing. This is important, for at times it will be money in the pocket to know just in what momentary position a stock or the whole market stands. The broker who is not overburdened with business can give this service; he can also devote time and care to the execution of orders.
Let me give an instance of how this works out in practice: You are long 100 shares of Union stock, with a stop-order just under the market price; a dip comes and 100 shares sells at your stop price - say 164. Your careful, and not too busy broker, stands in the crowd. He observes that several thousand shares are bid for at 164 and only a few hundred are offered at the price. He does not sell the stock, but waits to see if it won't rally. It does rally. You are given a new lease of life. This handling of the order may benefit you $50, $100 or several hundred dollars in each instance, and is an advantage to be sought when choosing a broker. Having knowledge of the depth of the market – how much is offered for sale and at what price and how much is bid and at what price; the placement of bid and ask orders are of tremendous importance to the tape reader.
The brokerage house which transacts an active commission business for a large clientele is unable to give this type of service. Its stop-orders and other orders not "close to the market," must be given to exchange Specialists, and the press of business is such that it cannot devote marked attention to the orders of any one client.
In a small brokerage house, such as we have described, the Tape Reader is less likely to be bothered by a gallery of traders, with their diverse and loud-spoken opinions. In other words, he will be left more or less to himself and be free to concentrate upon his task. The ticker should he within calling distance of the telephone to the Stock Exchange. Some brokers have a way of making you or a clerk walk a mile to give an order. Every step means delay. The elapse of a few seconds may result in a lost market or opportunity.
If you are in a small private room away from the order desk, there should be a private telephone connecting you with the order clerk. Slow execution won’t make it in Tape Reading. Your orders should generally be given "at the market." We make this statement as a result of long experience and observation, and believe we can demonstrate the advisability of it. The process of reporting transactions on the tape, consumes from five seconds to five minutes, depending upon the activity of the market. For argument's sake, let us consider that the average interval between the time a sale takes place on the floor and the report appears on the tape is half a minute. A market order in an active stock is usually executed and reported to the customer in about two minutes. Half this time is consumed in putting your broker into the crowd with the order in hand; the other half in transmitting the report. Hence, when Union Pacific comes 164 on the tape and you instantly decide to buy it, the period of time between your decision and the execution of your order is as follows:
The tape is behind the market …30 seconds Time elapsed before broker can execute the order … 30 seconds It will therefore be seen that your decision is based on a price which prevailed half a minute ago, and that you must purchase if you will, at the price at which the stock stands one minute after. This might happen between your decision and the execution of your order: UP 164, ¼, 1/8, ¼, ½, ½, 3/8, ¼, 1/8, 164, …and yours might be the last hundred. When the report arrives you may not be able to swear that it was bought at 164 before or after it touched 164½. Or you might get it at 164½, even though it was 164 when you gave the order, and when the report was handed to you. Just as often, the opposite will take place - the stock will go in your favour. In fact, the thing averages up in the long run, so that traders who do not give market orders are hurting their own chances.
An infinite number of traders seeing Union Pacific at 164, will say: "Buy me a hundred at 164." The broker who is not too busy will go into the crowd, and, finding the stock at 164¼ at ¼ will report back to the office that "Union is ¼ bid." The trader gives his broker no credit for this service; instead he considers it a sign that his broker, the floor traders and the insiders have all conspired to make him pay ¼ per cent higher for his 100 shares, so he replies: “Let it stand at 164. If they don't give it to me at that, I won't buy it at all." How foolish! Yet it is characteristic of the style of reasoning used by the public. His argument is that the stock, for good and sufficient reasons, is a purchase at 164. At 164¼ or 1/2 these reasons are completely nullified; the stock becomes dear, or he cares more to foil the plans of this "band of robbers" than for a possible profit. If you believe UP stock is cheap at 164 it's still cheap at 164¼. Here’s the best advice I can give: If you can't trust your broker, get another.
If you think the law of supply and demand is altered to catch your $25, floor - you better reorganize your thinking. Were you on the floor you could probably buy at 164 the minute it touched that figure, but even then you have no certainty. You would, however, be 60 seconds nearer to the market. Your commission charges would also be practically eliminated.
Therefore, if you have two hundred seventy or eighty thousand dollars which you do not especially need, buy a seat on the Stock Exchange. A Tape Reader who deserves the name, makes money in spite of commissions, taxes and delays. If you don't get aboard your train, you'll never arrive.
Giving limited orders loses more good dollars than it saves. We refer, of course, to orders in the big, active stocks, wherein the bid and ask prices are usually 1/8th apart. Especially is this true in closing out a trade. Many foolish people are interminably hung up because they try to save eighths by giving limited orders in a market that is running away from them. For the Tape Reader there is a psychological moment when he must open or close his trade. His orders must therefore be "at the market." Haggling over fractions will make him lose the thread of the tape, upset his poise and interrupt the workings of his mental machinery. In ‘scale’ buying or selling it is obvious that limit orders must be used. There are certain other times when they are of advantage, but as the Tape Reader generally goes with the trend, it is a case of "get on or get left." By all means "get on."
The selection of stocks is an important matter, and should be decided in a general way before one starts to trade. Let us see what we can reason out.
If you are trading in 100 share lots, your stock must move your way one point to make $100 profit. Which class of stocks are most likely to move a point? Answer: The higher priced issues. Looking over the records we find that a stock selling around $150 will average 2½ points fluctuations a day, while one selling at 50 will average only one point. Consequently, you have 2½ times more action in the higher priced stock. The commission and tax charges are the same in both. Interest charges are three times as large, but this is an insignificant item to the Tape Reader who doses out his trades each day.
The higher priced stocks also cover a greater number of points during the year or cycle than those of lower price. Stocks like Great Northern, although enjoying a much wider range, are not desirable for trading purposes when up to 300 or more, because fluctuations and bid and asked prices are too far apart to permit rapid in-and-out trading. Look for stock leaders where there is a large floating supply; where there is a wide public interest in the stock; where there is a broad market and wide swings; where trends are definable (not too erratic); these are popular with floor traders, big and little. It is better for a Tape Reader to trade in one or two stocks at the most - rather than more - since concentration is absolutely necessary for the work at hand.
Stocks have habits and characteristics that are as distinct as those of human beings or animals. By a close study the trader becomes intimately acquainted with these habits and is able to anticipate the stock's action under given circumstances. A stock may be stubborn, sensitive, irresponsive, complaisant, and aggressive; it may dominate the tape or trail along behind the rest; it is whimsical and exhibit serendipity. Its moods must be studied if you would know it personally. Study implies concentration. A person who trades in a dozen stocks at a time cannot concentrate on one.
The popular method of trading (which means the unsuccessful way) is to say: "I think the market's going bearish. ‘Smelters’, ‘Copper’ and ‘St. Paul’ have had the biggest rise lately; they ought to have a good reaction; sell a hundred short of each for me." Trades based on what one "thinks" seldom pan out well. The selection of two or three stocks by guesswork, instead of one by reason and analysis, explains many of the public's losses. If a trader wishes to trade in three hundred shares, let him sell that quantity of this stock which he knows most about. Unless he is playing the long term he injures his chances by trading in several stocks at once. It's like chasing a drove of pigs - while you're watching this one the others get away. It’s better to concentrate on one or two stocks and study them exhaustively. You will find that what applies to one does not always fit the other; each must be judged on its own merits. The varying price levels, volumes, percentage of floating supply, earnings, the manipulation of large traders and other factors, all tend to produce a different combination in each particular case.