RICHARD D. WYKOFF - MY SECRETS OF DAY TRADING IN STOCKS
The Use of Charts as Guides And Indicators
MANY interesting queries have been received regarding the use of charts. The following is a letter representative of most: “Referring to your figure chart explained in Volume 1 of the Magazine of Wall Street, I have found it a most valuable aid to detecting accumulation or distribution in market movements. I have been in Wall Street a number of years, and like many others have always shown a sceptical attitude toward charts and other mechanical methods of forecasting trends; but after a thorough trial of the chart on Union Pacific, I find that I could have made a very considerable sum if I had followed the indications shown. I note your suggestions to operators to study earnings, etc., and not to rely on charts, as they are very often likely to mislead. I regret that I cannot agree with you. You have often stated that the tape tells the story; since this is true, and a chart is but a copy of the tape, with indications of accumulation or distribution, as the case may be, why not follow the chart entirely, and eliminate all unnecessary time devoted to study of earnings, etc?”
Let us consider those portions of the above which relate to Tape Reading, first clearly defining the difference between chart operations and tape reading. The genuine chart player usually operates in one stock at a time, using as a basis the past movements of that stock and following a more or less definite code of rules. He treats the market and his stock as a machine. He uses no judgment as to market conditions, and does not consider the movements of other stocks; but he exercises great discretion as to whether he shall "play" a chart signal or not. The Tape Reader operates on what the tape shows now. He is not wedded to any particular issue, and, if he chooses, can work without pencil, paper or memoranda of any sort. He also has his code of rules - less clearly defined than those of the chart player. So many different situations present themselves that his rules gradually become intuitive - a sort of second nature evolved by self-training and experience.
A friend to whom I have given some points in Tape Reading once asked if I had my rules all down so fine that I knew just which to use at certain moments. I answered him this way: “When you cross a street where the traffic is heavy, do you stop to consult a set of rules showing when to run ahead of a trolley car or when not to dodge a wagon? No. You take a look both ways and at the proper moment you walk across. Your mind may be on something else but your judgment tells you when to start and how fast to walk. That is the position of the trained Tape Reader”. The difference between the Chart Player and the Tape Reader is therefore about as wide as between day and night.
But there are ways in which the Tape Reader may utilize charts as guides and indicators and for the purpose of reinforcing his memory. The Figure Chart is one of the best mechanical means of detecting accumulation and distribution.It is also valuable in showing the main points of resistance on the big swings. A figure chart cannot be made from the open, high, low and last prices, such as are printed in the average newspaper. We produced a Figure Chart of Amalgamated Copper showing movements during the 1903 panic and up to the following March (1904):
It makes an interesting study. The stock sold early in the year at 75 5/8 and the low point reached during the above period was 33 5/8. The movements prior to those recorded here show a series of downward steps, but when 36 is reached, the formation changes, and the supporting points are raised. A seven-point rally, a reaction to almost the low figure, and another sixteen-point rally follows. On this rally the lines 48-49 gradually form the axis and long rows of these figures seem to indicate that plenty of stock is for sale at this level. In case we are not sure as to whether this is further accumulation or distribution we wait until the price shows signs of breaking out of this narrow range. After the second run up to 51 the gradually lowering tops warn us that pressure is resumed. We therefore look for lower prices. The downward steps continue until 35 is touched, where a 36-7 line begins to form. There is a dip to 33 5/8, which gives us the full figure 34, after which the bottoms are higher and lines commence forming at 38-9. Here are all the earmarks of manipulative depression and accumulation - the stock is not allowed to rally over 39 until liquidation is complete. Then the gradually raised bottoms notify us in advance that the stock is about to push through to higher levels.
If the Figure Chart were an infallible guide no one would have to learn anything more than its correct interpretation in order to make big money. Our writer says, "after a thorough trial of the chart on U. P. I find that I could have made a very considerable sum if I had followed the indications shown". But he would not have followed the indications shown. He is fooling himself. It is easy to look over the chart afterwards and see where he could have made correct plays, but I venture to say he never tested the plan under proper conditions.
Let anyone, who thinks he can make money following a Figure Chart or any other kind of a chart have a friend prepare it, keeping secret the name of the stock and the period covered. Then put down on paper a positive set of rules which are to be strictly adhered to, so that there can be no guesswork. Each situation will then call for a certain play and no deviation is to be allowed. Cover up with a sheet of paper all but the beginning of the chart, gradually sliding the paper to the right as you progress. Record each order and execution just as if actually trading. Put my name down as covering the opposite side of every trade and when done send me a check for what you have lost. I have yet to meet the man who has made money trading on any kind of Chart over an extended period.
The Figure Chart can be used in other ways. Some people construct figure charts showing each fractional change instead of full points. The idea may also be used in connection with the Dow Jones average prices. But for the practical Tape Reader the full figure chart first described is about the only one we can recommend. Its value to the Tape Reader lies chiefly in its warnings of important moves thus putting him on the watch for the moment when either process is completed and the marking up or down begins. The chart gives the direction of coming moves; the tape says "when."
The ordinary single line chart which is so widely used, is valuable chiefly as a compact history of a stock's movements. If the stock which is charted were the only one in the market, its gyrations would be less erratic and its chart, therefore, a more reliable indicator of its trend and destination. But we must keep before us the incontrovertible fact that the movements of every stock are to a greater or lesser extent affected by those of every other stock. This in a large measure accounts for the instability of stock movements as recorded in single line charts. Then, too one stock may he the lever with which the whole market is being held up, or the club with which the general list is being pounded. A chart of the pivotal stock might give a strong buying indication, whereupon the blind chart devotee would go long to his ultimate regret; for when the concealed distribution was completed his stock would probably break quickly and badly. This shows clearly the advantage of Tape Reading over Charts. The Tape Reader sees everything that goes on; chart player's vision is limited. Both aim to get in right and go with the trend, but the eye that comprehends the market as a whole is the one which can read this trend most accurately.
If one wishes a mechanical trend indicator as a supplement and a guide to his Tape Reading, he had best keep a chart composed of the average daily high and low of ten leading stocks in a group. First find the average high and average low for the day and make a chart showing which was touched first. This will be found a more reliable guide than the Dow Jones averages, which only consider the high, low and closing bid of each day, and which, as strongly illustrated in the May, 1901, panic, frequently do not fairly represent the day's actual fluctuations. Such a composite chart is of no value to the Tape Reader who scalps and closes out everything daily. But it should benefit those who read the tape for the purpose of catching the important five or ten point moves. Such a trader will make no commitments not in accordance with the trend, as shown by this chart. His reason is that even a well planned bull campaign in a stock will not usually be pushed to completion in the face of a down trend in the general market. Therefore he waits until the trend conforms to his indication.
It seems hardly necessary to say that an up trend in any chart is indicated by consecutive higher tops and bottoms, like stairs going up, and the reverse by repeated steps toward a lower level. A series of tops or bottoms at the same level shows resistance. A protracted zigzag within a short radius accompanied by very small volume means lifelessness, but with normal or abnormally large volume, accumulation or distribution is more or less evidenced. Here is a style of hand chart especially adapted to the study of volumes:
When made to cover a day's movements in a stock, this chart is particularly valuable in showing the quantity of stock at various levels. Figures represent the total 100 share lots at the respective fractions. Comparisons are ready made by adding the quantities horizontally. Many other suggestions may be derived from the study of this chart. The proficient Tape Reader will doubtless prefer to discard all mechanical helps, because they interfere with his sensing the trend. Besides, if he keeps the charts himself the very act of running them distracts his attention from the tape on which his eye should be constantly riveted. This can of course be overcome by employing an assistant; but taking everything into consideration - the division of attention, the contradictions and the confusing situations which will frequently result - we advise students to stand free of mechanical helps so far as it is possible. Our correspondent in saying "a chart is but a copy of the tape" doubtless refers to the chart of one stock. The full tape cannot possibly be charted. The tape does tell the story, but charting one or two stocks is like recording the actions of one individual as exemplifying the actions of a very large family.