Starting a trading journal based on my understanding of Wyckoff's work

dbphoenix

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Ah that's true, I can easily pick a US market to paper trade in.

So we're at:

1. Paper trade daily chart
2. Trade only retracements

Is there anything else I should be doing? Do I keep on watching replays of price moving? I was doing this with on a 3 minute chart, I guess the time frame for this doesn't matter?
I suggest you set aside intraday work for the time being since you will be focusing on daily charts until you become more comfortable with Wyckoff's process. The first step, then, is to find an instrument that is simple to trade, easy to trade, that is “directional”, that moves smoothly, that moves with ”intent” (i.e., that is decisive after reversals and breakouts), that chops as little as possible, and is, of course, liquid. I suggest that you review pp. 28-34 in the Dbs Burrow section of your book. You may also want to review Wyckoff's approach to the use of group charts, posts 29-34 in the Wyckoff thread. This is, to be honest, grunt work, but it's what one has to do if one is going to trade stocks rather than, say, futures. If at some point you decide that stocks just aren't for you, then you'll have other choices to make. The "Developing A Plan" section may be of further help in that circumstance, at least in terms of determining exactly what it is you want to accomplish.

Db
 

moreina

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So, looking at Veeva Systems (VEEV) on the NDX shows a strong markup phase with no signs of distribution as of yet. I've chosen this stock since it has basically ignored the dip in May of the NDX and has just continued on its way, suggesting strength.

We can see a congestion zone that started in November and lasted until mid January, at which point the stock just took off. So far it has gained 90 points. The increase in the slope of the advance, marked by the second demand line, suggests a certain urgency in the markup phase that could suggest a distribution area not too far in the future. However since there is no sign so far we will trade on the long side.

We can see a top at the 173 price area but the inability of supply to push the price back down, comparing the price and volume reaction on the 24th of june to that of the 16th of july, suggests absorption is happening.

As price is just now rebounding from the low formed just below the resistance area, and volume is low, it seems like price is readying itself for a strong move up to break through resistance.

We will enter here at 173, with a stop loss at 168.
 

moreina

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Price broke down and took out the stop but the volume was unremarkable. Volume then increased the next day and pushed price further down to 163. The day after that volume increased significantly and price remained unchanged, suggesting that buyers came in at that price level. The next day price moved up to 168, confirming that demand has outstripped supply.

We re-entered at that level.

The following day price moved up to 170, halfway back from the top formed at 176.
 

dbphoenix

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Given the outcome of this trade, would you change your original analysis, as posted here? If so, how?

Db
 

moreina

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I wouldn't change my analysis, I'm taking the position that the down move from the area that I thought was the bottom is just a normal fluctuation based on these things:

Price retraced to almost exactly 50% of the last up move from 154 to 176 and held there with strong volume - buyers stepping up and defending the price area

The price action at the top and the down move were relatively normal, and it took a few days to get to the halfway-point - indicative of no strong move by sellers

If a trading range forms between 154 and 176, which seems likely at this point, then the rising support, followed by good volume, indicates absorption rather than distribution.

The only negative indication I can find with regards to price advancing is that there seems to be some sort of shortening of the buying waves, but isn't this normal when we enter a trading range?

 

moreina

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I assume Wyckoff would enter here, at the retracement, since the high volume and failure to push price lower would confirm the bullish tendency of the market. Maybe with a stop at 160, halfway between the retracement bottom and the origin of the last up move.
 

dbphoenix

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I assume Wyckoff would enter here, at the retracement, since the high volume and failure to push price lower would confirm the bullish tendency of the market. Maybe with a stop at 160, halfway between the retracement bottom and the origin of the last up move.
W looked for equilibrium, an accumulative base, preparation for an advance, and the springboard for that advance. Buying something absent these elements would not be an efficient use of funds since price could drift along in a trading range for weeks, or months. VEEV's first base was two years long. The next base, after having doubled, was nine months long. The stock then dropped 20% along with the rest of the market last Fall but recovered and reached new highs this past January. Since then there have been higher highs and higher lows along with a few retracements, but no preparations per se. This does not mean that the advances are done, but the risks here are far greater than they would be after a sufficient period of accumulation - or, at this point - absorption - and preparation for another advance. I'm hardly an expert on Wyckoff (I unfortunately don't know anyone who is), but, based on what he says in his course, particularly Section 7 (Appendix D in your book), the last opportunity to enter would have been off the month-long base in May, perhaps the RET at the very beginning of June.

Analysis and trading needn't be joined at the hip. In fact, beginners and traders who have been having difficulties ought to make every effort to separate the two. The focus should be on what traders are trying to accomplish rather than "where do I enter?". If one doesn't understand traders' objectives then the question of where do I enter is moot. At least for the time being. You've made some good points in your analyses, but consider that this stock has sextupled since it exited its primary base, tripled since its second, and more than doubled since its correction last Fall. Its advance has been pretty much vertical. Wyckoff - if I understand his work - would be more likely to buy on a correction rather than jump into a momentum play and would be more likely to monitor this stock while looking for others that were on the springboard after doing the work of preparing for an advance.

If you are at heart a momentum player, this may not be your cup of tea. But the risks involved in W's approach are far less.

Db
 

moreina

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Thanks for the comments DB, I hadn't paid much attention to areas of equilibrium and their relationships with the length of the advance/decline after price leaves it. Will go back and do a hindsight analysis on those areas. Since the danger point is so close in those areas I actually find them attractive places to enter. What I can't properly do is understand the flow and balance in those areas.

In your opinion, is it better to enter only on equilibrium areas that are about to move, rather than combine those entries with retracements? W mentions pyramiding and selling on bulges in Section 7 during the bear market, are those applicable only in the early parts of the bull/bear cycle?

You're right, I find that when I'm just observing price action vs when I'm actively looking for an entry things are much clearer. Will focus on that right now.
 

dbphoenix

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Thanks for the comments DB, I hadn't paid much attention to areas of equilibrium and their relationships with the length of the advance/decline after price leaves it. Will go back and do a hindsight analysis on those areas. Since the danger point is so close in those areas I actually find them attractive places to enter. What I can't properly do is understand the flow and balance in those areas.
See pp 9-19, "Demand/Supply" in Db's Burrow, particularly the material on accumulation. See also pp 118-124, "Equilibrium", in Notes as well as the material on "Auction Market Theory" in the SLAB, pp 50-63.

In your opinion, is it better to enter only on equilibrium areas that are about to move, rather than combine those entries with retracements? W mentions pyramiding and selling on bulges in Section 7 during the bear market, are those applicable only in the early parts of the bull/bear cycle?
Knowing that something is "about to move" requires a level of sophistication that I don't have. To a large extent, detecting this requires a thorough understanding of volume, including what volume is and what it represents, and if I haven't covered this sufficiently in my book, there's always "Section 14" in Wyckoff's course as well as "Section 7" in his course ("Appendix D" in my book). But even W acknowledges that one can be misled by the activity within a range and that breakouts are often false, which is why trading the retracement - if there is one - after the breakout is preferable to being trapped in a false breakout. There is also the matter of the equilibrium state converting itself into an accumulative base, which can go on for far longer than one would expect from a simple pause to reach equilibrium. Waiting for a BO and RET avoids a lot of waiting.

As for pyramiding, see "Appendix E", the SLAB, Footnote 1, p 100, for one suggestion on how to work your way through this. Focusing on demand/supply lines and last swing highs/lows can also be helpful since breaks of D/S lines warn of trouble, or at least change, while last swing highs/lows tell you where major money stepped up the last time to support price movement or resist it.

You're right, I find that when I'm just observing price action vs when I'm actively looking for an entry things are much clearer. Will focus on that right now.
Most if not all inexperienced traders find analysis boring, perhaps because they don't see the point of it, the point of it being, of course, to determine whether or not to enter at all. Analysis in and of itself is worthwhile, even if the results of that analysis are that one should continue to wait patiently for his moment. And the more practice one has in analysis, the easier and faster it becomes, so that when a quick, on-the-run analysis becomes necessary, the trader is in a position to do it. Observing price action without purpose doesn't accomplish much, except perhaps to drive home the fact that price movement is continuous. In the "Developing A Plan" section of the SLAB, I offer some suggestions on what to look for while one is observing:

Developing a system begins with deciding just what it is you're looking for. Therefore, begin by studying price movement in real time (or at the end of the day through "replay", if your charting program offers it). By "study", I mean to observe it with intent, not just read about it or listen to somebody talk about it. You have to understand what you're looking at before you know what to look for (see p. 2, Notes). Note the conditions under which price rises, falls, drifts. Make every effort to avoid imposing your biases onto what you observe. You may see trading as a war, a competition, a game, or a puzzle. You may think you're out to kill some-body, outwit somebody, or are out only to detect the flow and slip into it, riding the waves as if you were sailing. None of this should be allowed to affect what you observe.

Pretend that you are watching a team sport in which you know nothing about the rules and couldn't care less about the players, much less about who wins. But you do want to understand what's going on, out of curiosity if nothing else. Your chief
thought is not when you should jump onto the field and begin playing. Your chief thought centers around the following questions, primarily What the Hell Are These People Doing? So you observe.

What are they doing?

Where are they doing it?

Why are they doing it? Why are they doing it where they're doing it and when they're doing it?

How are they doing it?

What do they want to accomplish? What were they doing before?

If one observes the game long enough, he begins to discern the rules and will enter a phase where he pretty much understands what's going on but still has no interest in which team wins.

And if the teams are buyers and sellers . . .


Remember that Wyckoff, when not trading intraday, looks at all this from the standpoint of major money. The moves of major money are predictable to the extent that one understands what it is they're trying to accomplish, e.g., through the process of accumulation. Therefore one is more likely to profit if he trades with major money (see "Please Sir", "What Am I Bid", and "Trading Opportunities" in Notes). This means, in part, looking for opportunities at the bottoms of corrections, whether relatively minor, such as VEEV at the end of June, or more major, such as VEEV at the end of December, along with all the major market averages. The major corrections offer examples of his "climax/test" scenario, which exists today just as it did a hundred years ago (note all the tests in early January). Wyckoff looks for and waits for these opportunities because he understands that it is major money that not only halts the decline but orchestrates the reversal. And the money is to be made by trading with major money, not by fighting against it.

Entering on relatively trivial RETs is fine as long as one understands and is willing to accept the risks. But unless major money is buying that RET, the odds of being stopped out are just as good as those of being propelled into higher highs. This is not to suggest that they not be taken. If one is a momentum trader and price is in serious momentum mode, there may be no other choice. However, the risks should be thoroughly understood (the Danger Points exactly located) and accepted. This ensures an emotionless trade.

Db
 
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dbphoenix

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For anyone who's following along, C=climax, T=test. The objective is not to enter during the climax as one has to way of knowing in real time whether it is THE climax or not. There may be further downside. And often is. But a bell should ring. A light should flash. And the trader should pay closer attention and be on the alert, waiting for signs of a reversal and, eventually, a test.
 

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dbphoenix

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For the notebook, an example of a base breakout in VEEV, with retracement/test. Granted it's three years old, but this stuff occurs every day.

265494
 

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