1️⃣There are manipulators in the market
This is the cognitive premise of Wyckoff's trading method. He believes that capital is profit-seeking. Once the market can make money, it will definitely attract capital competition. In a zero-sum competitive market, if someone wins, someone must lose. According to the general principles of war theory, the party with superior resources will inevitably win with a high probability. As the book says: "The manipulators create some appearances that conform to the normal psychological thinking and behavioral habits of the public, but their real intentions are just the opposite." In reality, the public in the entire market is likely to lose money, which is also in line with the Matthew effect and the 80/20 rule.
The common tactics used by manipulators mainly combine three methods:
① Consumption: Use fatigue tactics in the time dimension. Retail investors think that when the price goes up or down, it will not go up or down, or even go the other way. When we can't bear it and sell it at the bottom, it will go up. When we wait for a long time at the top and it doesn't fall, we think it will go up again. After we buy it, it will fall.
② Shock: a surprise attack in the spatial dimension. The main force creates a long positive in the shock to lure retail investors to buy, while they themselves sell out; or suddenly accelerate the decline in volume during the decline, causing panic investors to hand over their chips, and then quickly pull back or even rush higher.
③ Confusion: Create a confusing array in the information dimension. Manipulate all kinds of news and small articles in the market to create emotions that are contrary to the main strategy to ensure that they withdraw or absorb funds.
In response to the above problems, the book summarizes that there is a significant difference in the trading logic habits of public retail investors and major players:
① Public retail investors rely on technical indicators, news, fundamentals, etc., while the main players only look at prices, trading volumes and speed of change;
② The public buys and sells based on the signals given by technical indicators, while the main players interpret the market's own behavior and supply and demand relationships, and make buying and selling decisions based on the overall environment;
③ The public retail investors have no crisis management, which leads to being trapped, while the main players always put risk control first.
2️⃣ How can smart small funds understand the tricks of manipulators?
The power of the main force is far greater than the public imagines. Therefore, if you want to make a profit in the market, you need to study the manipulator's trading logic and strategy and follow the rhythm, rather than fantasizing about predicting or changing the manipulator's methods.
The book focuses on the following points:
① Establish a trading evaluation strategy based on the supply and demand relationship, mainly analyzing the strength of buyers and sellers, as well as the corresponding quantity-price relationship, trend changes, etc. This theoretical basis is intended to cultivate our ability to identify the supply and demand relationship in the market at that time through detailed changes in prices and trading volumes without using technical indicators. Sellers are supply, and buyers are demand. When supply dominates the market, the stock or currency price will fall (oversupply, price drop), and demand dominates the rise (shortage of supply, price rise); we generally only do demand-led markets. The book also focuses on the relationship between supply and demand and volume. Only when quantity and price match can the corresponding trend be constructed, and the divergence of quantity and price often represents the occurrence of anomalies. For our daily use, this tells us to try to make the stage where the supply and demand relationship is clear.
② Establish a trend change identification strategy based on the theory of causality. The core idea is that the occurrence of volume-price divergence is often the occurrence of trend change, and the length of the oscillation cycle affects the height of the rebound reversal. I understand that every abnormal volume-price relationship or a period of frequent abnormal volume-price relationship (oscillation) is often a process of trend reversal. What needs to be paid attention to here is a time issue. The trend reversal of the vast majority of targets will not happen overnight, but there will be a process. For example, the real bottom-fishing is often not the first two large-volume positive lines. The high probability is "a huge sell-off, then a low-volume test, and finally a shock to drive away the last floating supply (unsteady chips) in the market or a long positive line with volume leaving the accumulation range". This tells us that when an abnormal volume-price relationship occurs, don't rush to judge and operate. Appropriate observation and tracking are necessary.
③ Establish an operation strategy that focuses on the support and pressure boundaries, and pay attention to the stop behavior at the support and pressure levels, which may become a new direction for the follow-up (called the principle of effort and results in the book). Focus on the large volume, small amplitude, and large Yin and Yang at the support and pressure levels as possible changes or acceleration signals in the future market. This tells us that we must master the support and pressure trend lines of the currency price trend, and then pay close attention to possible changes in volume and price when the stock price is near these trend lines; at the same time, we should also pay attention to the large volume of Yang and Yin in the process. A large volume of Yin and Yang itself is a support and pressure level.
We can see that the core idea of the entire Wyckoff trading method is a comprehensive evaluation of the relationship between volume and price. The author believes that as long as the relationship between volume and price is truly understood, all other technical indicators can be thrown out of the window. The goal of judging the relationship between volume and price is to discover the change of trend, confirm the formation of trend, and participate in the main process of trend.
3️⃣The broad vision and small rhythm of Wyckoff trading method
After I finished reading the book, the biggest gain for me, besides a new perspective on the relationship between volume and price, was the global perspective of Wyckoff’s trading method:
Let's take his "fall-bottoming-rebound-pull-up", that is, the process of bear turning bull, as an example (more in line with the current situation):
Wyckoff believes that when a bear market enters its final stage and turns into a bull market, it can be divided into five stages:
Phase A, accelerated decline phase (bottom accumulation zone 1): The bear market declines, and experiences a brief stop or small rebound at the tail to form an initial support for the decline. Subsequently, the decline accelerates, panic intensifies, panic selling occurs, trading volume increases, and then there is a rebound for a period of time.
Phase B, the sideways trading phase (bottom accumulation zone two): the stock price oscillates back and forth within a range, and the direction of the stock price is unclear. The high point of this phase may be higher than the final rebound high point of Phase A, and the low point may be lower than the low point of the previous panic selling, but the overall gap will not be too large.
Phase C, breaking the new low and then quickly pulling back (bottom accumulation zone three, spring effect): the stock price breaks away from the bottom of the original oscillation box and falls rapidly, but is quickly pulled back, and then oscillates upward.
Phase D, the beginning of strength (the last accumulation zone in the bottom accumulation zone): a large-volume rise occurs in the upward oscillation, accompanied by a retracement with a small volume, and the support and pressure conversion matches the previous support and pressure lines; at the same time, a large-volume breakthrough of the high point since Phase A occurs, and the retracement fails to break through or quickly pulls back after a break.
Phase E, entering the main rising range.
The structure of a bull market turning into a bear market is exactly the opposite, with the bottom accumulation area turning into a high distribution area. The different trends in each stage are also explained in detail throughout the book.
This Wyckoff stage and trend chart is very inspiring to us. Here are the three points of personal gain:
① Enhanced the overall view of stock trends. When I look at a stock now, I habitually magnify the time range of the stock, look at the trend of the target in the entire operating time cycle of the stock (or the last 5 years), and then compare it with the Wyckoff stage or other theories to benchmark the current position. Looking at the overall situation can lay a certain structural support for our operations. At the same time, this book also tells us that as traders who are the opposite of manipulators, we must race against manipulators and time. For manipulators, what is important for us is to follow, and for time, what is important for us is patience, including patient waiting and patient empty positions.
② I have a greater sensitivity and objective understanding of panic selling, key support and pressure points (lines), spring effects, and the emergence of strength. For example, panic selling, when a slow downward trend appears, often leads to an accelerated decline after a period of time, which is particularly obvious for the market and sector indexes. For another example, when a stock has risen for a period of time, and the rise looks good, but it is close to the pressure point and line, it was easy to rush in before, but now I will continue to observe and gradually build a position after the breakthrough is confirmed. For another example, I pay special attention to the pressure trend line (slope channel) and the ice line (horizontal) as an important reference for operation.
③ You will have a better grasp of the holding time and position control, especially in the shock zone. You will not rush in and then sell at a loss after the stock price does not rise and falls. When entering the shock zone, you need to gradually build positions and small positions, and then gradually increase your positions when the spring effect appears and the second or third low-level tests appear.
4️⃣Listen to both sides and make a comprehensive analysis
Wyckoff hopes to find out the trends of market manipulators, main players, and large funds through the relationship between volume and price and the trend structure, so as to ensure that smart small funds can keep up with the pace. However, when we actually operate, we cannot be metaphysical or take things for granted. We must put Wyckoff's trading theory in the dimensions of time and space and use it dialectically.
For example, panic selling and secondary testing may not happen, and there may be third or fourth testing. But we also hope that we can firmly believe that if the accumulation time is long enough, the rebound will be high enough! Wyckoff trading method is also effective for different cycles. Especially in the period of shock, we should pay more attention to the cycle below the daily cycle and respond with short-term strategies.
The most important thing in the entire trading strategy is to determine the timing of the transaction. The author believes that the trading opportunities developed by Wyckoff can refer to the following three points:
① Supply is exhausted, one manifestation of which is the negative K with no volume;
② If the underlying asset continues to fall, it is best to see a secondary test after the climax of selling or thereafter, when the supply (selling pressure) decreases;
③ The demand begins to come in, and the volume increases, with a certain increase (also known as right-side trading).
The book also provides a relatively detailed explanation of crisis management. I personally believe that all trend predictions are based on speculation about volume and price phenomena, and therefore cannot be 100% accurate. Once a wrong judgment is made, you need to leave the market quickly. This kind of exit execution is crisis management.
To do a good job in crisis management, I think three things need to be done based on the whole book:
① Every purchase must have a stop loss line. For predictions that are not as expected, set a stop loss line before trading. Once it is triggered or confirmed, immediately admit the loss and leave the market. This is one of the key points of crisis management.
② To prevent transaction failure, execute entry and exit operations in batches.
③ Pay attention to the break of the structural trend structure, especially the break with a big Yin. If the second K-bar does not pull back, you must leave the market resolutely.
Trading is not just a numbers game, but also a competition of mental and wisdom that tests your concentration, endurance, vision and perspective. Only by constantly improving your cognitive level and trading skills can you be invincible in the market.
Finally, this theory has been around for nearly 100 years and has been a classic in the market for decades. I only saw it now, which shows that I was too impetuous when entering the market. I dared to take on this job without any skills. It would be strange if I didn’t lose money!
mutual encouragement