Listen to the what the market is saying about others, not what others are saying about the

market. --- Richard Wyckoff Wykoff/Wykcoff methods of Richard D. Wyckoff, a technical trader in the early 1900s. His principles are based on volume and price action. Richard D. Wyckoff had modeled the campaigns of some of the greatest stock market operators, 18891928. Wyckoff also found many common characteristics among successful investment campaigns. After modeling the action of Jesse Livermore, Edward Wasserman, James Keen, J.P. Morgan, and many other big operators of his day, Wyckoff developed a paradigm which helped to explain the boom and bust cycle in stocks. He implemented this model and grew his account such that he eventually owned a mansion next door to the Alfred Sloan Estate in the Hamptons. Wyckoff's Solutions Wyckoff's Idealized Cycle and Phases The Composite Operator The Campaign Nine Tests -----------------------------------------------------------------VSA Volume Spread Analysis is the study of the relationship between relative volume on a chart and the price action of the day in relation to previous price action. Such techniques were originally pioneered by Wyckoff in the 1930's and W.D. Gann is also known to have used similar methods. Tom Williams may be called the most exemplary and practical modern exponent of these methods. He has taken the work of Wyckoff and refined those methods into very precise rules, which he has documented in his book, The Undeclared Secrets of the Stock Market and a computer programme, called, rather more aptly just Volume Spread Analysis (a name I take credit for!). The programme gives off green or red arrows which relate to "signs of strength" or "signs of weakness". Often these signals work extremely well when taken as buys or sells but Tom Williams and I *steadfastly* maintain that they are not to be used as such. They merely point out the occurrence of accumulation or distribution which may warn of a coming rise or fall, which can be but are not necessarily a signal in of themselves. The Volume Spread Analysis technique involves getting a grass roots understanding of the supply and demand / accumulation and distribution picture building in the market. Such understanding of the fundamental condition of WHAT is driving a market will allow you to "judge" what is the point of going long or short and actually placing a trade. This does not invalidate or decry those who use other techniques, such as the so called black box techniques commonly available commercially, with their fantastically documented performance. Perhaps they are much better than VSA. Please do not ask what our

performance record is with the maximum drawdown figures for the past x years as this is simply not that kind of system. Casket traders not wanted here. It's just not our style. Either our concepts have basic appeal to you and *you* can apply them in your own way or not. If you want to see more, take a wander over to our web site. This contains sample charts from VSA showing what a crap programme it is for casket traders as "signals" which they assume are buy or sell signals are sometimes apparently "premature" (like the one that showed all the selling/distribution in April Gold on the way up to 420) - rather than understanding what the programme was actually saying to u). There are also "teasers" as to the books content, as well as a bit about Tom. The book, which as mentioned is called The Undeclared Secrets of the Stock Market should never have been called that in my view, as the "secrets" are obvious truths once read and in one form or another been published by Wyckoff over the years. It should rather be called something like "A Precise Manual for Trading Wyckoff" as the exceptional thing it does is precisely that although there are some concepts within the book that are not pure Wyckoff. Hand on my loved heart, I've sold about 20 of these books over the net over the last few months and we haven't yet had a really negative reaction, except from Tom Pall, who has called it a piece of crap. Some people appear over the moon with how the concepts in VSA have changed their idea of trading and their approach to market analysis. Others simply find VSA a good compliment or confirm on other techniques they already use. Without reposting some of the out and out adulation for the book, which u can view under "testimonials" on the web site (if you really want) I am posting with permission a review that Ray Barros, a trader from down under, did of the book: <Start of review> "THE UNDECLARED SECRETS OF THE STOCK MARKET" by Tom Williams. Cost is US$99.00 plus postage and is available form Larry Levy, 1 800-2608095 or Spain +34 71 402654 direct, the number is routed through Europe so please allow a full minute. I?m told that it?s disconcerting to hearing nothing for a minute as with US phones you hear the connection almost immediately. Fax is 34 71 700965. E-mail address is llevy@ibm.net. There is also a web page at http://www.ocea.es/vsa/vsa.htm Tom has a Wyckoff approach to the markets. I first came across Wykoff?s ideas about 6 or 7 years ago when I completed SMI?s The Wyckoff Method of Stock Market Method Analysis. Tom?s work is not as detailed as SMI?s in dealing with the various stages of the market and in defining what is accumulation or distribution. Both concepts are extremely important to Tom?s "secrets" which are a very clear description of the volume and price patterns to look for when looking to decide if a trend is likely to continue or if there is going to be a major change in trend. Tom?s strength lies in this very clear description.

If you have your own method to determine structure and price patterns to decide the continuation or change in trend questions then Tom?s work (as GDL) will provide invaluable assistance. The web address serves as a valuable support module. Tom is giving end of day assessments for the FTSE, DOW and S&P. Tom also sells real time and end of day software but I have not evaluated them. In a rating from 1 -10, I?d give Tom?s work 7. <end of review> So there you have it. As for the software, the most commonly asked question is "can I copy the ideas onto Trade Station or Supercharts" ? Yes is the answer, but 8 years of programming went into Toms programme. The rules there are very intricate, but certainly the book (which does not require the programme rather than the other way around) does give the principles should you wish to programme it all in yourself. It will undoubtedly do you *better* to programme it in and learn everything yourself but how long will it take ? I don't know the answer to this as I am not a programmer and there are programmers and programmers. Some of the basic rules should be very easy to code though. If you decide that you that you want to spend the time trading rather than coding things in then you still have 30 days to evaluate our programme and ask for your money back if u think its not worth the "two big ones". We have few returns. Repeat: VSA is not a "system". Though some people use it as such in various combinations, we make NO SUCH representation. ---------------------------------------------GANN'S LAW OF PRICE MOVEMENT APPLIED TO TODAY'S MARKETS By Greg Meadors Part 1 ========================================================= As a young stockbroker, W.D. Gann already suspected that there were unseen causes, operating behind the scenes, that were responsible for price movements in stocks and commodities. He liked to think that these hidden causes were part of a natural law that was secretly at work in the markets. As he acquired more knowledge and developed his theories, Gann systematized his theory of price movement and called it the "Law of Vibration". In the Ticker Magazine interview Gann states, "In going over the history of markets and the great mass of related statistics, it soon becomes apparent that certain laws govern the changes and variations in the value of stocks, and there exists a periodic or cyclic law which is at the back of all these movements. I soon began to note the periodical reocurrence of the rise and fall of stocks and commodities. This led me to conclude that natural law was the basis of market movements."

Gann believed that all successful men -- be they scientists, doctors, or businessmen, have devoted years to the study of their particular professions before attempting to practice them. Similarly, Gann spent many years in the pursuit of knowledge, leaving no stone unturned. Gann states, "After exhaustive research and investigations of the known sciences, I discovered that the "Law of Vibration" enabled me to accurately determine the exact points to which stocks or commodities should rise and fall within a given time. The working out of this law determines the cause and predicts the effect long before the Street is aware of either." Gann concludes by stating, "If we wish to avert failure in speculations we must deal with causes. Everything in existence is based on exact proportion and perfect relationship. There is no chance in nature, because mathematical principles of the highest order lie at the foundations of all things." What does Gann mean when he refers to the highest order, vibrations, and cycles? Some are familiar with cycles research which attempts to understand price cycles in the markets, but many times this study is ineffective because all the supposed regular time cycles are in fact irregular, occurring at varying time intervals. Since "Time" is based upon the Earth's rotation and it's cycle around the Sun, all standard time cycles have an Earth/Sun planetary base. However, by studing other planetary cycles, we readily observe both regular (heliocentric), and irregular (geocentric) cycles. Of all the sources which Gann studied, perhaps the one who most influenced him was Pythagoras, who started a school of philosophy, and believed that an object could be understood by knowing its number vibration. Pythagoras is credited with the discovery of the Diatonic Scale, in which numbers and ratios determine the whole science of music. Having established music as a science, consisting of exact harmonic ratios, Pythagoras then proceeded to divide all Creation, according to the law of harmonic intervals, into proportionate planes and spheres, each of which was assigned a number, tone, harmonic interval, and color. Gann's "Law of Vibration" incorporates Pythagoras' Law of Harmonic Intervals. It is obvious that Gann drew heavily from Pythagorean mathematics, when he developed the squaring of "Price and Time", and the ratios by which highs and lows could be divided.

A lesser known part of the Pythagorean System includes numbers ruling planets, and the ratios of their orbits, which are in harmonic relationships to each other. This harmonic organization of the cosmos was called the "Music of the Spheres." While it is well known that Gann's primary market timing tool was based upon cosmic correlations, what is not understood my most Gann adherents is that Gann's Astro work was based upon empirical research, irrespective of traditional Astrological doctrines. Gann makes this clear when he states, "these vibratory forces can only be known by the movements they generate on the stocks and their values in the market". In other words, to obtain a high degree of accuracy when applying natural cycles, one must learn through empirical research which cosmic cycles and events correlate historically with particular Stocks, Indexes, or Commodities. This can only be ascertained by doing original research to discover the historical correlations! For example, the October 19, 1987 Crash low was perfectly timed by the 84 year Uranus Cycle. Uranus reached the exact same degree in the Heavens where it was on November 9, 1903, the day of the 1903 Crash low. The 1987 Crash was preceded by the August "Harmonic Convergence", a rare planetary alignment which was widely advertised in the mass media (see Newsweek, 8/17/87). Our March 1987 forecast for a major top to occur at the New Moon on August 24th and to be followed by a 3 month correction prefectly timed the 1987 Stockmarket top within one day. ------------------------------------------------Around the turn of the century Richard D. Wyckoff published a lot of information about how to read from charts what the big players are doing. He seems to have been as important as figures like Dow and Gann, but doesn't seem to have a wide following today. I have just read the book "Charting The Stock Market, The Wyckoff Method" by Hutson et al. and would like to find others who use or are interested in this method of trading. I'm also aware of the Volume Spread Analysis program that has been mentioned in the misc.invest groups, that uses Wyckoff techniques. So. Any Wyckoff devotees out there? --------------------------------------I'd be interested in knowing where you got the book. Richard Wyckoff was a hard drinking, womanizer and prolific trader. He shoot from the hip like Jesse James, or was it Jesse Livermore. They just don't make them like that any more. Now they are all like Grecko. Wyckoff and Livermore were fortunate to be born with an acute analytical

mind, the ability to view price formations better them any modern computer. They should make a movie about these guys. It mets all the requirements, sex, violence and greed. ----------------------------------The book & software by Tom Williams beaks revolutionary new ground in the accuracy possible with technical analysis. It deals with the relationship of relative market volume to the day's price action and applies specific and reliable rules to any stock or future as to what price action will result from this interaction. You might call it pattern recognition for volume *and* price - and that is the hidden secret as to how stocks will move in the coming hours and days. Words such as accumulation, supply lines, reverse up-thrusts and pushing up through supply are part of the vocabulary of Toms work. This man has taken predictive analysis to the next stage. Those days when the Dow is up three, down three points will now have total meaning for you. How many times have you been whiplashed in an upmove or down move that is a technique to get you out before the markets ride off in the opposite direction. After studying the work of Tom Williams *and* applying it, yourself or with the aide of his software, Toms rules will become the new basis of how you read and see the market. His work will form the basis of technical analysis tomorrow. For too long people have applied patterns to price and not volume *with* price. Tom applies a *real* tangible set of rules to volume/price pattern analysis. Many traders use his software as an accessory to the other system they are using, as the insight it gives can be invaluble. If you trade stocks the programme is capable of tracking hundreds of stocks in real time, to reveal the hidden agenda of the "operators" who manipulate the market. The programme is optimised in terms of the DOW or FTSE, as well as certain other optimised rulesets. A general ruleset can be applied to other markets. Little known outside the UK, Tom's work follows on from that of Wyckoff and Gann in the 1930's on volume and breaks much new ground. Tom is a dedicated trader, advisor and paper chartist who also has a number of realtime feeds running in his home and end of day software which gives automatic indications of weakness and strength in the markets based on his unique volume and spread analysis. He has written a book with the title "The Undeclared Secrets of the Stock Market" but appears less interested in selling his wares than in using them. So, I have decided to bring his book (The Undeclared Secrets of the Stock Market $99) and the software (VSA for Windows or DOS $1995) to the attention of anyone interested. Call me for a chat or email me (LLEVY@IBM.NET). Please wait about one silent minute for connection, especially if calling the 1 800 number. The software retails for $1995 and works with Signal, Future Source, BIS, Market Eye, and other feeds in real time or any end of day feed that provides access in Metastock/Computrac format (7 field).

---------------------------------------------------------Both Windows on Wallstreet and Telechart (TC) 2000 support candlestick charting. I don't know about the other titles, as I don't own them. Perhaps the best book on the subject is "Japanese Candlestick Charting Techniques" by Steve Nison, published by New York Institute of Finance. How reliable is it? I have found it to be an above average indicator for market reversals. It also puts market activity (for me) in a clearer perspective. ----------------------You should also get Nison's second book, _Beyond Candlesticks_. He covers renko, kagi and three-line break charts as well as Japanese-style moving average trading techniques. Renko, kagi and three-line break charts are all reminiscent of point and figure charts or swing charts, but provide a unique perspective when combined with candlesticks. I often question, though, the uncanny appearance that "Japanese rice traders" developed these technical trading techniques earlier than or at roughly the same time Dow, Wyckoff, Livermore and other Americans were developing their technical theories about the New York stock market. It reminds me of the claims the Russians used to make that they had invented baseball and hot dogs. ---------------------------Strangely enough, World War I was responsible for making New York the financial center of the world. London was the financial center for many years up until that time. Still, when I look at Rollo Tape's _Studies in Tape Reading_ ("Rollo Tape" was a pseudonym of Wyckoff) written in 1910, and see swing charts that look a lot like the ones in Nison's 1994 book, I can't help wondering whether Wyckoff got the idea from "Japanese rice traders" or the other way around. Speaking of Wyckoff, the people who publish _Technical Analysis of Stocks and Commodities_ have put out a good book on the Wyckoff techniques. -------------------------Another book on the subject is "Candle Power" by Greg Morris (Probus Publishing, Chicago). Candle Power is also the name of the software package by North Systems - I use this & find it quite useful. The reliability of candlestick patterns will vary between types of stocks but I'd agree with Jake's comments that it helps to put trading patterns in perspective. I wouldn't rely on candle patterns alone but they are one of many useful tools available. ----------------------------spoke of candle stick patterns, books available and usefulness. What I find useful and very trippy about candlesticks is that they work, but for perhaps different reasons, after all these

years. Take a dark cloud engulfing pattern, for example. It has many reasons. The newest one is that a pension fund, say, wants to sell off its very big block of XYZ company because they've made as much as they think they can squeeze out of it. But dumping it on the market would have the wrong effect: they'd depress the price and would not get their locked-in profit. What they do is buy, at the open, yet more shares of XYZ company, driving up the price and creating a feeding frenzy for the stock. They oblige this feeding frenzy by selling off their holdings. Eventually the market does get saturated with XYZ and they sell their last bit at a price way below what they opened the market at but still way above what they bought it at. Of course the big black candlestick engulfing the previous white candlestick is a bear pattern: the stock's been dumped and at a time the big boys (after interviewing the CEO, touring the plants) have decided it's gone up about as much as it's worth for now and perhaps there are dark clouds for the company on the horizon as well. ------------------------------------Lets takes a brief look at Wyckoff The Wyckoff method is a study of supply and demand which is determined by close observation of the price action, and on that price action what was the volume (or activity). Markets develop phases, and a phase is generally seen as a area of congestion, while this is going on a cause for the next move is taking place. While each bar is of great importance, it still only fits into the developing phase. The analyst builds up a picture of the phase that is being developed, knowing that a bear phase cannot suddenly become bullish overnight on 'good news', and that a bullish phase cannot become bearish on 'bad news'. You will see sudden moves on 'news' frequently creating well known signals for students, like up-thrusts, testing, even shakeouts. The trend of the market cannot be changed overnight because of the underlying rules of accumulation and distribution. All free markets work on ;supply and demand, but how can we follow supply and demand? The markets are riddled with confusing news rumours, tips? Markets moving up when you are absolutely sure the market is going to fall, and the market falling as soon as you have predicted a rise! Even the volume does not make sense to the casual observer. The market can be seen to go up on high volume, go sideways, or even down on exactly the same volume! How can you possibly analysis that? The way to recognise the true balance of supply and demand, and to understand volume, is first to realise, and then to recognise, how the market makers, trading syndicates, are responding to the shifts of supply and demand. The market makers view is easily seen because the prices he is willing to trade at is creating your chart, keeping in mind that they are trading their own accounts very aggressively, and will trade right up to the edge of the law if necessary. Market makers are not controlling the markets, but are there to make a market, and at the same time trade their own accounts. There is also a huge amount of trading going on that you will never know about, and that is intra-market makers trading between themselves. However, if there is a transfer of stock from one market maker to another it must only be to fill large buy orders that the other market maker has received. You have to assume that the market makers. have a very good picture of the true balance of supply and demand and on this information are trading their own accounts.

Most of the buy and sell from around the world finish up with the market makers who are making the market. This will tell you that the market makers can see the true balance of supply and demand better than most traders. These wholesalers of stocks trade their own accounts on this information, information you are not privileged to see. The volume is so important to the real traders, that the Stock Exchange has set up new rules (self regulatory) to mislead you as much as possible, and you are expected to pay for this potentially false information! Trades can be withheld for up to 36 hours if they want to, this includes the volume. It is almost unbelievable that they can get away with it these days. However,it is difficult for them to hide their activities, this is why we use tick volume as well. Principles of supply and demand Wyckoff would have seen and recognised. A market is very unlikely to go up on no demand (low volume), if there is weaknes in the background. It can go up on low volume if there is an immediate sign of strength in the very near background, like a shakeout for example. The shakeout has almost created a vacuum by removing most of available stock off the market. There is not much stock around to sell as the market rallies so the market appears to go up on low volume! Up-thrusts are signs of weakness. Market -makers are very experienced in their trading, and you would never expect to trade better than a market maker. They instinctively know where most of the stops are, they also know that a rapid move up will attract buyers, and will also panic premature shorts to cover (buying). A rapid move up to then collapse onto the lows of the day will do all of these things, and can be a very profitable manoeuvre for the market makers accounts, and is commonly seen in all potentially weak markets just before a fall. Testing is a sign of strength. To be marked down during your time frame, to then close onto the highs on low volume is a test. Note a test is the exact opposite to the up-thrust. Effort Verses Results. Up-thrusts show an ef f ort to go up and has failed. A test is an effort to go down and has failed. A wide spread up to close on the highs is an effort to go up. If the next bar is down on a wide spread to close on the lows is a sign of weakness (reversal). There has been no result from the effort. Strength always appears on down bars. Why? because to change a down trend into an up-trend, weak holders have to sell and professional money decides to absorb this selling. This action stops the down move, and by its very nature has to occur on a down bar and is known as stopping volume. Weakness always appears on up-bars. Why? because to change an up trend into a down move, strong holders have to sell their holdings bought at lower levels into a surge of buying from the public and uninformed traders. This by its very nature has to appear on an up-bar, and is known as an end of a rising market signal. Effort via Results is seen frequently and arrives in many different disguises. A sudden high volume down bar for example is some sort of effort, the following few bars will usually tell you what the results are from that effort. For example, if the volume on the down bar had been 'high volume' you would normally expect

lower prices, however, an up bar/s follow and you note that the volume is low (no demand from the main players) This confirms the weakness. There is no demand because the market makers are not participating in these up-bars. Markets are heavily influenced by background history of strength or weakness that has appeared. for or example, if you have seen a selling climax or a shakeout one month ago, which indicates a major shift of stock from weak holders to strong holders (always seen on a down bar) it does not matter what the news is over the following weeks or even months, because you will know that the market cannot go lower than the selling climax, you will also know that any down bar/s on low volume after this event indicates that supply has disappeared, if supply has disappeared then the market is going to go up! All these indications may be seen on good or bad news, rumours (true or false), incorrect data, even computers breaking down! If anybody is interested in more information please e-mail me.

Richard Wyckoff traded the stock and bond market in the early and mid 1900s. He was curious about the logic behind market action. Through conversations with successful traders of his time he arrived at his methodology which concentrated on Volume-Price analysis. Richard D. Wyckoff modeled and found many common characteristics among the greatest winning stocks and the campaigns of some of the greatest stock market operators. After modeling the action of Jesse Livermore, Edward Wasserman, James Keen, J.P. Morgan, and many other big operators of his day, Wyckoff developed a trading system which helped to explain the boom and bust cycle in stocks. He analyzed the market and determine where risk and reward were optimal for trading. He emphasized the placement of stops and the importance of controlling the risk of any particular trade. He implemented this model and grew his account such that he eventually owned a mansion next door to the Alfred Sloan Estate in the Hamptons. Wyckoffs ideas are universal and may be applied in analyzing any market. His method principally uses price charting and volume studies as a means of analyzing and forecasting the stock market. It incorporates a common-sense approach to trading that emphasizes study, practice and risk limitation. It also takes into account investor psychology and provides insight into how and why professional traders buy and sell stocks. Wisdom From Richard Wyckoff About Trends The Main Factor Is The Trend. If you work in harmony with the trend of the market, your chances for success are three or four times what they would be if you buck the trend. That is, if you buy in a bull market, the trend will, under ordinary circumstances, give you a profit; but if the trend of the market is downward, and you take a long position, the only way you can get out is on the incidental rally. even when a purchase is not well-timed, it is likely to show a profit at sometime or other if the broad tendency of prices is upward. Even poor weak stocks advance to some extent in a bull market. Dealing Should Be in The Active Stocks. In order to make a profit, a stock must move. A great deal of money and many opportunities are lost by traders who keep themselves tied up in stocks which are sluggish in their action. About Stops

Risk Should Almost Invariably Be Limited. The best way to limit your risk is to form a habit of placing two- or three-point stops behind any trade which is made for the purpose of deriving a profit from the fluctuationsThe most successful traders have followed this rule and its importance cannot be overestimated. Profits can often be protected by moving stop orders up or by selling one-half of the commitment in order to mark down the cost of the remaining half. Unless a stock shows a profit within two or three days after he buys or sells it short, .. close the trade, on the ground that his judgment was wrong as to the immediate action of the stock, and he cannot afford to be tied up. Whenever I find myself hoping that a trade will come out all right, I get out of it. Cut your losses(have) a mental stop and when it is reached close out the trade. I can trace most of my principal losses to my failure to place stop orders when the trades were madeI have very often delayed placing a stop order until the opportunity was lost, and in some cases these losses have run into five or ten points when they might just as well been limited to two or three. About Risk Anticipated Profits should Be At Least Three or Four Times the Amount of the Risk. About Short Selling One Should Be Able To Deal Freely On Both Sides Of The Market. Any one who is unable to do this had better become an investor instead of a trader, buying in panics or in big declines such securities as appear to be selling below their intrinsic value. About Trading You should either make a business of trading or else not try to be a trader. You cannot be successful at trading any more than you can be at mining, manufacturing, doctoring or anything else, unless you are trained for itunless you are peculiarly adapted to the business you are better become an intelligent investor instead of an unintelligent trader. Wall Street history shows that securities more often reach their low point when some danger or disaster is threatened, than upon the actual occurrence of these incidents, and the reason the low point is made just prior to, or at the time the event actually occurs is: By that time every one who is subject to fear-of whatwill-happen, has sold out. When the thing does happen or is prevented, there is no more liquidation, and the price rallies on the short interest, or else on the investment demand created by the improved situation I have yet to find a man, in or out of Wall Street, who is able to make money in securities, continuously or uninterruptedly. My experience is no different from that of many successful Wall Street men. Like every one else, I have my good and bad periods. Sometimes it appears as though everything I touch pans out well, and at other times everything seems to go wrong. It is much like any other line of business. The best work I ever did in judging the market was when I devoted one hour a day in the middle of each session. I did not come to Wall Street. I had no news ticker. I seldom read the news items but judged solely from the action of the market itself; hence I was not influenced by any of the rumors, gossip, information or misinformation with which the Street is deluged day after day. But all he needs is the highest, lowest and last prices of the stocks which he is watching. Without being at all egotistical I believe I could go around the world and having arranged to have these few details of a stock cabled to me daily, I could cable my orders and come back with a profit. It would not be necessary for

me to be advised of the volume of trading in that stock or the general market, although in some instances this might help. Certainly I would not care to have any news of any kind included in the cables. Most people make their mistake when averaging (down), by starting too soon; or if they are buying on a close scale, say one point down, they do not provide sufficient capital to see them through in case the decline runs two or three times as many points as they anticipate. Eight-five or ninety per cent of business, investment and speculative mortalities are due either to overtrading or lack of capital, which when boiled down are one and the same thing. And those who average their investment or speculative purchases supply in a great many instances, glaring examples of the causes of failure. Everyone should occasionally sit down and take account of stock not securities, but his own ability, judgment, and what is most important, results thus far obtained. If he finds that the past few months or years have been unsatisfactory and unprofitable, judging from the amount of time, thought, study and capital employed, he should suspend operations until he ascertains the cause; then he should set about and cure it. This can be done by study and practice (on paper or with ten share lots if necessary) until he is confident that he has overcome the difficulty. It may be that he is a chronic bull and finds himself in a bear market. I have frequently discovered that I was out of tune with the market, although I am never a chronic bull or bear, but always the kind of an animal the situation seems to call for. It has been a great advantage to me, however, to have gone off by myself at times and figured out just where I stood, and, if things were going wrong, why? I find that it is more important to study my misfortunes than my triumphs. No one can avoid having his capital tied up at times in mediums which are not satisfactory. But there should be no hesitation about switching, even though it necessitates the taking of a loss in your present holdings. A good security will make up this loss much faster than one which is mediocre. I cannot afford to let my money sleep, nor have it work slowly. I am a merchant: I must turn my money over as often as I can, so that the average yearly return will be at its maximum. Ones capital should be made to do the greatest service in the shortest length of time. I have found that it is best to use only a small part of the total available capital for trading. To employ all or most of it is a fatal mistake, for in the case of an unforeseen situation, causing a large loss, one is obliged to begin over again; whereas if the bulk of the capital is invested where it is safe, returns an income, and will probably enhance in value, then in case of a calamity a part of it can be turned into cash in order to renew trading operations. When a man finds that he has a certain sum invested and that this sum is diminishing on account of his pulling it down for trading purposes, he is on the wrong track and had better stop short and take account of himself before he travels further. A person who cannot be successful in trading with a small amount of capital, will unquestionably lose a large amount if he employs it. It is better to depend on your own judgment than on that of any other person. If you have not reached a point where you can do this, better continue your studies and practice until you can form a sound, independent judgment on which you can base your commitments. The longer your experience, the better background you have for comparison and the greater your ability to judge and forecast correctly. As conditions are constantly changing, no two markets are alike and no two daily sessions are similar; but markets and sessions and panics and booms all have certain characteristics which should be carefully studied and intimately understood. -----------------------------------------------------------------------

Wyckoff's Investment Theory Conception of Primary Phases Accumulation: The establishment of an investment or speculative position by professional interests in anticipation of an advance in price. Markup: A sustained upward price movement. Distribution: The elimination of a long investment or speculative position. Markdown: A sustained downward price movement. .....Wyckoff believed that the action of the market itself was all that was needed for intelligent, scientific trading and investing. The ticker tape revealed price, volume and time relationships that were advantageously captured by charts. Comparing waves of buying and selling on the bar chart reveals the growing strenght of demand or supply. With the aid of schematics of accumulation or distribution, the speculator is able to make informed decisions about the present position and probable future trend of a market. The figure chart is added to project the probable extent of a price movement. Wyckoff also revealed how to interpret the intentions of the major interests that shape the destiny of stocks and how to follow in the footsteps of these sponsors at the culmination of bullish or bearish trading ranges. Accumulation (Acc.) An area where Informed forces buy stocks or futures with the intention to mark-up prices. At the same time less informed forces tend to sell in that area. Automatic Rally (AR) The rally that occurs after a Selling Climax. It occurs without previous preparation, hence the word automatic. The top of an AR usually marks the beginning of the coming creek. Automatic Reaction (AR) The reaction that occurs after a Buying Climax. It occurs without previous preparation, hence the word automatic. The bottom of an Automatic Reaction usually marks the beginning of the coming ice.

Bar Charts Vertical charts of price movement (OHLC) and their corresponding volume. Wyckoff only discussed linear price axes. Buying Climax (BC) A major panic that occurs at the end of a steep ascent in prices. In its classical form it is typified by large range reversal in prices accompanied by large volume. Continuation Charts In commoditieslong-term charts that are constructed by concatenating expiring contracts with front month contracts to create continuity over time. Composite Man (C.M.) Wyckoffs name to the total sum of more informed forces that move the market. Akin to The market, or They in other parlance. Creek A general area of resistance. It indicates the band of prices at the top of accumulation area. Demand Buying power. Distribution An area where informed forces sell stocks or futures with the intention to mark-down prices. At the same time less informed forces tend to buy in that area. Falling (breaking) thru the Ice A vigorous penetration of the ice area (support) that held prices throughout the process of distribution. Usually associated with a wide price range, weak closes and large volume Four phases of the market Any market according to Wyckoff is in one of four phases: Accumulation; Mark-up; Distribution; Markdown. Ice The mirror image of a creek. It is a general area of support. It indicated the band of prices at the bottom of distribution area. Jump Across the Creek (JAC) A vigorous penetration of a creek (resistance) that was capping prices throughout the process of accumulation. Usually associated with wide price range, strong closes and large volume. Last Point of Supply (LPSY) A point at the end of the process of distribution where the CM recognizes that demand forces have exhausted themselves and it is safe to start marking down prices. Last Point of Support (LPS) A point at the end of the process of accumulation where the CM recognizes that supply forces have exhausted themselves and it is safe to start marking up prices.

Mark Down The phase of the market where prices decline, from the beginning of a bear market to its bottom. Mark up The phase of the market where prices rise, from the beginning of a bull market to its top. News Wyckoff said: Unless you completely discard all news, reports, tips, corporate statements, crop situations and other types of news-you will be unable to get the best results from your market operation. Preliminary Supply (PSY) The first significant reaction that occurs after a prolonged rally that indicates budding supply showing up. It is usually associated with a minor buying climax. Preliminary Support (PS) The first significant rally that occurs after a prolonged decline that indicates budding demand showing up. It is usually associated with a minor panic preceding that rally. Point and Figure charts (P&F) A chart that records price reversals of a predefined magnitude. It records up-moving prices in a box called X and down-moving prices in a box called O. The box is the minimum price fluctuation. The reversal is the size of the predefined magnitude. It is indicated as the number of boxes. E.g. if the box size is 2 cents than a reversal of 3 boxes will be 6 cents. According to Wyckoff, P&F charts measure the energy stored in trading ranges and is often correlated with the extent of the ensuing move. Rally A phase in the market that experiences rise in price. That is, higher highs and higher lows. Rally back to the Ice The rally that follows breaking (falling) through the Ice. The nature of that rally should indicate whether demand is indeed scarce and it is safe to sell. Reaction A phase in the market that experiences decline in prices. That is ,lower highs and lower lows. Reaction back to the creek The reaction that follows Jump across the creek. The nature of that reaction should indicate whether supply is indeed scarce and it is safe to buy. Resistance An area where supply overcomes demand. Right Hand Side A time zone when the processes of accumulation or distribution are likely to terminate. Risk Management Part and parcel of the business of good trading. Each trade should be evaluated by its risk reward ratio. The convention says that if reward is 3 times the risk involved-then the trade has business merit. Secondary Test (ST) A name given by Wyckoff to the reaction following Automatic Rally, (or rally following the Automatic reaction.) If that test is associated with small range and light volumeit increases the likelihood that the previous trend is over.

Selling Climax (SC) A major panic that occurs at the end of a steep decline in prices. In its classical form it is typified by large range reversal in prices accompanied by large volume. Sign of Strength (SOS) A rally towards the creek during the process of accumulation that is associated with wide range, strong close and higher volume. Sign of Weakness (SOW) A reaction towards the ice during the process of distribution that is associated with wide range, weak close and higher volume. Spring A form of a test of a trading range. Characterized by pushing prices below support by the CM in order to check the status of supply. The markets response to the spring indicates the nature of supply and demand forces for the near future. Stop Loss An order to exit a trade if the market does something that proves your initial decision to enter the trade as wrong. According to Wyckoff stop losses are best placed at points where previous market definitions fail to materialize. Supply Selling power. Support An area where demand is overcoming supply. Terminal Shakeout (TSO) A decline below area of accumulation, which reverses itself rather quickly and vigorously back into the accumulation area. A true TSO is followed by a strong rally back to the creek. Terminal Upthrust (TUT) A poke above the area of distribution, which reverses itself rather quickly, and vigorously back into the distribution area. A true TUT is followed by a strong reaction back to the ice area. Trading Range (TR) A period of balance between supply and demand forces. Prices move within a range where the bottom represents demand and the top represents supply forces. Trend-lines (TL) Oblique (diagonal, not horizontal) lines combining important points of extreme support or resistance. According to Wyckoff, the way a market reacts and responds to trend-lines is a good indication of the status of supply and demand forces. It is not what the market does around a trend-line, but how it does it that counts. Upthrust The mirror of a spring. It is a form of a test of a trading range. Characterized by pushing prices above resistance by the CM in order to check the status of demand. The market response to the upthrust indicates the nature of supply and demand forces for the near future. Volume (VOL) Number of units bought and sold, or the quantity of trading. According to Wyckoff it is the force which moves the market. An essential component in any Wyckoff analysis. Wyckoff (W)

Richard D. Wyckoff lived around the turn of the 20th century. He was a bond trader who was curious about the logic behind market action. Thru conversations with successful traders of his time he arrived at his methodolgy which concentrated on Volume-Price analysis, Point and Figure analysis and a process of sifting and ranking among sectors and individual stocks or commodities within each sector (relative strength) for the best trade possible. He wrote his original thesis, which turned into the Wyckoff course. Wyckoff Wave (WW) A proprietary indicator (of SMI). It is a bar chart of an index comprised of a few selected stocks (he called them the most sensitive) with their combined volume. It is somewhat similar to the Dow Jones averages when plotted with bar chart and volume. There is no Wyckoff wave for commodities. You have to comprise it yourself. -----------------------------------------------------------------------------------------Trader Linda Bradford Raschke Gets 'Back to Basics' By Jim Wyckoff (Note: I wrote this story a few years back, when I was a journalist with FWN.) Some of the best methods of technical analysis were formulated many years ago-well ahead of the computer age, according to Linda Bradford Raschke, the well-known market trader and lecturer. "There is little 'new' technical analysis; it's all been touched on in some way or another" over the years, she said. Raschke was speaking at the Technical Analysis Group (TAG XVIII) workshop held in New Orleans and sponsored by Dow Jones Telerate. Successful futures traders need to "get back to basics," said Raschke. She said traders that rely solely on computer-aided "trading systems" are overlooking a key element of the markets: "tape-reading," or the study of the price action. "System" or "mechanical" trading methods use computer-generated signals that usually have a trader "in" the market much of the time. "Do your homework the night before, and study price action," Raschke urged all types of traders. Raschke relies on "Keltner channels" in her trading. Chester Keltner was a famous grain market trader with over 30 years of commodity trading experience. He was one of the first to pioneer systems work using trend-following rules. One of the systems Keltner presented was the "10-day moving average rule." A 10-day moving average of the daily trading range was added and subtracted to a simple 10-period moving average-essentially forming bands. These bands served as buy and sell stops by which to enter or exit a position. Keltner's original system was traded on a stop-and-reverse basis, which was mildly profitable, said Raschke. By varying the bands on the most recent average daily price range, the channels will naturally be a greater distance from the market when the price swings are wide than when they are narrow. However, they will stay at a much more constant width that Bollinger bands," she said. "You can see how you would have participated in the majority of a trend if you used Keltner's rules. Unfortunately, you would have experienced many whipsaws, too. This is because the system's intentions are to keep you in the market all the time," Raschke said.

"I put Keltner channels set at 2.5 times the 20-day moving average daily range, centered around the 20period moving average. This is wide enough so that it contains 95% of the price action. In flat-trading markets, as indicated by flat moving averages, it serves as a realistic objective to exit positions. However, I find its greatest value is in functioning as a filter to signal runaway market conditions, much as a rising ADX would do." (The ADX, or directional movement index, helps determine market trend.) "Keltner channels will identify runaway markets caused by a large standard deviation move or momentum thrust. Thus, they can alert one much earlier to unusual volatility conditions than the ADX, which has a longer lag. On the other hand, (Keltner channels) will not capture the slow, creeping-trend market that an ADX will indicate." Raschke's rule for defining trending markets: "If the bar (on the bar chart) has a close outside the Keltner channels, or trades 50% of its range outside the band, with a close in the upper half of its trading range, the market should not be traded in a counter-trend manner. Stay with the trend and trail a two-bar trailing stop." Another trading technique Raschke relies upon is the Richard Wyckoff method of analyzing accumulation and distribution patterns. On Wyckoff's trading methods, Raschke recommended traders read his book, "The Art of Day Trading," which is available at many publishing firms focused on business and investing. One key component of Wyckoff's trading techniques involves a "critical" day. This usually involves a triangle formation on any bar chart-whereby price ranges and volatility are decreasing, to the point where a breakout in either direction is likely. Once the breakout occurs and a trend is under way, traders can get into the market and follow the trend. In her presentation to around 150 futures and equities traders from around the world, Raschke also gave the following recommendations for all traders: Always put current price action into perspective with historical price action. Raschke likes pivot points, as they determine whether prices are moving closer to, or farther away from, the pivot points. When volatility expands, "impulse moves will be followed by more impulse moves. You don't have to hit the first move" to be successful in a trade. The first hour of market trading usually is the most critical, when determining significant highs or lows in a market. In "runaway" markets, one side (longs or shorts) is usually trapped. "Don't try to pick tops or bottoms." Oscillators don't work well in strong-trending or runaway markets. They work best in choppy markets. When a market looks at its very best, or very worst, a major change in trend is likely. Raschke recommends that smaller-scale traders trade shorter timeframes than larger-scale traders. On where and when to take profits and place stops in a market, she says, "How much do you want to win or lose? There is never a magic place to take profits or place stops." However, look at "swing moves" and key support and resistance levels closely. "Find your own comfort level." The most successful traders "like to play the game" of trading markets. If you like the game, then you'll play a safe game and enjoy trading. On trading psychology, Raschke says follow 3 rules: 1) Believe in "your" trading methodology. 2) Have a good attitude toward trading. 3) Concentrate. "Be 100% in the game."

There is no such thing as "mental stops." Always have your desired stops in place. Raschke began her trading career in 1981 as a floor trader at the Pacific Coast Stock Exchange. In 1984, she became a member of the Philadelphia Stock Exchange, where she expanded to trading futures markets. She has been featured in "The New Market Wizards," by Jack Schwager, and also co-authored, with Larry Conners, the book, "Street Smarts." ------------------------------------------------------------------------------------Wyckoff once said, "Manipulation in the stock and commodity markets is an everyday fact of life. The small-scale trader, the scalper, the skimmer, the plunger, and the big-money trader all must contend with the effects of manipulation in their day-to-day market campaigns. Manipulation of prices is done by well-financed money interests who have a particular stake in a given stock or commodity and must necessarily "manipulate" price transactions in their buying and selling so as to fool the uninformed tape reader. In fact, so vital is manipulation to the success of a large-scale trading campaign that those who carry big lines [of stock or commodities] must engage in it, otherwise they would never be able to make a profit above what they bought their initial line at since these large transactions would show up on the tape very clearly as insider selling. Therefore, skill and manipulative movements are required to unload a large amount of stock or commodity." As Wyckoff explained, manipulation, per se, is a regular occurrence in the futures markets and there is nothing unusual about this in and of itself. In most cases it is perfectly legal and can even be spotted by the skilled tape reader or chart analyst. So how does this apply to what is going on right now in the gold market? It is rather obvious (and no secret) that there are international money interests who have high stakes in the gold market and who have a vested interest in controlling gold's rate of ascent. We have written the better part of the last four years on Gold-Eagle how insiders have been accumulating large stakes in gold and gold stocks for several years and are just as desirous of realizing a large profit on these interests as the average gold investor is. These strong-handed insiders just as much want to see the price of gold soar to $800 and above as you or I. And soar it will in time. But time is required to undertake market campaigns of such magnitude. Time is always an essential ingredient in watching a bull market unfold. "Pullbacks" and "corrections," even steep ones, are quite the norm in an embryonic bull market such as the one we are watching unfold in gold. If the big-money traders and major financial interests sold all their stake at once it would cause a parabolic blow-off in the market and would immediately reverse and collapse of its own weight before achieving its maximum upside potential. This is because the trading public, which is a crucial ingredient in any long-term bull market, would be so saturated with supply they wouldn't have anywhere to go with it and prices would sag under the excessive weight of supply. This is why major bull markets proceed with fits and starts and leave many inexperienced and impatient traders and investors in the lurch due to their lack of foresight. The present gold market is a prime example. Gold finally breaks above a critical benchmark resistance ($300-$310) and even makes it above $320, yet it stalls and pulls back a few dollars and the Internet is suddenly rife with rumors of "manipulation!" and "conspiracy!"

Quite the contrary, this is a normal occurrence and if you will go back and check the price history of any long-term bull market for virtually any stock or commodity (including gold) you will see much the same patterns repeating on a regular basis. There is nothing unprecedented about what is happening to the gold price right now. Nothing that has not happened before and nothing so unusual that it screams for our attention. It is simply a case of the insiders finding a level where supply and demand are mostly in balance and a time when the market needs resting after a heated run to the upside. Markets, like high-performance engines, need to cool down and rest at some point before acceleration can continue. The action of the market correcting and pulling back is usually preceeded by a flood of news articles in the popular press expressing bullish optimism or even euphoria over the market's performance. This is actually one critical component of the manipulation campaign by the insiders since they must sometimes plant news stories and pay media outfits to publicize a market at critical times in order to create more liquidity and bullish (or bearish) fervor among the trading public so that they can unload their shares at certain points. This time was no different for the gold market as the financial press was positively brimming with new-found enthusiasm over gold and gold shares. This was a clue that a market correction was near. When gold has "corrected" enough to where the market makers feel gold has sufficiently "cooled down" and they can begin putting up prices again through their trading efforts, they will. Undoubtedly, it will be accompanied by heavy bearish sentiment in the financial press and among "weak-handed" gold traders. Always be watchful of the message of the market as it always has an important story to tell. --------------------------------------------------------------------------------Swing Time By Linda Bradford Raschke Traditionally, there have been two major methods of forecasting market movements-the fundamental method and the technical method. Fundamental factors include analyzing long-term business cycles and identifying extremes in security prices and public sentiment. An investor looking to establish a line of securities after a long-term business cycle low is said to be playing for the "long swing." Short-swing trading, or "swing trading," seeks to capitalize on the short and intermediate "waves," or price fluctuations, that occur inside the longer major trends. The market's short-term swings are caused by temporary imbalances in supply and demand. This causes the price action to move in waves. A combination of up waves and down waves forms a trend. Once you understand the technical aspects of these imbalances in supply and demand, you can apply the principles of swing trading to any time frame in any market. Swing charts have been used for the past 100 years as a way to analyze the overall market's price structure, to follow a market's trend, and to monitor changes in the trend. Whether you are analyzing the market's swings for short-term trade opportunities or monitoring them for trade management purposes, it is important to understand the enduring principles of price behavior that forecast the most probable outcome for a market. All these principles are deeply entrenched in the foundation of classical technical analysis. Swing trading is based on the technical study of price behavior, including the price's strength or weakness relative to the individual market's technical position. In other words, the length and amplitude of the current swing is compared with those of the prior swings to assess whether the market is showing signs of

weakness or signs of strength. A trader attempts to forecast only the next most immediate swing in terms of the probabilities of reasonable risk/reward ratios for the next leg up or down. A swing-trading strategy should show more winners than losers. Swing traders make frequent trades but spend limited time in those trades. Short-term swing trading involves more work in exchange for more control. The earliest fathers of traditional technical analysis as well as many great traders in the first half of the 20th century examined both the longer-term cycles and short-term price fluctuations. Most of them practiced swing trading to some degree. By studying their work, you will understand the origins of the principles of price behavior (listed on the next page) that are responsible for the three basic types of swing-trading patterns today. Charles Dow Perhaps the best-known individual who contributed to the foundation of technical analysis was Charles Dow (1851- 1902). From 1900 to 1902, he wrote a series of editorials in The Wall Street Journal that set forth his ideas on the markets. His original theories were actually intended to serve as a barometer of general business activity. It was later that his principles were developed into forecasting methods. Sam Nelson, another writer and market technician, had tried unsuccessfully to persuade Dow to put his ideas in a book. Nelson ultimately collected Dow's editorials and developed his ideas into principles of market behavior, coining the phrase "Dow Theory," which became the cornerstone for technical analysis. Two other technicians also deserve to be noted as developing Dow's ideas into a more formal structure. The first was William Hamilton, who became the editor of The Wall Street Journal after Dow died, and the second was Robert Rhea. Dow explained that there are three market movements going on simultaneously: the primary, secondary, and minor, or day-to-day, trends. Although Dow Theory concentrates on forecasting the primary trend, which can last three to six years, the theorems and observations as to the nature of the secondary trends, which can last from three weeks to a few months, form the basis for swing trading. The first principle that Dow pointed out is that of action/reaction. It states that the market moves in waves, or up legs and down legs. In a bull market the swings upward are called primary swings and the downswings are called secondary reactions. The greater the swing in one direction, the greater the eventual reaction in the other. It is important to note that each market movement represents a different time frame, and different time frames can be in opposite trends at the same time. For example, the primary, or longer term, trend could be up, yet the minor trend, or intermediate-term time frame, could be down. Dow gave us the classic definition of a trend based on the movement of the secondary reactions. For an up trend to be established, the price action must display both a higher high and a higher low. For an up trend to reverse, a lower high and lower low must occur. A trend will remain intact until it changes according to the above definitions, and a trend has greater odds of continuation than it does of reversal. In a strongly trending environment, a swing trader looks to trade only in the direction of the trend, for this is the true path of least resistance. The theorem for which Dow is best known is "the averages discount everything." The markets represent a composite of all known information and prevailing emotions. This remains today the underlying assumption of technical analysis-all known variables have already been discounted by the current price action. Swing trading is technical and purely price-based. Traders do best having no opinions or preconceived ideas. Ideally, all they have to do is identify the trend and wait for a low-risk entry in the direction of the trend. Dow also gave us the concept of confirmation/nonconfirmation (also known as divergence). He stated that a change in the primary trend must be confirmed by two other indexes-the Dow Industrial and the Transportation Averages. Today this principle of confirmation/ nonconfirmation is used in comparing one market with another market or index on both a short- and a long-term basis. It can also be used to compare the price action with a variety of technical indicators. A nonconfirmation is one of the tools used to warn of a "failure test" (the potential for a swing reversal).

Finally, Dow looked at the importance of volume in confirming the movement of secondary reactions. For example, a market that is oversold will display light volume during sell-offs and increasing volume during rallies. Upswings can often start on light volume and end with excessive activity. More important, volume can also be used to confirm a breakout from a "line" or consolidation area. The three types of swing-trading patterns are retracements, tests, and breakouts. The concept of a sideways line was originally defined as a sideways movement extending for a few weeks within a 5% price fluctuation. This represents a period of accumulation or distribution. Lines often occur in the middle of secondary swings. Small lines, or periods of consolidation, occur in just about any chart in any market in any time frame. Differentiating a breakout from a line, however, requires analyzing more factors than just price direction. It also involves consideration of cycles in volatility-the principle that contraction in range is followed by range expansion. Robert Rhea Robert Rhea (1896-1939) studied Dow's work and spent much time compiling market statistics and adding to Dow's observations. He noted that indexes are more inclined than is an individual stock to form horizontal lines or extended chart formations. He was also one of the first technicians to specify that a leg must have a minimum amplitude (height or depth) to be considered a legitimate secondary swing. Analyzing the market's swings is much easier when the market has good volatility and range. It is much trickier when the price starts trading sideways and the range narrows. The amplitude of a swing, in addition to its duration, are two of the main criteria used to assess the relative strength or weakness of the market's technical position. The third criterion is the volume on each swing. In a trending environment, the amplitudes of the market's reactions tend to be similar in nature. A swing trader can look for equal-length swings as a measuring method for a market's expected move. Richard Schabacker While Dow set forth some basic principles of price behavior, including the theory that market movements are composed of a series of swings and reactions, Richard Schabacker (1902-1938) could be called the father of the "science" of technical analysis. Schabacker categorized concrete tools that help the technician not only to forecast a move, but also to recognize signs that a swing might end. He was the first to classify common chart formations, to develop "gap" theory, to formalize the use of trend lines, and to emphasize the importance of support and resistance levels. Schabacker, the youngest-ever financial editor of Forbes magazine, was a prolific writer and managed to pen three huge volumes before his death at age 36. The bulk of his writings were published in the early 1930s. In addition to being a consummate technician, he was also a renowned forecaster and an astute trader. No one has written with more insight than Schabacker about the differences between short-term swing trading and long-swing investing. He said, in general, that a long-swing investor has less worry, fewer chances of making mistakes, smaller commissions, and most likely, smaller profits. A short-swing trader has more work, more worry, higher commissions, but chances for much larger profit. Some of Schabacker's greatest insights are on the psychological aspects of trading. Regarding the difficulty in holding positions for the long run, he stated, "You'll start out with the best of intentions, but you probably won't be able to buck human nature. And even if you do succeed in holding conscientiously to your long-swing basis all the way through, it will be so difficult that you won't have much fun in doing it." Short-term swing trading is more like human nature, which desires fairly rapid action. Schabacker's most popular tools were bar charts, which record the market's price action. When studying the market's technical position, the practice of chart reading is devoted to studying certain patterns to forecast future price movement. Schabacker grouped these patterns into two classes-continuation patterns and reversal formations. He noted that the chart patterns with the most forecasting significance do not occur very frequently, but they are quite important when they do show up. It is important for swing traders to remember that they do not need to be in the market all the time, and that it requires a great deal of patience to wait for the high-probability trades to set up.

Schabacker pioneered work with price gaps and categorized them into common gaps, breakaway gaps, continuation gaps, and exhaustion gaps. He considered gap phenomena to have great forecasting value regarding the potential for the next immediate price swing. He was also one of the first to write extensively on both trend lines and support and resistance levels. Trend lines serve two main purposes. They help define the probable limits of intermediate-term declines and recoveries within established trends. When a market finds support or resistance at these levels, it forecasts continuation of the trend. Trend lines can also warn of an impending reversal when they are broken. The more frequently the price touches the trend line, the more significant that trend line becomes. The general study of support and resistance levels is one of the most practical tools for both the market student and swing trader. Trend lines forecast future support and resistance levels in a trending market. However, in a trading-range environment, key swing highs and lows serve as basic support and resistance. Once the market moves out of its trading range, previous resistance levels become future support levels, and old bottoms become future tops. Much of the study of chart formations, trend lines, gaps, and support and resistance levels seems so basic that the average market student glosses over it. What is most important, though, is not mere knowledge of these phenomena, but the practical application of them in a trader's nightly analysis. Much forecasting information is revealed by price, and studying price will always be faster than analyzing a derivative of price. Some of the best swing traders in history have been master tape readers. When studying the charts or price, the market's technical strength or weakness is assessed by its position relative to the previous leg or market action. For example, if the previous up leg was greater than the previous down leg and the subsequent reaction was shallow, forming a continuation pattern, the odds would favor that only the long side should be traded. This process would continue until there was a failure test and the up leg failed to show continuation. Experienced traders can play this failure test, but the most conservative play would be to wait until the down leg was greater than the previous upswing and then sell the next reaction. Schabacker understood intimately the importance of tape action. "If the market or individual stock does not act according to one's primary analysis, the market itself is trying to tell the trader to change that analysis, or at least cut losses short and get out until confidence can be resumed in new analysis." Price should always be the primary factor for a swing trader, and the number one rule is: Don't argue with the tape. Richard Wyckoff Richard Wyckoff (1872-1933) took the process of analyzing market swings one step further. He used volume and tape reading to analyze whether the patterns represented accumulation or distribution, and then organized the market activity into an overall sequence. Wyckoff started working as a runner on Wall Street in 1888 when he was 15. In the early 1900s, he began to publish an advisory letter as well as his research. He first published his method of technical analysis in 1908. His technique used a combination of bar, point-and-figure, and wave charts to analyze market swings. It is based on the simple approach of monitoring the forces of supply and demand for a directional bias, and learning to select the markets that have the most immediate potential, thus making most effective use of a trader's capital. The basics of analyzing supply and demand come from studying the individual bar charts and monitoring the market's action in relationship to volume, and using trend lines, or "supply" and "support" lines, to follow the market's movement. Bottoms and tops are formed by a process with which Wyckoff introduced some key concepts used by all swing traders, such as a "selling climax" and a "secondary reaction." In the case of a downtrending market (the sequence is essentially reversed for a topping process), assume that the market has been moving down and a decline is mature. The first attempt at finding a bottom is called "preliminary support." On this day, there will be a definite increase in volume and the market will

find some type of support, or make a short-term low. The ensuing rally should still be contained within the channels of the downtrend. After this first swing low is made and the market reacts by moving up a bit, the downtrend resumes and flushes out the last longs with a selling climax. There is extremely heavy volume on this day and the range should expand. If prices rally toward the end of the day, it indicates that the last longs have been flushed out. Next there is an "automatic rally" that is made up primarily of the shorts covering. In general, the volume is much lighter on this rally. No large market participants or institutions have established heavy long commitments yet. A "secondary test" then follows. This is a retest of the low of the selling climax, which tends to take place on lighter volume. Also, the range will not be as wide as the range on the day of the selling climax. Usually the market will make a higher low on this test. Once the secondary test takes place, a trading range has been established, and it may last quite a while. The market will finally indicate that it is ready to break out from this trading range by showing a "sign of strength." This is a strong thrust up, indicating an increase in upside momentum, accompanied by an expansion in the volume. The reaction that follows this sign of strength is often just a sideways pause, but it is marked by a contraction in daily range and a drop-off in the volume. This is called the "last point of support" and may be the last chance to get on board before a trend begins. Figure 1 shows a "Wyckoff Sequence" at the top, including: A. Buying climax, B. Automatic reaction, C. Retest back up, D. Break below support-which Wyckoff called "the ice"-sign of weakness, and E. Rally back up to the ice forming a "bear flag." "Springs" and "upthrusts" also set up key pivot points (swing highs or lows) for a swing trader. Springs and upthrusts describe the tests or false breakouts that can occur in a trading range. A spring occurs when the market breaks below support and then quickly reverses itself. There is little volume on the breakout and the market manages to shake out weak longs. Upthrusts occur when the market tests the upper band of trading range but is quickly met by overhead supply. Each of these patterns represents "price rejection" and provides a setup for a short-term trade in the opposite direction. Wyckoff developed an index composed of five leading stocks used to indicate early reversals in the market swings. The stocks can be rotated to include the most active leaders at the time. He used a line chart (also called a wave chart) to detect early reversals at critical swing points. Wave charts help monitor the responsiveness of the market to buying and selling impulses. The theory is that the five leading stocks should be the most sensitive. The length and time of each wave indicates the technical strength of the buyers and the sellers. The principles of confirmation/nonconfirmation are also used when comparing the index of the leaders with the overall market. Although short-term swing analysis is often used to identify a particular trading pattern, it is important to understand that Wyckoff's primary emphasis was on formulating a comprehensive approach to trading. The ultimate goal is to make trades with a minimum of risk, using only the best markets when all conditions are favorable, and being conscientious about when to exit a trade after it is made. Avoiding a large loss is the guiding principle in swing trading. When in doubt, do nothing. Learn to wait and see. Wyckoff was the first technician to seriously study the action within congestion areas and to seek clues about potential reversal points. He also looked to enter on swing reactions instead of entering via a breakout from chart formations, as Schabacker often did. While Schabacker calculated measured move objectives from various chart formations, Wyckoff used point-and-figure charts to calculate a price objective. However, he strongly advised judging the market by its own action, by following the tape action and taking what it gives you. Ralph N. Elliott While Schabacker classified chart patterns that preceded the market swings and Wyckoff looked for signs of accumulation and distribution within these patterns, a third dimension was added through the work of Ralph N. Elliott (1871-1948). He saw patterns in the market's waves, or cycles, and set forth some basic tenets classifying them.

Elliott started out as a devout student of Dow Theory. He believed that market timing was the key to successful investing-when to buy was far more important than what to buy. When a long illness in the late 1920s and early '30s kept him bedridden, he began an intensive study of market behavior that went into much greater detail than Dow's work. He developed his first set of principles in 1934, and they were later published as "The Wave Principle." His work eventually became known as the Elliott Wave Principle or Elliott Wave Theory. Elliott concentrated on the cyclical behavior of the market's swings or waves as opposed to chart patterns. He noted that these waves had a tendency to repeat themselves. This price behavior forms a structure that one can predict and use as a forecasting tool. A full wave, or "cycle," consists of five waves up followed by three waves down. The swings that occur in the direction of the trend are called "impulse" waves. Elliott observed that the laws of nature tend to unfold in an upward direction, and thus there is an upward bias to the cycle. Each wave or cycle can be divided into smaller degrees. The larger cycles are subject to the same principles as the smaller cycles. Recognizable swing-trading patterns can occur on any time frame. Waves are defined by measuring both price and time. The market alternates between impulse waves-those that occur in the direction of the trend-and corrective waves. Elliott looked at ranges instead of closing prices. The distance between a swing high and a swing low defines a wave over a given period of time. The range of the impulse wave in relation to the range of the corrective wave is used to forecast the next impulse wave. A technique called "channeling" is the easiest way to visualize this process. In general, the degree of correction in a market swing indicates the strength of the next wave. Although Elliott did not analyze volume to the extent that Wyckoff did, both technicians noted that volume tends to dry up during corrections. Human emotions cause waves, Elliott said, and thus cycles are more visible when a market is broad and active with good commercial interest. Volume and liquidity make swing-trading patterns more readily visible to the eye. Don't trade in dead, quiet markets. W.D. Gann W. D. Gann (1878-1955), another famous technician/trader in the first half of the 20th century, started trading in 1902 and developed his market theories by observing the same markets as Schabacker, Wyckoff, and Elliott. Gann was an adept student of the market. He had experience as a runner, a broker, a trader, and an author. He wrote on a variety of market aspects, including market psychology, practical trading tips, and more esoteric ideas touching on astrology and geometry. One of his main contributions to analyzing the market swings was the importance of studying the time element. He felt that time was the most important factor, because time governs when price extremes will occur. His most famous concept is that "price equals time," meaning that an amount of time must pass before prices reverse direction. Gann counted the number of days from swing highs and swing lows in order to determine time cycles and time periods. Many technicians use the length of a price swing to determine the trend. For example, when the length of the upswing exceeds the length of the prior downswing, a trend reversal is imminent. Gann applied the same concept to time. If the number of days a market has been moving higher exceeds the time duration of the last down leg, the trend has reversed. Primary levels of support and resistance come in at previous swing highs and lows. Gann calculated the percentage retracements of swings, and considered the 50% reaction to be one of the most important trading points. The wider the swing and longer the time period, the more important the halfway point becomes. If the market has been in an up trend, look to buy around the 50% retracement level with a stop just underneath. A market that fails to retrace a full 50% in its reaction back down shows a sign of strength.

Swing trading requires that a great deal of time be spent in preparation and study. Much emphasis is always given to the initial trade setup, but the successful traders in the past all wrote an equal amount about the habits and organization it takes to successfully swing trade. Gann felt that a successful trader must have a plan, and knowledge is key in putting it together. The more time you spend gaining knowledge, the more money you will make later. Gann's use of pivot points, time cycles, seasonal dates, and intricate charting methods were his way of "gaining knowledge." These methods keep a trader intimately involved with the market's price action. Many successful swing traders keep charts and logs by hand, and credit this process in aiding their market "feel." In addition to technical knowledge, Gann had separate trading rules that were essential for success: Always use stop orders. Never let a profit turn into a loss. When in doubt, get out, and don't get in when in doubt. Trade only in active markets. Never limit your orders-trade at the market. Don't close out trades without a good reason. Follow up with a stop-loss order to protect your profits. Never average a loss. Avoid getting in and out of the market too often. And finally, avoid increasing your trading after a long successful run. ? Linda Bradford Raschke is president of LBRGroup. This article is excerpted from New Thinking in Technical Analysis (Bloomberg Press, 2000). -------------------------------------------------------------------------------------------Laying Eggs:...the need for chicken feedThe last two market days have been uncommitted, light volume trading. Today was Yom Kippur and because many investors and traders were celebrating the holiday that cer-tainly contributed to the dullness in the market. From June 6th to August 8th the S&P 500 cash indexs average directional index (ADX) remained above 30 indicating a trending, volatile environment. Price movement was good. Since August 9th the ADX has remained below 30 thereby indicating dull, low volatil-ity price movement. The low volatility period is a more difficult period to trade because without volatility theres no trend. Okay. So, what? Well, this is just a reminder that volatility is cyclical. Price moves from resting to moving to resting to moving. Price has been resting and its getting ready to move again. The last two days in the S&P have been close to NR7 (narrowest range of the last seven days) days which usually lead to a breakout type of move. Within the longer period of consolidation today was an inside day. An inside day is a day where the high and low are contained within the high and low of the previous daymore consolidation. Long term and short term we are wound tight for a nice move. All this is mentioned because (and I dont have the exact figures) about 20% of the trading time produces the vast majority of the trading profits. Some traders lost money in this low volatility environment because they overtraded instead of being patient for a bet-ter trading time. Now that a better trading time may be around the corner, be prepared. Its frustrating for a trader to lose money waiting for the big move and then miss it when it finally does arrive. All the signals point to a good move. The kicker is that we dont know the direction. This also reminds me of a something I read from Richard Wyckoff. Wyckoff was one of the first traders to formulate a methodology to trading. For instance, he was the person who identified the trading patterns known as springs and upthrusts. Wyckoff was referring to eliminating anxiety in trading, but the quote also applies to when to trade. In his turn of the century common speak he put it this way: Tape reading is a good deal like laying eggs. If the hen is not left to pick up the necessary food and retire in peace to her nest, she will not produce properly. If she is wor-ried about dogs and small boys, or tries to lay seven eggs out of material for six, the net proceeds may be an omlet. He concludes the thought by stating, the tape readers prof-its should develop naturally. He should buy or sell because it is the thing to do not because he wants to make a profit of fears to make a loss. Wyckoffs main point was that eggs and profits are best produced naturally and not under some inner or outer duress. The other point made is that you need the right mate-rial to make an egg ...or profits. This last month hasnt produced the right material (volatility) to make good profits. However, it appears that in the next few

days we should have the chicken feed traders need to produce desired profits. Let the profits develop naturally. Dont force trades out of frustration or eager anticipation. Trade when its the right thing to do and not because you want to make a profit. - Bob Lord Monday, September 16, 2002 ----------------------------------------------------------------------------------------PRIVATE TRADERS: AN ENDANGERED SPECIES? Daryl Guppy Where do you stand as a private trader? Are the odds against you so overwhelming that you ought to stay clear of the market unless you have a minimum of $100,000 or more? Unless you are prepared to loose $50,000 you have no place in the market, or so you are told by fund managers eager to manage your money. You do have distinct advantages as a private trader. Starting with as little as $2,000, or better still, $6,000, you can use these advantages successfully so you can live and work anywhere in the world. You can control your own time and answer only to yourself. Success has many rewards, but getting there takes skill and care. Dr. Alexander Elder, author of Trading for a Living, helped to edit this book. He is a successful New York private commodity trader because he concentrates on managing risk. Every morning before trading he sits in front of the quote screen in his office and says: "Good morning, my name is Alex, and I am a loser. I have it in me to do serious financial damage to my account today." Daryl Guppy is a successful private trader because he understands the risks he faces in the market. Every morning, after he has downloaded the previous days data, but before he looks at a chart, he reminds himself: "This Guppy is shark food unless I am careful." TRADER OR INVESTOR? Everyone wants to make money, but the way you preserve your cash and put it to work depends on how comfortable you are with taking risks.This comfort factor determines what investment markets you enter and how long you stay in them. The techniques you employ in investing and the time frame for these investments flow from your temperament. The comfort factor is a major influence on the investor's approach to the market and collectively it plays an important part in determining the way the stock market moves. The level of uncertainty you are willing to risk is a factor that keeps most people out of the stock market because they feel more comfortable buying real estate as an investment. Despite the massive devaluations of property over recent years, people still see real estate as a sound investment. Bricks and mortar have a solid thunk to them that a share certificate cannot match. The real estate people point to the rental income stream, while ignoring the maintenance costs, and confidently predict that real estate prices will start to increase and go up forever. Comfort for these investors is reinforced because the property can be willed to their heirs or used as collateral. This feeling of security through stability is much more important here than other factors. Temperament also accounts for the differences between the small landlord, the property developer, and the housing companies. Stock market investing attracts people who are a little more adventurous - those prepared to risk a little more uncertainty than the real estate investor. Although an increasing number of people are forced into the market by proxy through compulsory retirement and superannuation funds, only about 21% of the population of Australia voluntarily invest in the market. Even then, the number who invest directly in the market, as distinct from investing with a mutual or market fund, is smaller again - under 13%.

For these investors rental income is replaced by dividend stream. Capital gainsseem to be guaranteed over time through such popular methods as dollar cost averaging where the same amount is invested each month irrespective of the stock or counter price. There is a pride of ownership, no matter how few the shares we hold, in successful companies that manufacture familiar brand name products. Sound stock or counters can also be willed to your heirs and used as collateral. Investors in the financial markets enjoy substantial peer group support. What makes the environment apparently more adventurous than real estate is the feeling that paper burns more easily than bricks and mortar. Portfolio values move up and down more frequently than property values. Unless you have enough income to live without drawing on your investment capital you may suffer that nagging feeling of something insubstantial that allows your neighbor to sneer at your paper holdings while he happily pats his brick wall. You smile back weakly and hope that Warren Buffet lives up to his reputation. For whatever particular reason, fewer people are comfortable with exposure to the financial markets. It seems that everybody talks about property, but only a few discuss investing in the market. Such a discussion is more likely to be limited to your broker or remisier, and perhaps a few very close friends. The peer support group is smaller and your investments are at the mercy of violent forces discussed daily in the media. In comparison, property values offer a rock of stability. The greater level of uncertainty attached to share market investing brings with it a sense of adventure. Not all investors have the self-confidence to tackle this adventure and many are washed out of the markets when conditions move against them. Unable to stand the strain of substantial, if temporary, dips in value, their reactions help to set up or emphasize market moves. Understanding these reactions is part of the traders advantage. TRADING THE MARKET If investing in the financial markets is an adventure, then trading the markets is a jungle survival course where even the butterflies have teeth. Trading is a more pro-active process appealing to people with a more active temperament. It has none of the apparent advantages of either real estate or investment shares. Ownership is sometimes so fleeting that you are out of the position before the confirmation of trade arrives in the mail. Capital gains are the sole objective although they are never assured. Dividend income is a bonus. Only good money management religiously practiced daily lets you hang onto the gains. It is unlikely that the trading stock can be willed to your heirs because by the time the estate is sorted out, the market will have changed. Depending on the technique, the portfolio can be used as collateral with your broker.Your bank manager is more likely to show us the door. With uncertificated holdings, there is a leap of faith into cyberspace. If paper burns more easily than bricks and mortar then what hope is there for a 'bit' of computer data? Everybody sneers at the trader's quixotic holdings. You smile weakly back and hope that your trading plan lives up to expectations. Traders do not look for variations on the stable capital or income aspects that real estate or market investors prize. Trading is uncomfortable for most people who must face up to the absolute inability to shift the blame for wrong decisions onto someone else. Wannabe traders often pile in when the price nears its high, and bail out much later than is consistent with good money management. These behaviors help set the character of the market and better traders can use this to advantage. Trading is made more uncomfortable by the lack of peer group support. If property is usually the subject of after-dinner chats, and to a lesser extent investing in the market, then talk of trading is, perhaps best kept for a confessional. There are very few private traders, so contact and support is via small groups, select publications and Internet providers like CompuServe.

Does this make trading an exercise in bravado and every private trader a 'greed is good' demon like the fictional trader, Gordon Geko in the movie Wall Street? There are many like this who become market victims. TRADING DISCIPLINE You have to deal with stress and a huge potential for self doubt. Because trading so often takes profits from being out of step with the crowd, you need a level of self discipline that is not dependant upon the approval of your peers. Private trading is a lonely business that requires strength of conviction and of character. Anybody can open a trading account, but only those who have the right temperament, or who can develop it, will feel comfortable and succeed. The path from startup to survival, on to prosperity and beyond is difficult. This book is written with the benefit of hindsight. If you believe becoming a trader and acquiring the traders skills is worth the effort then take from this book anything that you think will help you. Much of what is said about stocks also applies to non-equity markets - futures, currencies and options. Where information only applies to stocks it is noted. By learning to watch where the big money - the smart money- is moving you can take advantage of opportunities. You are only a loser when you trade on institutional terms. You should not slavishly copy institutional trading methods and assume they will work for you. The person on the other side of the trade is not necessarily smarter. The institutions and their traders have a market edge that is created by their size and their ability to withstand losses. The institutional trader can survive on narrow margins because of the high dollar volume. The private trader has no size by comparison and his ability to withstand losses is very limited, usually because of capital size. Good margins are necessary from each trade. These are perceived weaknesses, but they can be turned into strengths by properly using the advantages he has. ADVANTAGE, PRIVATE TRADER The first advantage is the advances in technology that are providing us with the means to flatten the playing field. More powerful computers, better software, and better electronic data supplies are closing the gap between the professionals and the private trader. A gap will always be there, but it will be narrower than in the past. You can take advantage of this because it allows you to participate more easily. Information flows more freely, more rapidly and at less cost. The same information can be used simultaneously by many people and everyone can make money in the market. The institutions might trade news, but the mechanism of the trade is price. Private traders have access to price data at a reasonable cost. A desktop computer with technical analysis software can now number crunch the data with as much ease as the professionals. Using first hand experience trading from the remote parts of the Australian outback, Chapter 3, Electronic Trading Tools explores the way the handicap has been reduced. Information, or price data alone is not enough to give traders an advantage. The institutions approach the market differently. Like all sharks, they need to eat a little bit very often and must move all the time. You are not under this pressure so you have greater flexibility in deciding when to enter the market and the risk you are prepared to take on. Your advantage is that you can take your time in establishing trading as a business. The progress from startup to survival is usually spread over years. While you still have your day job, there is no pressure to trade as the sole means of earning your living. The danger is this can bring complacency and many fail to move beyond dalliance.

Time is a luxury that no institutional trader enjoys. Successful private traders use the startup period to build the discipline, and the capital, needed for trading survival. These advantages may appear trivial, but they give the private trader an edge. Most novices squander this edge and are blown out of the market. This outcome is not inevitable, but avoiding it takes discipline, planning, skill and a determined interest in trading for profit. WHERE YOU ARE GOING Set Return Parameters To prevent these golden advantages turning to dross you need to develop trading discipline by establishing suitable return parameters based on the minimum return on capital required for trading survival. Without cashflow you starve. Chapter 4, Benchmarks for Trading returns looks at the differences between traders and investors and the way this determines the type of returns each seeks from the market. Institutional traders largely avoid small cap stocks. One of the reasons for this is that larger stocks have more liquidity and a better dividend stream. When they make large transactions, these considerations are important because moving big volumes can make waves. The small trader rarely makes a ripple on the market so our rules must be different. Once you have established the minimum level of cash flow required for survival you need to turn your attention to practical ways of obtaining it from the market. Some practical approaches to determining reasonable return levels for different classes of stock or counters are explored in Chapter 5, Blue Chips -Hold or fold? This looks at ways to assess Blue Chip, small cap and speculative stock classes against cashflow requirements. Specialise Unlike the institutions, you cannot afford to allocate cash to every market. You must specialise. The one man band cannot play a symphony. As Roy Longstreet comments of a trader colleague in Viewpoints of a Commodity Trader, "His specialty is soybeans - only on the long side." It is no good honing an edge on a sharp axe if it is locked in the woodshed. Like the institutions, you must select the tree you want to fell. Of course, the funds fell many trees, but as long as most of them fall in the right direction the fund survives. They have a very strong safety cage. Private traders cannot do this. You must know which direction the tree is going to fall. Your safety cage is very flimsy. You must know the trend and anticipate its direction, or reversal, as accurately as possible. Near enough is not good enough because if you miscalculate and the tree we select falls on us, we sustain a lot of structural damage. Chapter 6, The Trend is Your Friend explores this concept and suggests ways to reveal the trend in a chart. The area of your specialisation decides the market crowd you want to understand. You need to develop a measure of trend sentiment for your particular group. A private index fills the same role as the published market indexes, but it provides specific tradeable information about the market of your choice. Chapter 7, Your Private Index looks at the benefits of building and using this. This is your research department and it is the edge your trading business needs to survive and prosper. The fact that you are removed from Wall Street gives you an advantage. American 'market wizard' Gary Bielfeldt trades bonds from Peoria partly because it is away from Wall Street. Like Bielfeldt you can learn to recognise the crowd from a distance. You can understand its motivation by looking at yourself. Your instinctive reactions, multiplied a millionfold, are those of the crowd. By recognising your own instinctive emotions, you can discount them, and so look at the market crowd more clearly. Greed and fear are such powerful enemies that it is much better to have them on your side. Once you understand the role crowd psychology plays in setting price you can decide how far you want to go. Armed with risk parameters that are distinctly your own, and equipped with clear targets for return on capital, you can confidently walk a mile with the crowd. As a private trader, you have the time to make

every decision a good decision. You have the opportunity to see the crowd from a detached viewpoint. How to use this major advantage is the subject of Chapter 8, Walk a Mile With the Crowd. Selected Tools Like a burglar crouched in front of a safe, you need the right tools to crack the combination. Surprisingly, the tools you use to crack the market safe are much the same as the tools used by the institutions. Your trading edge lies in selecting the right tools and using them in the best way. Every burglar has his private MO. Every private trader needs no less. Your safe is in the stock market office and we look at how point and figure charting can be a useful safe-cracking tool. Fully armed, fully informed and equipped with the necessary discipline the guppy enters the sea along with the sharks. Any fool can enter the market. A guppy that stakes out the middle of the sea is instant fishfood. As a private trader, you must find your own corner from which you can dart into the melee for a few moments before withdrawing without being bitten or eaten. You are not big enough to hide technique behind bravado. The tactics youuse depend on the corner you hold. Chapter 10, Enter the Fool - Not considers how an entry and exit technique should be linked with stop loss tactics. Linking the theory together in a practical way is the subject of Chapter 11, Putting it all Together. Specific monitoring and management techniques are discussed, along with some trading tactics made possible by electronic transactions. This is the day to day activity of a private trading business, from evaluating trading opportunities, to fine tuning the placement of orders and making an exit with discipline. Things Can Go Wrong No matter how successful you are, you are going to make mistakes. The institutions make them frequently, but as a small trader you cannot say " Wait a minute. Hold everything. A $350,000 loss? Why, that's nothing," as Nancy Goldstone does in Trading Up. Taking a loss and recovering from a loss is serious business for you. Unlike the institutions, your very survival depends on your ability to recover. Losses threaten your prosperity and have a greater potential to destroy your business. The threat of catastrophic risk looks over your shoulder at every trade and casts a shadow on the screen. Risk is real and Chapter 12, Protecting Profits considers how it can be controlled in small stock trading accounts. The 2% rule is the core of money management, but managing profits can further add to risk. This chapter considers how money management applies to small accounts. The next, Six to Twenty-One explores three money management models from a startup capital base of $6,000 to a safer $21,000. The way you manage your profits plays a bigger part in your long term success than just winning trades. This chapter explores in detail six approaches all subject to the same series of trades. Not a single one of us trades perfectly from day one. Getting better at the job is only part of the solution. Even when you develop enough discipline to stop the bleeding, there is still a fair amount of old blood on the floor. Running your account into the ground is not the end. It is an opportunity in rather ugly wrapping. If you cannot take a loss, but if you can live with it for a while, then your only choice is to trade your way out. Chapter 14, When Trades go Sour looks at some ways to really make you and your capital sweat. Trading provides seductive distractions for the private trader. Not so for the institutions who are able to contract them out. For you, the search for the Holy Grail of trading - the perfect system for finding profit through price differences - is very seductive. Like watching garbage on TV, the pastime has its place, but it must not become an end in itself. The institutions can pay a team of computer nerds for years on end to develop a propriety trading system because their traders are still trading. When you get waylaid by the search, too often your trading stops. Chapter 15, Waylaid by the Holy Grail considers how this search can help, or hinder us. As private traders you stand on the shoulders of giants, dragging your errors behind you. When you understand that you are not like institutional traders then you take the first step towards survival in the market. The next chapter, A Guppy Among Sharks, explores those differences.

----------------------------------------------------------------CHARTISTS AND TECHNICAL ANALYSTS I. Framework II. The Basis of Technical Analysis III. The Nature of Technical Analysis

THE EMPIRICAL EVIDENCE ON SIMPLE PRICE PATTERNS Investors have used price charts and price patterns as tools for predicting future price movements for as long as there have been financial markets. The first studies of market efficiency focused on the relationship between price changes over time, to see if in fact such predictions were feasible. Evidence can be classified into two classes studies that focus on short-term (intraday, daily and weekly price movements) price behavior and research that examines long-term (annual and five-year returns) price movements. a. Serial correlation Serial correlation measures the correlation between price changes in consecutive time periods Measure of how much price change in any period depends upon price change over prior time period. 0: imply that price changes in consecutive time periods are uncorrelated with each other >0: evidence of price momentum in markets <0: Evidence of price reversals From viewpoint of investment strategy, serial correlations can be exploited to earn excess returns. A positive serial correlation would be exploited by a strategy of buying after periods with positive returns and selling after periods with negative returns. A negative serial correlation would suggest a strategy of buying after periods with negative returns and selling after periods with positive returns. The correlations must be large enough for investors to generate profits to cover transactions costs.

Serial Correlation in Short-period Returns Author Data Variables Time Interval Correlation 1 week 0.131 Kendall & Alexander(28 19 indices - UK price 2 weeks 0.134 4 weeks 0.006 Moore (28) 30 companies - US log prices 1 week -0.056 45 companies Cootner (28) log prices 1 week -0.047 US 1 day 0.026 Fama (46) 30 companies - US log prices 4 days -0.039 9 days -0.053 King (28) 63 companies - US log prices 1 month 0.018 15 companies Niarchos (119) log prices 1 month 0.036 Greece

Praetz (128)
Summary of Findings

16 indices 20 companies

log prices

1 week 1 week

0.000 -0.118

Serial correlations in most markets is small. While there may be statistical significance associated with these correlations, it is unlikely that there is enough correlation to generate excess returns. The serial correlation in short period returns is also affected by price measurement issues and the market micro-structure characteristics. Non-trading in some of the components of the index can create a carry-over effect from the prior time period, this can result in positive serial correlation in the index returns. The bid-ask spread creates a bias in the opposite direction, if transactions prices are used to compute returns, since prices have a equal chance of ending up at the bid or the ask price. The bounce that this induces in prices will result in negative serial correlations in returns. Bid-Ask Spread = Square root of (Serial Covariance in returns) where the serial covariance in returns measures the covariance between return changes in consecutive time periods. b. Filter Rules In a filter rule, an investor buys an investment if the price rises X% from a previous low and holds the investment until the price drops X% from a previous high. The magnitude of the change (X%) that triggers the trades can vary from filter rule to filter rule. with smaller changes resulting in more transactions per period and higher transactions costs. Figure 9.1: Illustration of Filter Rule

Assumptions underlying strategy This strategy is based upon the assumption that price changes are serially correlated and that there is price momentum, i.e., stocks which have gone up strongly in the past are more likely to keep going up than go down. The following table summarizes results from a study on returns, before and after transactions costs, on a trading strategy based upon filter rules ranging from 0.5% to 20%. ( A 0.5% rule implies that a stock is bought when it rises 0.5% from a previous low and sold when it falls 0.5% from a prior high.)

Table 9.2: Returns on Filter Rule Strategies

Value of X 0.5% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 8.0% 10.0% 12.0% 10.3%
Results of Study

Return with strategy 11.5% 5.5% 0..2% -1.7% 0.1% -1.9% 1.3% 1.7% 3.0% 5.3% 224

Return with Buy and Hold 10.4% 10.3% 10.3% 10.1% 10.1% 10.0% 9.7% 9.6% 9.6% 9.4% 1.4%

# Transactions with strategy 12,514 8,660 4,764 2,994 2,013 1,484 1,071 653 435 289 16.0%

Return after transactions costs -103.6% -74.9% -45.2% -30.5% -19.5% -16.6% -9.4% -5.0% -1.4% 2.3% 4.2%

The only filter rule that beats the returns from the buy and hold strategy is the 0.5% rule, but it does so before transactions costs. This strategy creates 12,514 trades during the period which generate enough transactions costs to wipe out the principal invested by the investor. While this test is an dated, it also illustrates a basic problem with strategies that require frequent short term trading. Even though these strategies may earn excess returns prior to transactions costs, adjusting for these costs can wipe out the excess returns. Relative Strength Rules A variant on the filter rule is the relative strength measure, which relates recent prices on stocks or other investments to either average prices over a specified period, say over six months, or to the price at the beginning of the period. Stocks which score high on the relative strength measure are considered good investments. This investment strategy is also based upon the assumption of price momentum. c. Runs Tests A runs test is a non-parametric variation on the serial correlation, and it is based upon a count of the number of runs, i.e., sequences of price increases or decreases, in the price changes. Thus, the following price changes, where U is an increase and D a decrease would result in the following runs: UUU DD U DDD UU DD U D UU DD U DD UUU DD UU D UU D There were 18 runs in this price series of 33 periods. The actual number of runs in the price series is compared against the number that can be expected in a series of this length, assuming that price changes are random. If the actual number of runs is greater than the expected number, there is evidence of negative correlation in price changes. If it is lower, there is evidence of positive correlation. Studies of Price Runs A study of price changes in the Dow 30 stocks, assuming daily, four-day, nine-day and sixteen day return intervals provided the following results -

DIFFERENCING INTERVAL Daily Four-day Nine-day Sixteen-day Actual runs 735.1 175.7 74.6 41.6 Expected runs 759.8 175.8 75.3 41.7 Based upon these results, there is evidence of positive correlation in daily returns but no evidence of deviations from normality for longer return intervals. Long strings of positive and negative changes are, by themselves, insufficient evidence that markets are not random, since such behavior is consistent with price changes following a random walk. It is the recurrence of these strings that can be viewed as evidence against randomness in price behavior. SEASONAL AND TEMPORAL PATTERNS IN PRICES a. The January Effect Studies of returns in the United States and other major financial markets consistently reveal strong differences in return behavior across the months of the year. Figure 9.13 reports average returns by month of the year from 1926 to 1983.

Returns in January are significantly higher than returns in any other month of the year. This phenomenon is called the year-end or January effect, and it can be traced to the first two weeks in January. The January effect is much more accentuated for small firms than for larger firms, and roughly half of the small firm premium, described in the prior section, is earned in the first two days of January. Figure 9.14 graphs returns in January by size and risk class for data from 1935 to 1986. Figure 9.14: Returns in January by Size and Risk Class - 1935-86

A number of explanations have been advanced for the January effect, but few hold up to serious scrutiny. Tax loss selling by investors at the end of the year on stocks which have 'lost money' to capture the capital gain, driving prices down, presumably below true value, in December, and a buying back of the same stocks in January, resulting in the high returns. A second rationale is that the January effect is related to institutional trading behavior around the turn of the years. It has been noted, for instance, that ratio of buys to sells for institutions drops significantly below average in the days before the turn of the year and picks to above average in the months that follow. Figure 9.15: Institutional Buying/Selling around Year-end

Figure 9.16: Returns in January vs Other Months - Major Financial Markets

b. The Weekend Effect The weekend effect is another phenomenon that has persisted over long periods and over a number of international markets. It refers to the differences in returns between Mondays and other days of the week. Figure 9.17, which graphs returns by days of the week from 1962 to 1978

The Weekend Effect: Explanations

There are a number of other findings on the Monday effect that have fleshed it out. First, the Monday effect is really a weekend effect since the bulk of the negative returns is manifested in the Friday close to Monday open returns. The returns from intraday returns on Monday are not the culprits in creating the negative returns. Second, the Monday effect is worse for small stocks than for larger stocks. Third, the Monday effect is no worse following three-day weekends than two-day weekends. There are some who have argued that the weekend effect is the result of bad news being revealed after the close of trading on Friday and during the weekend. Even if this were a widespread phenomenon, the return behavior would be inconsistent with a rational market, since rational investors would build in the expectation of the bad news over the weekend into the price before the weekend, leading to an elimination of the weekend effect.

Further Notes on the Weekend Effect The presence of a strong weekend effect in Japan, which allowed Saturday trading for a portion of the period studies here indicates that there might be a more direct reason for negative returns on Mondays than bad information over the weekend. As a final note, the negative returns on Mondays cannot be just attributed to the absence of trading over the weekend. The returns on days following trading holidays, in general, are characterized by positive, not negative, returns. Figure 9.19 summarizes returns on trading days following major holidays and confirms this pattern.

FOUNDATIONS OF TECHNICAL ANALYSIS A summary of the underlying assumptions (Levy) (1) Market value is determined solely by the interaction of supply and demand (2) Supply and demand are governed by numerous factors both rational and irrational. The market continually and automatically weighs all these factors. (A random walker would have no qualms about this assumption either. He would however point out that any irrational factors are just as likely to be one side of the market as on the other.) (3) Disregarding minor fluctuations in the market, stock prices tend to move in trends which persist for an appreciable length of time. ( Random walker would disagree with this statement. For any trend to persist there has to be some collective 'irrationality') (4) Changes in trend are caused by shifts in demand and supply. These shifts no matter why they occur, can be detected sooner or later in the action of the market itself. (In the financial economist's view the market (through the price) will instantaneously reflect any shifts in the demand and supply. However knowledge that the demand or supply has shifted after it has already been reflected in the price is worthless.) On why technical analysts think it is futile to estimate intrinsic values "It is futile to assign an intrinsic value to a stock certificate. One share of US Steel , for example, was worth $261 in the early fall of 1929, but you could buy it for only $22 in June 1932. By March 1937 it was selling for $126 and just one year later for $38. ... This sort of thing, this wide deivergence between presumed value and intrinsic value, is not the exception; it is the rule; it is going on all the time. The fact is that the real value of US Steel is determined at any give time solely, definitely and inexorably by supply and demand, which are accurately reflected in the transactions consummated on the floor of the exchange. Of course, the statistics which the fundamentalists study play a part in the supply and demand equationthat is freely admitted. But there are many other factors affecting it. The market price reflects not only the differing fears and guesses and moods, rational and irrational, of hundreds of potential buyers and sellers.. as well as their needs and resources- in total, factors which defy analysis and for which no statistics are obtainable but which nevertheless are all synthesised, weighted and finally expressed in the one precise figure at which a buyer and seller get together and make a deal. This is the only figure that counts.

THE RATIONALITY OF INVESTORS Historians who have examined the behavior of financial markets over time have challenged the assumption of rationality that underlies much of efficient market theory. They point out to the frequency with speculative bubbles have formed in financial markers, as investors buy into fads or get-rich-quick schemes, and the crashes with these bubbles have ended, and suggest that there is nothing to prevent the recurrence of this phenomenon in today's financial markets. There is some evidence in the literature of irrationality on the part of market players. a. Experimental Studies of Rationality While most experimental studies suggest that traders are rational, there are some examples of irrational behavior in some of these studies. One such study was done at the University of Arizona. In an experimental study, traders were told that a payout would be declared after each trading day, determined randomly from four possibilities - zero, eight, 28 or 60 cents. The average payout was 24 cents. Thus the share's expected value on the first trading day of a fifteen day experiment was $3.60 (24*15), the second day was $3.36 .... The traders were allowed to trade each day. The results of 60 such experiments is summarized in the following graph. Trading Price by Trading Day

Results of Experimental Study There is clear evidence here of a 'speculative bubble' forming during periods 3 to 5, where prices exceed expected values by a significant amount. The bubble ultimately bursts, and prices approach expected value by the end of the period. If this is feasible in a simple market, where every investor obtains the same information, it is clearly feasible in real financial markets, where there is much more differential information and much greater uncertainty about expected value. Some of the experiments were run with students, and some with Tucson businessmen, with 'real world' experience. The results were similar for both groups. Furthermore, when price curbs of 15 cents were introduced, the booms lasted even longer because traders knew that prices would not fall by more than 15 cents in a period. Thus, the notion that price limits can control speculative bubbles seems misguided. b. Chaos and Non-linear Dynamics in Prices The recent use of chaos theory to explain natural phenomena (such as weather patterns) has also generated some interest into its potential uses in explaining stock price behavior.

Peters, for instance, has tried to model price behavior using the non-linear models that underlie much of chaos theory with mixed results. A GLOSSARY OF NEW AGE TECHNOLOGY Artificial Intelligence: Software systems that attempt to replicate aspects of human intelligence. Expert System: Computerized decision-making technique that embodies knowledge gleaned from experts. Neural Network: Tries to mimic human brain processes and learns from mistakes it makes. Chaos Theory: Holds that seemingly random event s actually have patterns that computers can detect. Genetic Algorithm: Problem solving technique useful in identifying and handling anomalies. Evolution is used to find winners. I. MARKET OVERREACTION: The Contrarian Indicators Basis: Research in experimental psychology suggests that people tend to overreact to unexpected and dramatic news events. In revising their beliefs, individuals tend to overweight recent information and underweight prior data. Empirical evidence: If markets overreact then (1) Extreme movements in stock prices will be followed by subsequent price movements in the opposite direction. (2) The more extreme the price adjustment, the greater will be the subsequent adjustment

Issues: (1) Why, if this is true, is is that contrarian investors are so few in number or market power that the overreaction to new information is allowed to continue for so long? (2) In what sense does this phenomenon justify th accusation that the market is inefficient? (3) Is the market more efficient about incorporating some types of information than others? Technical trading rules: Contrarian Opinion 1. Odd-lot trading: The odd-lot rule gives us an indication of what the man on the street thinks about the stock (As he gets more enthusiastic about a stock this ratio will increase).

2. Mutual Fund Cash positions: Historically, the argument goes, mutual fund cash positions have been greatest at the bottom of a bear market and lowest at the peak of a bull market. Hence investing against this statistic may be profitable. 3. Investment Advisory opinion: This is the ratio of advisory services that are bearish. When this ratio reaches the threshold (eg 60%) the contrarian starts buying. II. DETECTING SHIFTS IN DEMAND AND SUPPLY USING PAST PRICE CHANGES: The Lessons in Price Patterns The Shiller Effect: The true value is the present value of all expected future dividends. However the variance in current prices is substantially greater than the variance in this present value.

Technical rules: Breadth of the market Measure: This is a measure of the number of stocks in the market which have advanced relative to those that have declined. The broader the market, the stronger the demand.

Related measures: (1) Divergence between different market indices (Dow 30 vs NYSE composite) (2) Advance/Decline lines

(2) Support and Resistance lines: A common explanation given by technicians for market movements is that markets have support and resistance lines. If either is broken, the market is poised for a major move.

Possible rationale: (1) Institutional buy/sell programs which can be triggered by breakthrough of certain well defined price levels (eg. Dow 1300) (2) Self fulfilling prophecies: How money managers use technical analysts for window dressing. (3) Moving Averages: A moving average line smooths out fluctuations and enables the chartist to see trends in the stock price. How that trend is interpreted then depends upon the chartist. (4) Trading Volume Indicators: Some technical analysts believe that there is information about future price changes in trading volume shifts.

(5) Point and figure charts:

III. MARKETS LEARN SLOWLY: The Momentum Investors Basis: The argument here is that markets learn slowly. Thus, investors who are a little quicker than the market in assimilating and understanding information will earn excess returns. In addition, if markets learn slowly, there will be price drifts (i.e., prices will move up or down over extended periods) and technical analysis can detect these drifts and take advantage of them.

The Evidence: There is evidence, albeit mild, that prices do drift after significant news announcements. For instance, following up on price changes after large earnings surprises provides the following evidence.

Note the price drift, especially after the most extreme earnings announcements. Relative Strength rules: The relative strength of a stock is the ratio of its current price to its average over a longer period (eg. six months). The rule suggests buying stocks which have the highest relative strength (which will also be the stocks that have gone up the most in that period). IV. MARKETS ARE CONTROLLED BY EXTERNAL FORCES: The Mystics The Elliot Wave: Elliot's theory is that the market moves in waves of various sizes, from those encompassing only individual trades to those lasting centuries, perhaps longer. "By classifying these waves and counting the various classifications it is possible to determine the relative positions of the market at all times". "There can be no bull of bear markets of one, seven or nine waves, for example.

The Dow Theory:" The market is always considered as having three movements, all going at the same time. The first is the narrow movement (daily fluctuations) from day to day. The second is the short swing (secondary movements) running from two weeks to a month and the third is the main movement (primary trends) covering at least four years in its duration.

V. FOLLOWING THE SMART INVESTORS: The Followers (a) Confidence Index: The confidence index measures the ratio of yields on risky bonds (eg. BBB) to safer bonds (AAA). A higher ratio here is bullish.

b) Specialists' short sales ratio: Specialists are better informed than the average investor. an increase in their short sales is considered a bearish sign.