with one hundredshares of Steel at 43 for the long -term, and two hundred for the day,would be tempted to close out all three hundred on indications of adecline. This is where he can test his ability to act in a dual capacity.He must ask himself: Have I good reason for thinking Steel willsell down five points before up five? Is this a small reaction or a bigshake-down? Are we still in a bull swing? Has the stock had its no rmalrally from the last decline?These and many other questions will enable him to decidewhether he should hold this hundred shares or "clean house." It takes anexceptionally strong will and clear head to act in this way withoutinterfering with your regular trading.Anyone can sell two hundred and hold one hundred; but will hisjudgment be biased because he is simultaneously long and short-bullishand bearish?There's the problem!
Richard D. Wyckoff
The real Day Trader is more likely to prefer a clean slate atmarket closing every day, so that he can sit down to his ticker at the nextmorning's opening and say, "I have no commitments and no opinion. Iwill follow the first strong indication."“He was advised not totrade in over ten-sharelots, and was especiallywarned against operatingat all until after he hadactually studied the tape
He would rather average $100 a day forten days than make $1,000 on one trade inthe same length of time. The risk isgenerally limited to a fraction and havingarrived at a point where he is showingeven small average daily profits, hisrequired capital per 100 shares need notbe over $1,500 to $2,000.
for two or three months.”
Suppose for sixty days on 100 share a daytrading his average profits over losseswere only a quarter of a point – or $25 a day. At the end of that time hiscapital would have been increased by $1,500, enabling him to trade in200 share lots. Another thirty days with similar results and he could tradein 300 share lots, and so on.I don’t mention these figures for any other purpose than to againemphasize that the objective point in Tape Reading is not largeindividual profits, but a continuous chipping in of small average netprofits per day.Some time ago, I am told, a man from the West Coast came intomy office and said that he had been impressed by this series on TapeReading, and had come to New York for the sole purpose of trying hishand at it. He had $1,000 which he was willing to lose in demonstratingwhether he was fitted for the work.I was later informed that he called again and related some of hisexperiences. It seems that he could not abstain from trading, but startedwithin two or three days after he decided on a brokerage house. He statedthat during the two months he had made forty-two trades of ten shareseach and had never had on hand over twenty full shares at any one time.He admitted that he had frequently mixed guesswork and tips with hisTape Reading but as a rule he had followed the tape.
Richard D. Wyckoff
His losses were seldom over a point and his greatest loss was oneand a half points. His maximum profit was three points. He had at timestraded in other stocks beside the leaders. In spite of his inexperience, andhis attempt to mix tips and guess with shrewd judgment, he was ahead ofthe game, after paying commissions, taxes, etc.This was especially surprising in view of the trader's marketthrough which be had passed. While the amount of his net profit wassmall, the fact that he had shown any profit during this study period wasreason enough for congratulations.Another handicap which he did not perhaps realize was hisenvironment. He had been trading in an office where he could hear andsee what everyone else was doing, and where news, gossip and opinionswere freely and openly expressed by many people.All these things tended to influence him, and to switch him fromhis foundation in Tape Reading fundamentals to other methods but he ispersisting and shows some signs of discipline. I have no doubt thathaving mastered the art of cutting losses and keeping commitments downand returning to Tape Reading fundamentals, he will soon overcome hisother deficiencies and begin showing remarkable progress.Given a broad, active market, he should show increasing averagedaily profits.
Speculation is a business. It must he learned.
Richard D. Wyckoff
CHAPTER XVarious Examples and Suggestions
RECENT trading observations and experiments have convinced methat it is impracticable and almost impossible to gauge the extent of amove by its initial fluctuations.Many important swings begin in the most modest way. The top ofan important decline may present nothing more than a light volume and adrifting tendency toward lower prices, subsequently developing into aheavy, slumpy market, and ending in a violent downward plunge.If it has been moving within a three-point radius and suddenlytakes on new life and activity, bursting through its former bounds, hemust go with it.I do not mean that he should try to catch every wiggle. If thestock rises three points and then reverses one or one and a half points onlight volume, he must look upon it as a perfectly natural reaction and nota change of trend.The expert operator will not ordinarily let all of three points get awayfrom him. He will keep pushing his stopup behind until the first good reaction puts“My opinion is that thehim out at close to the high figure.operator should aim toHaving purchased at such a time, he willcatch every importantsell out again as the price once moreswing in the leadingapproaches the high figure, unlessindications point to its forging through to aactive stock. To do thisnew high level.he must act promptlyThe more we study volumes, the better wewhen a stock goes into aappreciate their value in Tape Reading. Itnew field or otherwisefrequently occurs that a stock will workwithin a three-point range for days at agives an indication, andtime without giving one a chance for ahe must he ready tofollow wherever it leads.”
Richard D. Wyckoff
respectable-sized ‘scalp’. Without going out of these boundaries, itsuddenly begins coming out on the tape in thousands instead ofhundreds. This is evidence that a new movement has started, but notnecessarily in the direction first indicated. The Tape Reader mustimmediately go with the trend, but until it is clearly defined and the stockbreaks its former limits with large and increasing volumes, he must usecaution.The reason is this:If the stock has been suddenly advanced, it may be for thepurpose of facilitating sales by a large operator. The best way todistinguish the genuine from the fictitious move is to watch out forabnormally large volumes within a small radius. This is usuallyevidence of manipulation. The large volume is simply a means ofattracting buyers and disguising the hand of the operator.A play of this kind took place when Reading struck 159 3/4 inJune1909. I counted some 80,000 shares within about half a point of 159-- unmistakable notice of a coming decline. This was a case where thestock was put up before being put down, and the Tape Reader whointerpreted the move correctly and played for a good down swing wouldhave made considerable money.We frequently hear people complaining that "the public is not inthis market," as though that were a reason why stocks should not go upor the market should be avoided. The speaker is usually one of those whoconstitute "the public," but he regards the expression as signifying "everyoutsider except myself."In the judgment of many the market is better off without thepublic. To be sure, brokers do not enjoy so large a business, thefluctuations are not so riotous, but the market moves in an orderly wayand responds more accurately to prevailing conditions.A market in which the general pubic predominates the purchaseof individual stocks represents a sort of speculative "jag" indulged in bythose whose stock market knowledge should be rated at 1/8’s.
Richard D. Wyckoff
Everyone recognizes the fact that when the smoke clears away,the Street is full of victims who didn't know how and couldn't wait tolearn.Their buying and selling produce violent fluctuations, however,and in this respect are of advantage to the Tape Reader who would muchrather see ten-point than three-point swings.To offset this, there are some disadvantages. First, in a marketwhere there is "rioting of accumulated margins," the tape is so far behindthat it is seldom one can secure an execution at anywhere near his price.This is especially true when activity breaks out in a stock whichhas been comparatively dull. So many people with money, watching thetape, are attracted by these apparent opportunities, that the scramble toget in results in every one paying more than he figured; thus the TapeReader finds it impossible to know where he is at until he gets his report.His tape prices are five minutes behind and his broker is so busy it takesfour or five minutes for an execution instead of seconds.In the next place, stop orders are often filled at from smallfractions to points away from his stop price-there is no telling whatfigure he will get, while in ordinary markets he can place his stops within¼ of a resistance point and frequently have the price come within 1/8 ofhis stop without catching it.Speaking of stop orders: The ways in which one may manipulatehis stops for protection and advantage, become more numerous asexperience is acquired. If the Tape Reader is operating for afractional average profit per trade, or per day, he cannot afford tolet a point profit run into a loss, or fail to "plug" a larger profit at apoint where at least a portion of it will be preserved.One of my recent day's trading will illustrate this idea. I had justclosed out a couple of trades, in which there had been losses totalingslightly over a point. Both were on the long side. The market began toshow signs of a break, and singling out Reading as the most vulnerable, Igot short at 150 3/4.
Richard D. Wyckoff
In a few moments it sold below 150. My stop was moved downso there couldn't be a loss, and soon a slight rally and another break gaveme a new stop that insured a profit.A third drive started, and I pushed the stop down to within ¼ ofthe tape price at the time, as it was late in the day and I considered thisthe final plunge. By the time my order reached the floor the price waswell away from this latest stop and when the selling became most violentI told my broker to cover "at the market." The price paid was within ¼ ofthe bottom for the day, andnetted 2 5/8 after commissions“The scientific elimination of losswere paid.is one of the most importantI strongly advocate this methodof profit insuring.
factors in the art, and theoperator who fails to properly
It is also a questionprotect his paper profits will findwhether, in such a case, the tradethat many at point which hehad better not be stopped outthan closed out. When you pushthought he had cinched hasa stop close behind a rise or aslipped away from him.”decline, you leave the way openfor a further profit; but when youclose the trade of your own volition, you shut off all such chances.If it is your habit to close out everything before market closedaily, the stop may be placed closer than ordinarily during the last fifteenminutes of the session, and when a sharp move in the desired directionoccurs the closing out may be done by a stop only a fraction away fromthe extreme price. This plan of using stops is a sort of squeezing out thelast drop of profit from each trade and never losing any part that canpossibly be retained.Suppose the operator sells a stock short at 53 and it breaks to 51. Heis foolish not to bring his stop down to 51¼ unless the market is ripe fora heavy decline. With his stop at this point he has two chances out ofthree that the result will be satisfactory:(1) The price may go lower and yield a further profit;
Richard D. Wyckoff
(2) The normal rally to 52 will catch his stop and enable him to putthe stock out again at that price;(3) The stock will rally to about 51 ¼, catch his stop and then golower. But he can scarcely mourn over the loss of a furtherprofit.If the stock refuses to rally the full point to which it is entitled, thatis, if it comes up to 51½ or 5/8 and still acts heavy, it may be expected tobreak lower, and there usually is ample time to get short again at a pricethat will at least cover commissions.There is nothing more confusing than to attempt scalping onboth sides of the market at once. You might go long of a stock whichis being put up or is going up for some special reason, and short ofanother stock which is persistently weak. Both trades may pan outsuccessfully, but in the meantime your judgment will be interferedwith and some foolish mistakes will be made in four cases out of five.As Dickson G. Watts said, "Act so as to keep the mind clear, thejudgment trustworthy." The mind is not clear when the trader is workingactively on two opposing sides of the market. A bearish indication isfavorable to one trade, and unfavorable to the other. He finds himselfinterpreting every development as being to his advantage and forgettingthe important fact that he is also on the opposite side.If you are short of one stock and see another that looks like apurchase, it is much better to wait until you have covered your shorttrade (on a dip if possible), and then take the long side of the other issue.The best time for both covering and going long is on a recession that insuch a case serves a double purpose. The mind should he made up inadvance as to which deal offers the best chance for profit, so that whenthe moment for action arrives there will he nothing to do but act.This is one great advantage the Tape Reader has over other operatorswho do not employ market science. By a process of elimination hedecides which side of the market and which stock affords the bestopportunity. He either gets in at the inception of a movement or waitsfor the first reaction after the move has started.
Richard D. Wyckoff
He knows just about where his stock should come on the reaction andjudges by the way it then acts whether his first impression is confirmedor contradicted. After he gets in it must act up to expectations or heshould abandon the trade and get out of it immediately.If it is a bull move, the volume must increase and the rest of themarket offer some support or at least not oppose it. The reactions mustshow a smaller volume than the advances, indicating light pressure, andeach upward swing must be of longer duration and reach a new highlevel, or it will mean that the rise has spent its force either temporarily orfinally.Tape Reading is the only known method of trading which gets you inat the beginning, keeps you posted throughout the move, and gets youout when it has culminated.Has anyone ever heard of a man, method, system, or anything elsethat will do this for you in Wall Street?It has made fortunes for the comparatively few who have followed it.It is an art in which one can become highly expert and moreand more successful as experience sharpens his instincts andjudgment and shows him what to avoid.
CHAPTER XIObstacles to be Overcome - Potential Profits
MENTAL poise is an indispensable factor in Tape Reading.The mind should be absolutely free to concentrate upon thework; there should be no feeling that certain things are to beaccomplished within a given time; no fear, anxiety, or greed.
Richard D. Wyckoff
When a Tape Reader has his emotions well in hand, he will playas though the game were dominoes.When anything interferes with this attitude it should beeliminated. If, for example, there be an unusual series of losses, thetrader had better suspend operations until he discovers the cause.Following are the Tape Readers 7 Commandments:1. Do not overtrade ! One may be trading too often. Many opportunitiesfor profit develop from each day's movements; only the very choicestshould he acted upon. There should be no haste. The market will be thereto-morrow in case to-day's opportunities do not meet requirements.2. Eliminate anxiety! Anxiety to make a record, to avoid losses, tosecure a certain profit for the day or period will greatly warp thejudgment, and lead to a low percentage of profits. Tape Reading is agood deal like laying eggs. If the hen is not left to pick up the necessaryfood and retire in peace to her nest, she will not produce properly. If sheis worried by dogs and small boys, or tries to lay seven eggs out ofmaterial for six, the net proceeds may be an omelet.The Tape Reader's profits should develop naturally. He should buy orsell because it is the thing to do -- not because he wants to make a profitor fears to make a loss.3. Don’t trade when the market isn’t acting right! The market may beunsuited to Tape Reading operations. When prices drift up and downwithout trend, like a ship without a rudder, and few positive indicationsdevelop, the percentage of losing trades is apt to be high. When thiscondition continues it is well to hold off until the character of the marketchanges.4. Get a broker you can trust! One's broker may be giving poorservice. In a game as fine as this, every fraction – every second counts.Executions of market orders should average not over one minute. Stoporders should be reported in less time as such orders are on the floor andat the proper post when they become operative. By close attention todetails in the handling of my orders, I have been able to reduce the
Richard D. Wyckoff
average time of my executions to less than one minute. The quickestreport obtained thus far required but 25 seconds.A considerable portion of my orders are executed in from thirtyto forty seconds, varying according to whether my broker is near thephone or in a distant crowd when the orders reach the floor and how farthe identical 'crowd" is from his 'phone’.5. Do not leave orders to the discretion of the broker! Make yourorders clear and firm. Do not say, “Try to sell better than the bid and letme know what happened” – say, “Sell at the bid price and reportinstantly!”He cannot “do better" than the momentary bid or offered price.Ordinarily it is expected and is really an advantage to the general run ofspeculators to have the broker use some discretion; that is, try to dobetter, providing there is no chance of losing his market. But I do notwish my broker to act like that for me. My indications usually show methe exact moment when a stock should be bought or sold under thismethod, and a few moments' delay often means a good many dollars lost.With the execution of orders reduced to a matter of seconds, I canalso hold stop orders in my own hands and when the stop price isreached, phone the order to buy or sell at the market. Results are verysatisfactory as my own broker handles the orders and not the specialist orsome other floor broker.6. Keep alert, calm after losses! The Tape Reader should be careful totrade only in such amounts as will not interfere with his judgment. If hefinds that a series of losses upsets him it is an easy matter to reduce thenumber of shares to one-half or one-quarter of the regular amount, oreven to ten shares, so that the dollars involved are no longer a factor.This gives him a chance for a little self-examination.7. Stay physically and mentally fit! If a person is in poor physicalcondition or his mental alertness below par for any reason, he may beunable to stand the excitement attending the work. Dissipation, forexample, may render one unfit to carry all the quotations in his head, orto plan and execute his moves quickly and accurately. When anything of
Richard D. Wyckoff
this kind occurs which prevents the free play of all the faculties it is bestto bring the day's work to a close.Some of my readers may think it futile to aim for a fractionalaverage profit per trade when there are many full points per day to bemade by holding on through days and weeks and getting full benefit ofthe big moves. Admitting that it is possible to make many more points attimes there is a risk of losses corresponding to the profits and thequestion is not how much we can make, but how much we can make net.Tape Reading reduces profit- making to a manufacturing basis.To show how the nimble eighths pile up when their cumulativepower is fully employed, I have prepared a table representing the resultsof 250 trading days, starting with a capital of $1,000. It is assumed thatthe Tape Reader has reached that stage of expertness where he canaverage one trade a day and a profit of $12.50 per trade, and that as fastas $1,000 is accumulated he adds 100 shares to his trading unit.These results depend solely upon the Tape Reader's ability tomake more than he loses per day. There is no limit to the number ofshares he can trade in, provided he has the margin. If he is at allproficient his margin will not be depleted more than a few points beforehe makes up his losses and more. He is not pyramiding in the ordinarysense of the word; he is simply doing an increasing volume of shares ashis capital expands. All progressive business men increase commitmentsas fast as warranted by their capital and opportunities.What a profit 1/8 of point per day would amount to in 250 days ifprofits were used as additional margin:
Richard D. Wyckoff
100 shares200 “300 “400 “500 “600 “700“800 "900 "1000 "1100 "1200 “
$12.50 a day 1,000.0025.001,000.0037.501,012.5050.001,000.0062.501,000.0075.001,050.0087.501,050.00100.001,000.00112.501,012.50125.001,000.00137.50962.50150.001,050.00
GrossLess tax/commissionsNet Profit
In 80 days, etc.402720161412109877
$12,137.50 In 250 days- 1,942.00$10,195.50
Assuming that there are about three hundred Stock Exchangesessions in the year, the two hundred and fifty days figured representfive-sixths of a year or ten months. From that time on, having struck hisgait, the Tape Reader can, without increasing his unit to over 1200shares, make $900 a week or $46,800 a year.One trader who for years has been trying to scalp the market andwho could never quite secure a profit, reports that his first attempts atapplying these rules resulted in a loss of about $20 per trade. This hegradually reduced to $12, then to $8, finally succeeding in throwing thebalance over to the credit side and is now able to make a daily profit offrom $12 to $30 per 100 shares. That’s only an example of small traders.Medium size traders goal should be to make $150 to $350 per 1000shares. This is doing very well indeed. I have no doubt that profits willcontinue to increase as experience increases.Some people seem to hold the opinion that as the profits desiredare only 1/8 average per trade one should limit himself in taking profits.
Richard D. Wyckoff
Perhaps I have not made myself clear.I buy and sell when I get my indications. In going into a trade Ido not know whether it will show a profit or a loss, or how much. I try totrade at a point where I can secure protection with a stop from ¼ to ½point away, so that my risk is limited to this fraction plus commissionand tax. If the trade goes in my favor I push the stop up as soon aspossible, to a point where there can be no loss.I do not let profits run blindly but only so long as there appearsno indication on which to close. No matter where my stop order stands, Iam always on the watch for danger signals. Sometimes I get them awayin advance of the time a trade should be closed; in other instances my"get out" will flash onto the tape as suddenly and as clearly defined as astreak of lightning against a black sky.When the tape says "get out" I never stop to calculate how muchprofit or loss I have or whether I am ahead or behind on the day. I strivefor an increasing average profit but I do not keep my eye so much on thefraction or points made or lost, so much as on myself and keeping alert.I endeavor to perfect myself in resolute calmness and precision,quickness of thought, accuracy of judgment, promptness in planning andexecuting my trades, foresight, intuition, courage and initiative.Masterful control of myself in these respects will produce a winningaverage -- it is merely a question of practice.To show how accurately the method works out in practice, I willdescribe one recent day's trading in which there were three transactions,involving six orders (three buying and three selling). The market didn’tgo one-eighth against me in five orders out of the six. In the sixth, thestock went 5/8 above the selling price at which my order was given. Hereare the details:I had no open trades at the market’s open bell. Kansas CitySouthern, which had been intensely dull, came on the tape 2600 at 463/4. I gave a buying order and before it could reach the "post" the Tapesaid 46 7/8 and 47. The stock rose steadily and after selling at 48 5/8 and
Richard D. Wyckoff
coming back to 48 1/2 I gave the selling order. It did not touch 48 5/8again.The next trade was in Reading. I saw that it was being held incheck in spite of its great strength. The stock had opened at 158. After acertain bulge I saw the reaction coming. When it arrived, and the stockwas selling at 157 1/2, I gave the buying order, got mine at 157 5/8. Itimmediately rose to 158 3/4. I noted selling indications and gave theorder while the stock was at that price on the tape. It did not reactsufficiently to warrant my picking it up again and later went to 159 3/8,which was 5/8 above my selling indication.Southern Pacific suddenly loomed up as a winner and I bought itat 135. It promptly went to 135 1/2. The rest of the market began to looktemporarily over-bulled, so I gave my order to sell when the stock was135 1/2, which proved to be the highest for the day, making the fifth timeout of six orders when my stock moved almost instantly in my favor.This illustration is given as an example of the high percentageof accuracy possible under this method of trading. I do not pretendto be able to accomplish these results except occasionally, but I amconstantly striving to do so in a large percentage of my trades.If one makes 2 3/8 points one day and loses 2 points in the nexttwo days, he is 3/8 ahead for the three days, or an average of 1/8 per day.He may have losing and winning streaks, get discouraged and lose hisnerve at times, but if he is made of the right stuff he will in timeovercome all obstacles and land at the desired goal.
CHAPTER XIIClosing the Trade
THE student of Tape Reading, especially he who puts his knowledgeinto actual practice, is constantly evolving new ideas and makingdiscoveries which modify his former methods. From each new elevation
Richard D. Wyckoff
he enjoys a broader view; what were obstacles disappear; his problemsgradually simplify.We have previously defined Tape Reading as the art ofdetermining the immediate trend of prices. If one can do this successfullyin the majority of his trades, his profits should roll up. But recognizingthe trend and getting in at the right moment is only one-half of thebusiness.Knowing when to close a trade is just as important if not the mostimportant part of a complete transaction.At a certain point in my trading, I became aware that a largepercentage of my losing trades resulted from failure to close at theculmination of what I have termed the immediate trend.An example will make this clear: New York Central was on acertain day the strongest stock in a bull market that showed a tendency toreact. The pressure was on Reading and Steel. My indications were allbullish, so I couldn't consistently sell either of the latter short.I was looking for an opportunity to buy.The market began to slide off, Reading and Steel being theprincipal clubs with which the pounding was done. I watched themclosely and the moment I saw that the selling of these two stocks hadceased, gave my order to buy New York Central, getting it at 137 1/4. Itnever touched there again, and in ten minutes was 139 bid for 5,000shares.Here I should have sold, as my buying indication was for thatparticular advance. Especially should I have sold when I saw the riseculminate in a spectacular bid which looked like bait for outside buyers.Of course the stock might have gone higher The main trend for the daywas upward. But for the time being 139 was the high point. I knew thestock was due to react from this figure, and it did, but at the bottom ofthe normal reaction selling broke out in fresh quarters and the wholemarket came down heavily.
Richard D. Wyckoff
The result was that my profit was only a fraction of what it oughtto have been.This is the way the trade might have been made: I should havesold when 139 was noisily bid, and when the reaction had run its course,picked it up again, provided indications were still bullish. If they werenot I would have been in the position of looking to get short instead ofwaiting for a chance to get out of my long.Having reserved in the early part of this book the right to revisemy views, I will here record the claim that the best results in active TapeReading lie in recognizing the moves as they occur, getting in when theystart and out when they culminate.This will in most cases cause failure to get all of the moves in theone most active stock for the day, but should result in many smallprofits, and I believe the final results will exceed those realized by sittingthrough reactions with any one stock.There is a very wide difference in mental thought processesbetween the man who feels compelled to get out of something and onewho has money to invest and is looking for a chance to make a freshtrade.The start and finish of a small move is best illustrated by atriangle -- the narrow end representing the beginning, and the wide endthe termination of the move. The width, an upward move would appearlike this:
Richard D. Wyckoff
…and a downward move like this:
These figures denote the widening character of a move as itprogresses and are intended to show how volume, activity and number oftransactions expand until, at the end, comparatively active conditionsprevail.The principle works the same in the larger market moves; witnessthe spectacular rise in Union Pacific within a few sessions marking theend of the August1 1909, boom.After closing out a trade the tape will tell on the followingreaction whether you are justified in taking the same stock on again orwhether some other issue will pay better.Frequently a stock will be seen preparing for a move two or threeswings ahead of the one in which it becomes the leader. This is a finepoint, but with study and practice the most complicated indicationsclarify.And now a word about you – you who are endeavoring toturn day trading to practical account.The results which are attainable depend solely upon the YOU.
Richard D. Wyckoff
Each must work out his own method of trading, based onsuggestions derived from these suggestions or from other sources. It willdoubtless be found that what is one man's meat is another's poison, andthat no amount of "book learning" will be of any use if the student doesnot put his knowledge to an actual test in the market.It is surprising how an familiarity with subjects relative to thestock market, but seemingly having no bearing upon Tape Reading, willlead to opportunities or aid in making deductions.And so when asked what books will best for supplementing thesesuggestions, I should say:Read everything you can get hold of. If you find but a single ideain a publication it is well worth the time and money spent in procuringand studying it.Wall Street is crowded with men who are there in the hope ofmaking money, but who cannot be persuaded to look at the propositionfrom a practical business standpoint.Least of all will they