gent. In other words, the point of resistance was raised 1/8.Having bought at 128 3/4, the stop is placed at 127 7/8, which is ¼below the last point of resistance.The stock goes above its previous top (129 1/8) and continues to130 3/4. At any time after it has crossed 130 the trader may raise his stopto cost plus commission (129). The stock reacts at 129 7/8, thencontinues the advance to above 131. As soon as a new high point isreached the stop is raised to 129 5/8, as 129 7/8 was the point ofresistance on the dip.In such a case the initial risk was 7/8 of a point pluscommissions, etc…the market giving a well defined stop point, makingan arbitrary stop not only unnecessary but expensive.The illustration is given in chart form, but the experienced TapeReader generally carries these swings in his head. A series of highertops and bottoms are made in a pronounced up swing and the reverse in adown swing.Arbitrary stops may, of course, be used at any time, especially ifone wishes to clinch a substantial profit, but until a stock gets away fromthe price at which it was entered, it seems best to use the stops itdevelops for itself.If the operator is shaken out of his trade immediately afterentering the trade, it does not prove his judgment was wrong. Someaccident may have happened, some untoward development in a particularissue, of sufficient weight to affect the rest of the list. It is theseunknown occurrences that make the limitation of losses most important.In such a case it would he folly to change the stop so that the riskis increased. This, while customary with the general investing public, is
Richard D. Wyckoff
something a professional Tape Reader seldom does. Each trade is madeon its own basis, and for certain definite reasons. At the outset theamount of risk should be decided upon, and, except in very rareinstances, should not he changed, except on the side of profit. The TapeReader must eliminate, not increase, his risk.Averaging does not come within the province of the TapeReader. Averaging is groping for the top or bottom. The Tape Readermust not grope. He must see and know, or he should not act.It is impossible to fix a rule governing the amount of profit theoperator should accept. In a general way, there should be no limit set asto the profits. A deal, when entered, may look as though it would yieldthree or four points, but if the strength increases with the advance it mayrun ten points before there is any sign of halt.We wish our readers to bear fully in mind that theserecommendations and suggestions are not to be considered final orinflexible. It is not our aim to assume the role of an oracle. Rather, weare reasoning things out on paper, and as we progress in these studiesand apply these tentative rules to the tape, in actual or paper trading, youprobably have occasion to modify some of our conclusions.
A Tape Reader must close a trade:(1) when the tape tells him to close;(2) when his stop is caught;(3) when his position is not clear;(4) when he has a large or satisfactory profit and wishes to utilizethose funds for better opportunities.
The first and most important reason for closing a trade is:The tape says so.This indication may appear in various forms. Assuming that oneis trading in a Leader stock, the warning may come in the stock itself.
Richard D. Wyckoff
Within the recording of sales, there runs the fine silken thread ofthe trend. It is clearly distinguishable to one sufficiently versed in the artof Tape Reading, and, for reasons previously explained, is most readilyobserved in the leaders.So, when one is short of Union Pacific and this thread suddenlyindicates that the market has turned upward, it’s foolish to remain short.Not only must one cover quickly, but if the power of the movement issufficient to warrant the risk, the operator must go long. In a market ofsufficient breadth and swing, the Tape Reader will find that when it istime to close a trade, it is usually time to reverse his position. One musthave the flexibility of whalebone, and entertain no rigid opinion.He must obey the tape implicitly. The indication to close a trademay come from another stock, several stocks or the general market.For example, on the day of the Supreme Court decision in ConsolidatedGas, suppose the operator was long of Union Pacific at 11 o'clock,having paid therefor182 ¾.“If a stock or thewhole market cannotbe advanced, theassumption is that it
Between 11 and 12 o'clock Union rallied to183 1/2, and Reading, which was more active,to 144. Just before, and immediately after, thenoon hour, tremendous transactions took placein Reading, over 50,000 shares changinghands within three-quarters of a point.
will decline --a market
These may have been largely washsales, accompanied by inside selling; it isimpossible to tell. If they were not, theinference is that considerable buying power developed in Reading at thislevel and was met by selling heavy enough to supply all bidders andprevent the stock advancing above 144 3/8.
seldom stands still.”
Large quantities coming within a small range indicated either oneof two things:(1) That considerable buying power suddenly developed at thispoint, and the insiders chose to check it or to take advantageof the opportunity to unload.
Richard D. Wyckoff
(2) The demonstratio n in Reading may have been intended todistract attention from other stocks in which large operatorswere unloading. (There was no special evidence of this,except in New York Central).If the selling was not sufficient to check the upward move, themarket for Reading would have absorbed all that was offered andadvance to a higher level, but in this case the selling was more effectualthan the buying, and Reading fell back, warning the operator that thetemporary leader on the bull side of the market had met with defeat.At this point the operator was, therefore, on the lookout for a slump.Reading subsided, in small lots, back to 143 7/8. Union Pacific,after selling at 183 5/8, declined to 183 ¼. Both stocks developeddullness, and the whole market became more or less inactive.Suddenly Union Pacific fell to 183 1/8. Then UP traded 500 shares@183, 200 at 182 7/8, 500 at 183, 200 at 182 7/8, and 500 at 182 3/4,indicating not only a lack of demand, but remarkably poor support.Immediately following this, New York Central, which sold only a fewminutes before 400 shares at 131½ came131 on 1700 shares, 130¼ on500 shares and ended at 130 on 700 shares.This demonstrated that the market was remarkably hollow and ina position to develop great weakness. The large quantities of New YorkCentral at the low figure, after a running decline of a point and one- half,showed that there was not only an absence of supporting orders, but thatsellers were obliged to make great concessions in order to dispose oftheir holdings.The quantities, especially in view of the narrowness of themarket, proved that the sellers were not small traders. Coupled with thewet blanket put on Reading and the poor support in Union Pacific, thisweakness in New York Central was another advance notice of a decline.On any indication of this kind, the trader must be ready to jump out ofhis long stock and get short of the market.
Richard D. Wyckoff
While waiting for his cue, the Tape Reader has time to considerwhich stock among the leaders is the most desirable for selling. Hequickly chooses Reading, on the ground that the large lots which haveapparently been distributed around 144 will probably come into themarket as soon as weakness develops.Reason: The general investing public generally buys on just suchpeaks as the one which has taken place in Reading. A large volume, evenif accompanied by only a fractional advance, has the effect of making theordinary trader intensely bullish, the result being that he bites off a lot oflong stock at the top of the market. This is exactly what the manipulatorwishes him to do.We have all heard people boast that their purchase was at thetop eighth and that it had the effect of turning the stock down. Thosewho make their purchases after this fashion are quickest to becomescared at the first sign of weakness, and throw overboard what theyhave bought. First greed and then fear controlled them.In choosing Reading, therefore, the Tape Reader is picking outthe stock in which he is likely to have the most help on the bear side.At 12.30 PM the market is standing still, the majority oftransactions being in small lots and then only fractional changes.Reading shows the effect of the recent unloading. It is coming out 500 at143 3/4, 500 at 143 5/8, 400 at 143 ½ and 400 at 143 3/4.The operator realizes that Reading is probably a short sale righthere, with a stop order at 144 1/2 or 5/8, on the ground that the bullsmust have an extraordinary amount of buying power to push the stockabove its former top, where, at every eighth advance over 144 3/8, theywill encounter a considerable portion of 50,000 shares. This reasoning,however, is all aside from our main argument, which is to show how theclue to get out of the stock will be given by the action of stocks otherthan that in which the trader is working.Union Pacific shows on the tape in small lots at 182 3/4; NewYork Central 1100 at l30, and 900 at 130 3/8. The rest of the market
Richard D. Wyckoff
seems to have all the snap and ginger taken out of it and the operatordoes not like his position on the long side.He has no definite indication to sell short, however, he feels thathis chances on the long side have been reduced to practically nothing bythe weak undertone of the market, he therefore gets out of his UnionPacific and waits until the tape tells him to sell Reading short.Union Pacific weakens to182 5/8. The others slide offfractionally. The weakness is not strong enough to forecast any bigbreak, so he continues to wait. There are 1800 shares of Unionaltogether at 182 5/8, followed by 3000 at 182 1/2. Other stocks respondand the market looks more bearish.Consolidated Gas trades 163¾ - 163 ¼ - 163. This is the firstsign of activity in the stock, but the move is nothing unusual for Gas, asits fluctuations are generally wide and erratic. The balance of the listrallies a fraction. Gas trades 162 ½ to ¾, then 500 at 162 1/4. At thispoint Gas, which has been very dull up to now, forces itself, by itsdecline and weakness, upon the notice of the operator. He begins to lookupon the stock as the possible shears which will cut the thread of themarket and let everything down.12.45 PM Gas trades 500 at 161 1/2. It is very weak. Thebalance of the list is steady, Union Pacific 182 5/8, Central 130 3/8,Reading 143 3/4. There is a fractional rally -- Union Pacific to 182 7/8and Gas to 162. Plenty of Central for sale around 130; Reading is 1431/2.The rally peters out gradual weakening all around, but the TapeReader cannot go with the trend until he is sure of a big move. Centraltrades at 129¾, showing that after all the buyers at 130 are filled upconsiderable stock is still for sale. The others show only in small lots.The market is on the verge of a decline; it is where a jar of any sort willstart it down. Union Pacific is heavy at 182 1/2 - trades 300 at 182 3/8,200 at 1/2; Reading 143 1/2, 3/8, and 1000 shares at 1/2; Central trades2000 at 130 and 800 at 1/8.
Richard D. Wyckoff
Here is the thrust he has been looking for! Gas 163¾ on 200, 1/2on 400, 161 on 300, 160 on 400! He waits no longer and gives an orderto sell Reading short at the market. They are all on the run now, Reading143 1/2, 600 at ¼, 1300 at 1/4. Central 130, 129 1/2, Gas trades 500 at159 1/2. Something very rotten about Gas and it's a cinch to sell it shortif you don't mind trading in a buzz-saw stock.The market breaks so rapidly that he does not get over 142 3/4for his Reading, but he is short not far from the top of what looks like awide open break.Everything is slumping now -- Steel, Smelters, Southern Pacific,St. Paul. Union Pacific is down to 181 5/8 and the rest in proportion.Gas 158 1/2,158 on 300, 157, 156, 155, 154, 153 and the rest"come tumbling after." Reading 141 3/8, 500 at ¼, 400 at 141, 140 3/4,500 at 1/2, 200 at 140, 600 at 139 3/4, 500 at 5/8. Union 181 - 180 7/8,3/4, 1/2, 1/4, 600 at 1/8, 500 at 180, 179 3/4, 500 at 1/2, 300 at 1/4,Central 127 1/2.The above illustrates some of the workings of a Tape Reader'smind; also how a break in a stock, entirely foreign to that which is beingtraded in, will furnish an indication to get out and go short of one stockor another.The indication to close a trade may come from the general marketwhere the trend is clearly developed throughout the list all stocksworking in complete harmony. One of the best indications in this line isthe strength or weakness on rallies and reactions.Of course the break in Gas, which finally touched 138, was dueto the Supreme Court decision, announced on the news tickers at 1:10PM, but, as is usually the case, the tape told the news many minutesbefore anything else. This is one of the advantages of getting your newsfrom the first place where it is reflected. Other people who wait for suchinformation to sift through telephone wires and reach them by theroundabout way of news tickers or word of mouth, are working under atremendous handicap.
Richard D. Wyckoff
That not even the insiders knew what the decision was to be - isshown in the dullness of the stock all morning. Those who heard thedecision in the Supreme Court chamber doubtless went straight to thetelephone and sold the stock short. Their sales showed on the tape beforethe news arrived in New York. Tape Readers were, therefore, first to benotified. They were short before the Street knew what had happened.
CHAPTER VVolumes and Their Significance
AS the whole object of these studies is to learn to read what the tapesays, I will now explain a point which should be known and understoodbefore we proceed, otherwise the explanations cannot be made clear.First of all, we must recognize that the market for any stock -- atwhatever level it may be -- is composed of two sides, represented by thebid and the asking price.Remember that the "last sale" is something entirely different fromthe "market price." If Steel has just sold at 50, this figure representswhat has happened. It's history. The market price of Steel is either 491/8@50 or 50@50 1/8. The bid and asked prices combined form themarket price.This market price is like a pair of scales, and the volume of stockthrown out by sellers and reached for by purchasers, shows toward whichside the preponderance of weight has momentarily shifted.For example, when the tape shows the market price is 50 1/8, andthe large volumes are on the up side.
US500 @ 50
Richard D. Wyckoff
1000 @ 50 1/8200 @ 501500 @ 50 1/8
In these four transactions there are 700 shares sold at 50 verses2500 bought at 50 1/8, proving that at the moment the buying is moreeffective than the selling.The deduction to be made from this is that Steel will probably sellat 50 1/4 before 49 7/8. There is no certainty, because supply anddemand is changing with every second, not only in Steel but in everyother stock on the list.Here is one advantage in trading only the leaders: Theinfluence of demand or pressure is first evidenced in the principalstocks.The hand of the dominant power, whether it be an insider, anoutside manipulator or the public, is shown in these volumes. The reasonis simple. The big fellows cannot put their stocks up or down withouttrading in large amounts. In an advancing market they are obliged toreach up for or bid up their stocks, as, for example:U1000 @ 182 1/8200 @1821500 @ 182 1/8200 @ 182 1/43500 @ 182 3/82000 @ 182 1/2Take some opening trades and subsequent transactions like thefollowing:200... 47 1/41900... 46 3/4100... 46 5/8100... 46 1/2
100...100...100...200...
45 7/846 1/84646 1/4
100...100...600...500...
45 7/84645 7/845 3/4
Richard D. Wyckoff
100...600...100...600...100...200...100...
46 3/846 1/446 1/84645 7/845 3/446
100... 46 3/811 A. M.300... 46 3/8100... 46 1/8100... 46100... 45 7/8100... 46
200...100...100...400...100...400...100...
45 5/845 1/245 5/845 7/845 3/445 5/845 3/4
Here the opening market price was 46 3/4 bid @ 47¼ asking, andthe buyers of 200 shares "at the market" paid the high price.All bids at 46 3/4 were then filled. This is proved by the nextsale, which is at 46 5/8. The big lots thereafter are mostly on the downside, showing that pressure still existed.The indications were, therefore, that the stock would go lower. Alot of 1900 shares in some stocks would be a large quantity; in othersinsignificant. These points have a relative value with which traders mustfamiliarize themselves.Volumes must be considered in proportion to the activity ofthe market, as well as the relative activity of that particular issue . Noset rule can be established. I have seen a Tape Reader make money byfollowing the lead of a l000 share lot of Northwest which someone tookat a fraction above the last sale. Ordinarily Northwest is a sluggishinvestment stock, and this size lot appeared as the fore-runner of anactive speculative demand.Now let us see what happens on the floor to produce the abovedescribed effect on the tape.Let's prove that our method is correct.A few years ago the control of a certain railroad was beingbought on the floor of the New York Stock Exchange. One brokeragehouse was given all the orders, with instructions to distribute them andconceal the buying as much as possible. The original order for the daywould read, "Take everything that is offered up to 38".
Richard D. Wyckoff
38 was about 3 points above the market of the day before. Thisleft considerable leeway for the broker to whom the buying order wasentrusted.He would instruct his floor broker as follows:"The stock closed last night at 35. You take everything offered upto 35 1/2 and then report to me how things stand. Don't bid for the stock-- just take it as it is offered and mark it down whenever you can".In such a case the floor member stands in the crowd awaiting theopening. On the markets open the chairman's gavel strikes and the crowdbegins yelling. Someone offers "Two Thousand at an eighth." Anotherbroker says "Thirty- five for five hundred." Our broker takes the 2000 atan 1/8 then offers one hundred at one-eighth himself, so as to keep theprice down. Others also offer one or two hundred shares at 1/8, so hewithdraws his offer, as he wishes to accumulate and only offers or sellswhen it helps him buy more, or puts the price down. The buyer at 35 has300 shares of his lot cancelled, so he alters his bid to "thirty- five for twohundred." The other sellers supply him and he then bids "7/8 for ahundred." Our broker sells him 100 at 7/8 just to get the price down.Someone comes in with "a thousand at five." Our broker says, "I'll takeit." Five hundred more is offered at 1/8. This he also takes.Let us see how the tape records these transactions:Open 352000 @ 35 1/8200 @ 35100 @ 34 /7/8100 @ 35500 @ 35 1/8The day trader interprets these transactions:Opening bid and asked price was 35 1/8 someone took the largelot (2000 shares) at the high price.
Richard D. Wyckoff
The two sales following were in small lots, showing lightpressure.The 100 @ 35 after 34 7/8 shows that on the “7/8 bid” -“5 ask”market the buyer took the stock at the offered price and followed it up bytaking 500 more at the eighth. The demand is dominant and it does notmatter whether the buyer is one individual or a dozen, the momentarytrend is upward.To get the opposite side, let us suppose that a manipulator isdesirous of depressing a stock. This can be accomplished by offeringand selling more than there is a demand for, or by coaxing or frighteningother holders into throwing over their shares.It makes no difference whose stock is sold; "The Lord is on theside of the heaviest battalions," as men used to say. When a manipulatorputs a broker into a crowd with orders to mark it down, the brokersupplies all bids and then offers it down to the objective point or until hemeets resistance too strong for him to overcome without the loss of alarge block of stock.The stock in question is selling around 80, we will say, and thebroker's orders are to "put it to 77." Going into the crowd, he finds 500wanted at 79 7/8 and 300 offered at 80. Last sale, 100 at 80."I'll sell you that five hundred at seven-eighths. A thousand or any partat three quarters," he shouts."I'll take two hundred at three-quarters," says another broker."A half for five hundred," is heard. "Sold!" is the response."A half for five hundred more.""Sold 1""That's a thousand I sold you at a half. Five hundred at three-eighths!""I'll take a hundred at three-eighths," comes a voice.
Richard D. Wyckoff
"You're on!" is the reply."Quarter for five hundred.""Sold!" is the quick response.His pounding of the stock would reveal itself on the tape as follows:Open 80.500 sold@ 79 7/8200 sold@ 79 3/41000 sold@ 79 ½500 sold @79 ¼If he met strong resistance at 79 it would appear on the tape somethinglike this:1000 sold @ 79500 sold @ 79800 @ 79300 @ 79 1/81000 @ 79500 @ 79 1/4200 @ 79 1/2…showing that at 79 there was a demand for more than he was willing tosupply.(For example: There might have been 10,000 shares still wanted at 79which is more than he could supply).Frequently a broker meeting such an obstacle will leave thecrowd long enough to phone his principal. His departure opens the wayfor a rally, as the stock is no longer under pressure, and the large buyingorder at 79 acts as a back log for floor traders. So those in the crowd bidit up to 79 1/2 in hopes of scalping a fraction on the long side.
Richard D. Wyckoff
Take another case where two brokers are put into the crowd -one to depress the stock and the other to accumulate it. They play intoeach other's hands, and the tape makes the following report of whathappens:Open 80 1/8 - 80200 @ 79 7/81000 @ 79 7/8200 @ 79 5/8500 @ 79 3/4300 @ 79 3/41500 @ 79 1/2500 @ 79 1/4100 @ 79 1/8Were we on the floor we should see one broker offering the stockdown, while the other grabbed every round lot that appeared. We cannottell how far down the stock will be put, but when these indicationsappear it makes us watch closely for the turning point, which is our timeto buy.The Tape Reader does not care whether a move is made by amanipulator, a group of floor traders, the public or a combination ofall.The figures on the tape represent the consensus of opinion, theeffect of manipulation and the supply and demand, all combined. That iswhy tape indications are more reliable than what anyone hears, knows orthinks.With the illustration of the pair of scales (supply – demand)clearly implanted in our minds, we scan the moment by momenttransactions of the tape, mentally weighing each indication in our effortto learn on which side the tendency is strongest. Not a detail mustescape our notice. A sudden demand or a burst of liquidation mayenable us to form a new plan, revise an old one or prompt us to assume aneutral attitude.
Richard D. Wyckoff
These volume indications are not always clear. Nor are theyinfallible. It doesn’t do any good to rely upon the indications of any onestock to the exclusion of the rest. There are times when certain stocks arerun up, while volume indications in other active stocks show clearly thatthey are being distributed as fast as the market will take them. Thishappens frequently on a large or small scale. Especially is it apparent atthe turning point of a big swing, where accumulation or distributionrequires several days to complete.Volumes can be studied from the reports printed in the WallStreet Journal, but the real way to stud y them is from the tape.If you are not able to spend five to seven hours a day at the tapewhile the ticker is in operation, you can arrange to have the tape savedfor you each day. The tape can then be studied at leisure.In studying under these conditions let it be on as small a scale asyou like, but make actual trades with real money.There are times when the foregoing rule of volumes indicatesalmost the reverse of what we have explained. One of these instanceswas described in our last chapter. In this case the trans700... 143 5/8500... 143 3/45000... 143 5/81700... 143 3/4200... 143 5/84300... 143 3/43700... 143 7/8100... 14412 P.M.5000... 1441300... 143 7/83000... 1445000... 144 1/82100... 144 1/42200... 144 1/83500... 144 1/4
“…do not let yourself bedeceived as to your ability tomake money on paper.Imaginary trades provenothing. The way to testyour powers is to get intothe game.”
Richard D. Wyckoff
4000... 144 3/83000…144 1/42500... 144 1/83500... 144400... 144 1/81000... 144500.... 144 1/81100... 1442000... 143 7/82500... 143 3/41000... 143 5/8
Turning Point in Reading, morning ofJan. 4, 1909~the day of the Consolidated Gas collapse…actions in Reading suddenly swelled out of all proportion to the rest ofthe market and its own previous volume. Notwithstanding thepredominance of apparent demand, the resistance offered (whetherlegitimate or artificial) became too great for the stock to overcome, and itfell back from 144 3/8. On the way up these volumes suggested apurchase, but the tape showed abnormal transactions, accompanied bypoor response from the rest of the list. This smacked of manipulation andwarned the operator to be cautious on the bull side.The large volume in Reading was sustained even after the stockreacted, but the large lots were evidently thrown over at the bid prices.On the way up the volumes were nearly all on the up side and the smalllots on the down side.After 144 3/8 was reached the large lots were on the down sideand the small lots on the up.It is just as important to study the small lots as the large lots.The smaller quantities are like the feathers on an arrow -- theyindicate that the business part of the arrow is at the other end. In other
Richard D. Wyckoff
words, the smaller lots keep one constantly informed as to what fractionforms the other side of the market.For example: During the first five trades in Reading, recordedabove, the market quotation is shown to have been 5/8@3/4; it thenchanged to 3/4@7/8 and again to 7/8@4. On the way down it got to be4@1/8, and at this level the small lots were particularly valuable inshowing the pressure that existed.Stocks like Union, Reading and Steel usually make this sort of aturning point on a volume of from 25,000 to 50,000 shares. That is, whenthey meet with opposition on an advance or a decline it must be in somesuch quantity in order to stem the tide.Walk into the hilly country and you will