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How Professional Traders Think
as understoodby
FI 4985

The Five Themes ofWyckoffs work

r. Establishthe presentcondition and sta!.rsof the market

Deducefrom this analysisthe probablylimmediatefuntre
trend /e

e. Evaluatecandidates-(watchedstocks)
Match stockstatusto market status
Find strongesfsfocksin bull and weakesfin bear

3. Selectfrom the candidatesthosewith measured


4. Determineeachstock'spreparednessto move

S. Coordinateentries and exitswith market turns

Establish the present condition and stahrs of the
market q
Deduce from this analysis the probabry immediate
future trend /
g market classificationsexist bull, bear and goat (neutral)
Within eachtype of market and within eachtype of
market movementthree phases(swings,or trends or
waves)wilt be present:
, --short, intermediateand long
(We may considertheseto be fraetal in nahrre)
--and we may definethe length we are looking for,
i.e. by the grpeof trader we analyzeourselvesto be

A channelmodel is usedto analyzetrends ;
An uptrend hasa demand tine and an ouerboughtline
A downtrendhas a sLrypIAline and an ouersoldline
. A neutral or trading rangemarket has support and

The presenttrend is likely to continue (

It will most likely continueif the presentprice is located
near the demandline in bull trends and the supplyline
in bear trends
Priceswill likely remain in the trend and in the channel

The trend will be castin doubt when the

oversold/overboughtline is reached,at which point
support or resistance(read supplyor demand) might
developand makea changein the trend
The besttrading opporhrnitiesare alsothe points of
greatest dangerand alsothe points of leastrisk.

This is a trading strateg5rwhich overtly buys weakness

and sellsstrength-but only after a sophisticated
processof analyzingthe nahrreof thoseforces. It looks
for equaland oppositereactionsin the marketplaceand
dependson eatchingthe rhythms of the market.
As an aid to determiningthe presenttrend, the present
location, ffid probablefuture trend of the market a wave
chart is constnrcted.For all practicalpurposesthis is a self
construetedcommonstockind.ex.An exampleof this wave
index , or miniature model of the market is the averagingof
eight stocks,for example:

Brystol Myers (Bniff) GeneralMotors (GM)

Dow Chemical(DOW) IBM
Epron (XON) Merrill Lynch (MER)
GeneralElectric (GE) Union Pacific([INP)

Evaluate candidates- (watched stocks)

Match stock stahrs to market stahrs
Find strongesf stoclcs in bull and useakesf in bear
market. Not a necessary step in neutral markets.

Find b3st candidatesby relativestrengthanalysis

For thesestrongerthan the strong and weakerthan weakthe

best trading opporhrnitiespresentthemselvesasthey
approachthe extremesof their trends (or channels)--weak
to top and strong to bottom

Measuring relative strength

Measureorfrangesfrom tops to bottoms

ComparetJresemoves(range,average)to the market and the

group under study--determinewhich movefarther faster
Select from the candidates those with measured,
calculated potential

Selectthe issueswhich havebuilt a " cause"(conceptof

causeand effeet)

Point and Figure chart showshorizon buildup in a trading

rangewhile market is in a trading range.

Bristol Meyersp8d chart covers17boxes,and thus WM

calculatesit to havea 17point potential.
Psychology:stockhaslulled tradersto sleep
While the public sleptinsiders,smart moneymay have
beenaccumulatingstock,or conditionsmay have

Eachstockshould haveits potential measuredand its


Ii should not be concludedthat this processis infaltible.

Actual conditionsmust be constantlyreevaluatedand the
market must be honoredwhen it doesnot act aspredicted

First of all no trade shouldbe enteredunlessit representsa

return to risk ratio of g to r. And no trade shouldbe entered
without a stop enteredjust below (or above)someidentified
support or resistancelevel

At this point the trader shouldknow

The stahrsof the market and its location
Which stocksare outperformingand
How far they havethe potential to move
Deterrnine eactr stoclcs preparedness to move

Buying an;d Selting Tests

Determineeachstock'sreadinessto moveby
Analyzingbar chartsand p8d chart previouslyselected
bybuy/sell tests

what are the three most important things about a stock?

' And incidentally the nahrreof the action it is involved
At the top of a rally and or the bottom of a reaction

F;<amineprice and volume action

Demand= increasingvolume,widening range,strong
Demandis ending when = volumedecreases, ranges
becometighter, closesweaker,lessprice progress

Increasingsupply = continuing strong or increasing

' volume,tightening range,lessupsideprogress

Which sideis winning? .

If battle is being won by supplythere will be a bigger

If progressis stoppedby withdrawal of demand,

outcomein question

supply may becomeexhausted,ordemand
at lower levelsand overcomu,arppty---'E's urc''
may develop

correctiott., price represententry

other critenai1are met
Normal corrections = go%obutmay
The trader'seyeshould be caughtbe rangefrom 99-66,no
reactionsof this
magnitudeand supprya.*""d?toay,t
ourdbe made
Patienceis arwaysrequired to ailow
marketsto trend and to
find thg wise opportunitiu, Aui a.ufop

when the market is not trending, but
The trader should avoid commitin""ir-i" a trading range
rangeand should assumethat tt . the middle of the
t uJing rangewill

Divide trading rangeinto thirds or quarters

middles and avoid
spring and upthrasf action a part of
supportand resistance
In generalnew commitments shourd
be takenin
coordinationwith furns in major *"rr..t
coordinate entries and exits wi& market ttrrns

Recapitulationof methodology
Find the stahrsand locationof the market at present
And based principles of uend analysisdetirmine
Probablyimmediate fuhrre trend

Evaluatethe candidatesand matchstockstafusand location

to market stafusand location

Selectfrom the candidatesthosewith measuredcalculated


Determineeachstock's preparednesstomove

s. coordinate entries and exitswith market tums.

Requiresgeneralmarket index, e.g.wyckoffwave

Anticipating a turn requiresall three of basiclaws

Supply and demand
Causeand effect
ffiort us result
As measuredby A/p index
(Optfmism/Pessimism) (

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