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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 traderin the early 1900s. His principles are based on volume and priceaction.

Richard D. Wyckoff had modeled the campaigns of some of the greatest stock market operators, 1889-1928. Wyckoff also found many common characteristics among successful investment campaigns. Aftermodeling the action of Jesse Livermore, Edward Wasserman, James Keen, J.P. Morgan, and many otherbig operators of his day, Wyckoff developed a paradigm which helped to explain the boom and bust cyclein stocks. He implemented this model and grew his account such that he eventually owned a mansion nextdoor to the Alfred Sloan Estate in the Hamptons.

Wyckoff's Solutions

Wyckoff's Idealized Cycle and Phases

The Composite OperatorThe CampaignNine Tests------------------------------------------------------------------

VSA

Volume Spread Analysis is the study of the relationship between relativevolume on a chart and the price action of the day in relation to previousprice action. Such techniques were originally pioneered by Wyckoff in the1930'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 refinedthose methods into very precise rules, which he has documented in hisbook, The Undeclared Secrets of the Stock Market and a computer programme,called, rather more aptly just Volume Spread Analysis (a name I takecredit for!).

The programme gives off green or red arrows which relate to "signs ofstrength" or "signs of weakness". Often these signals work extremelywell 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 outthe occurrence of accumulation or distribution which may warn of a comingrise or fall, which can be but are not necessarily a signal in ofthemselves. The Volume Spread Analysis technique involves getting

a grass roots understanding of the supply and demand / accumulation anddistribution picture building in the market. Such understanding of thefundamental condition of WHAT is driving a market will allow you to"judge" what is the point of going long or short and actually placinga trade.

This does not invalidate or decry those who use other techniques, suchas the so called black box techniques commonly available commercially,with their fantastically documented performance. Perhaps they aremuch better than VSA. Please do not ask what our

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performance record is with the maximum drawdown figures for the pastx years as this is simply not that kind of system. Casket traders notwanted here. It's just not our style. Either our concepts have basicappeal 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 programmeit is for casket traders as "signals" which they assume are buy orsell signals are sometimes apparently "premature" (like the one thatshowed all the selling/distribution in April Gold on the way up to420) - rather than understanding what the programme was actually sayingto u). There are also "teasers" as to the books content, as well as abit about Tom.

The book, which as mentioned is called The Undeclared Secrets of theStock Market should never have been called that in my view, as the"secrets" are obvious truths once read and in one form or anotherbeen published by Wyckoff over the years. It should rather be calledsomething like "A Precise Manual for Trading Wyckoff" as the exceptionalthing 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 thenet over the last few months and we haven't yet had a really negativereaction, except from Tom Pall, who has called it a piece of crap.

Some people appear over the moon with how the concepts in VSAhave changed their idea of trading and their approach to market analysis.Others simply find VSA a good compliment or confirm on other techniquesthey already use.

Without reposting some of the out and out adulation for thebook, 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 fromdown under, did of the book:

"THE UNDECLARED SECRETS OF THE STOCK MARKET" by Tom Williams. Cost isUS$99.00 plus postage and is available form Larry Levy, 1 800-2608095or Spain +34 71 402654 direct, the number is routed through Europeso please allow a full minute. I?m told that it?s disconcerting tohearing nothing for a minute as with US phones you hear the connection almostimmediately. 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.htmTom has a Wyckoff approach to the markets.

I first came across Wykoff?s ideas about 6 or 7 years ago when Icompleted SMI?s The Wyckoff Method of Stock Market Method Analysis.Tom?s work is not as detailed as SMI?s in dealing with the variousstages of the market and in defining what is accumulation or distribution.Both concepts are extremely important to Tom?s "secrets" whichare a very clear description of the volume and price patterns to lookfor when looking to decide if a trend is likely to continue orif there is going to be a major change in trend. Tom?s strength liesin this very clear description.

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If you have your own method to determine structure and price patternsto 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 havenot evaluated them. In a rating from 1 -10, I?d give Tom?s work 7.

So there you have it. As for the software, the most commonly askedquestion 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 doesnot require the programme rather than the other way around) does givethe 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 thisas 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 ratherthan coding things in then you still have 30 days to evaluate ourprogramme 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 suchin various combinations, we make NO SUCH representation.

----------------------------------------------

GANN'S LAW OF PRICE MOVEMENT APPLIED TO TODAY'S MARKETSBy Greg Meadors Part 1

=========================================================

As a young stockbroker, W.D. Gann already suspected thatthere were unseen causes, operating behind the scenes, thatwere responsible for price movements in stocks andcommodities. He liked to think that these hidden causeswere part of a natural law that was secretly at work in themarkets. As he acquired more knowledge and developed histheories, Gann systematized his theory of price movementand called it the "Law of Vibration".

In the Ticker Magazine interview Gann states, "In goingover the history of markets and the great mass of relatedstatistics, it soon becomes apparent that certain lawsgovern the changes and variations in the value of stocks,and there exists a periodic or cyclic law which is at theback of all these movements. I soon began to note theperiodical reocurrence of the rise and fall of stocks andcommodities. This led me to conclude that natural law wasthe basis of market movements."

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Gann believed that all successful men -- be theyscientists, doctors, or businessmen, have devoted years tothe study of their particular professions before attemptingto practice them. Similarly, Gann spent many years in thepursuit of knowledge, leaving no stone unturned.

Gann states, "After exhaustive research and investigationsof the known sciences, I discovered that the "Law ofVibration" enabled me to accurately determine the exactpoints to which stocks or commodities should rise and fallwithin a given time. The working out of this lawdetermines the cause and predicts the effect long beforethe Street is aware of either."

Gann concludes by stating, "If we wish to avert failure inspeculations we must deal with causes. Everything inexistence is based on exact proportion and perfectrelationship. There is no chance in nature, becausemathematical 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 tounderstand price cycles in the markets, but many times thisstudy is ineffective because all the supposed regular timecycles are in fact irregular, occurring at varying timeintervals. Since "Time" is based upon the Earth's rotationand it's cycle around the Sun, all standard time cycleshave an Earth/Sun planetary base.

However, by studing other planetary cycles, we readilyobserve both regular (heliocentric), and irregular(geocentric) cycles.

Of all the sources which Gann studied, perhaps the one whomost influenced him was Pythagoras, who started a school ofphilosophy, and believed that an object could be understoodby knowing its number vibration.

Pythagoras is credited with the discovery of the DiatonicScale, in which numbers and ratios determine the wholescience of music.

Having established music as a science, consisting of exactharmonic ratios, Pythagoras then proceeded to divide allCreation, according to the law of harmonic intervals, intoproportionate planes and spheres, each of which wasassigned a number, tone, harmonic interval, and color.Gann's "Law of Vibration" incorporates Pythagoras' Law ofHarmonic Intervals. It is obvious that Gann drew heavilyfrom Pythagorean mathematics, when he developed thesquaring of "Price and Time", and the ratios by which highsand lows could be divided.

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A lesser known part of the Pythagorean System includesnumbers ruling planets, and the ratios of their orbits,which are in harmonic relationships to each other. Thisharmonic organization of the cosmos was called the "Music ofthe Spheres."

While it is well known that Gann's primary market timingtool was based upon cosmic correlations, what is notunderstood my most Gann adherents is that Gann's Astro workwas based upon empirical research, irrespective oftraditional Astrological doctrines. Gann makes this clearwhen he states, "these vibratory forces can only be knownby the movements they generate on the stocks and theirvalues in the market".

In other words, to obtain a high degree of accuracy whenapplying natural cycles, one must learn through empiricalresearch which cosmic cycles and events correlatehistorically with particular Stocks, Indexes, or

Commodities. This can only be ascertained by doing originalresearch to discover the historical correlations!

For example, the October 19, 1987 Crash low was perfectlytimed by the 84 year Uranus Cycle. Uranus reached theexact same degree in the Heavens where it was on November9, 1903, the day of the 1903 Crash low.

The 1987 Crash was preceded by the August "HarmonicConvergence", a rare planetary alignment which was widelyadvertised in the mass media (see Newsweek, 8/17/87). OurMarch 1987 forecast for a major top to occur at the NewMoon on August 24th and to be followed by a 3 month

correction prefectly timed the 1987 Stockmarket top withinone day.-------------------------------------------------

Around the turn of the century Richard D. Wyckoff published a lot ofinformation 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'tseem to have a wide following today. I have just read the book "ChartingThe Stock Market, The Wyckoff Method" by Hutson et al. and would liketo find others who use or are interested in this method of trading.I'm also aware of the Volume Spread Analysis program that has beenmentioned 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 ahard drinking, womanizerand prolific trader. He shoot from the hip like Jesse James, or was itJesse Livermore. They just don'tmake them like that any more. Now they are all like Grecko.

Wyckoff and Livermore were fortunate to be born with an acute analytical

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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 groundin the accuracy possible with technical analysis. It deals with the relationshipof relative market volume to the day's price action and applies specific andreliable rules to any stock or future as to what price action will resultfrom 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 cominghours and days.

Words such as accumulation, supply lines, reverse up-thrusts and pushing upthrough supply are part of the vocabulary of Toms work. This man hastaken predictive analysis to the next stage. Those days when the Dow isup three, down three points will now have total meaning for you. How manytimes 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 orwith the aide of his software, Toms rules will become the new basis ofhow you read and see the market. His work will form the basis oftechnical analysis tomorrow. For too long people have applied patterns toprice and not volume *with* price. Tom applies a *real* tangible set ofrules to volume/price pattern analysis. Many traders use his software asan accessory to the other system they are using, as the insight it givescan be invaluble.

If you trade stocks the programme is capable of tracking hundreds of stocksin 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 appliedto other markets.

Little known outside the UK, Tom's work follows on from that ofWyckoff 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 numberof realtime feeds running in his home and end of day software which givesautomatic indications of weakness and strength in the markets based on hisunique 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 theStock 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 providesaccess in Metastock/Computrac format (7 field).

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----------------------------------------------------------

Both Windows on Wallstreet and Telechart (TC) 2000 support candlestickcharting. I don't know about the other titles, as I don't own them.

Perhaps the best book on the subject is "Japanese Candlestick ChartingTechniques" by Steve Nison, published by New York Institute of Finance.

How reliable is it? I have found it to be an above average indicator formarket reversals. It also puts market activity (for me) in a clearerperspective.-----------------------

You should also get Nison's second book, _Beyond Candlesticks_. Hecovers renko, kagi and three-line break charts as well as Japanese-stylemoving average trading techniques. Renko, kagi and three-line breakcharts are all reminiscent of point and figure charts or swing charts, butprovide a unique perspective when combined with candlesticks.

I often question, though, the uncanny appearance that "Japanese ricetraders" developed these technical trading techniques earlier than or atroughly the same time Dow, Wyckoff, Livermore and other Americans weredeveloping their technical theories about the New York stock market. Itreminds me of the claims the Russians used to make that they hadinvented baseball and hot dogs.-----------------------------

Strangely enough, World War I was responsible for making New York thefinancial center of the world. London was the financial center for manyyears up until that time. Still, when I look at Rollo Tape's _Studiesin 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 1994book, I can't help wondering whether Wyckoff got the idea from "Japaneserice traders" or the other way around.

Speaking of Wyckoff, the people who publish _Technical Analysis ofStocks and Commodities_ have put out a good book on the Wyckofftechniques.---------------------------

Another book on the subject is "Candle Power" by Greg Morris (ProbusPublishing, Chicago). Candle Power is also the name of the software packageby North Systems - I use this & find it quite useful. The reliability of

candlestick patterns will vary between types of stocks but I'd agree withJake's comments that it helps to put trading patterns in perspective. Iwouldn't rely on candle patterns alone but they are one of many usefultools available.-----------------------------

spoke of candle stick patterns, books available and usefulness.

What I find useful and very trippy about candlesticksis that they work, but for perhaps different reasons, after all these

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years. Take a dark cloud engulfing pattern, for example. It has manyreasons. The newest one is that a pension fund, say, wants to sell offits very big block of XYZ company because they've made as much as theythink they can squeeze out of it. But dumping it on the market wouldhave the wrong effect: they'd depress the price and would not get theirlocked-in profit.

What they do is buy, at the open, yet more shares of XYZ company, drivingup the price and creating a feeding frenzy for the stock. They obligethis feeding frenzy by selling off their holdings. Eventually the marketdoes get saturated with XYZ and they sell their last bit at a price waybelow what they opened the market at but still way above what they boughtit at. Of course the big black candlestick engulfing the previous whitecandlestick is a bear pattern: the stock's been dumped and at a time thebig boys (after interviewing the CEO, touring the plants) have decidedit's gone up about as much as it's worth for now and perhaps thereare 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 byclose observation of the price action, and on that price action what was thevolume (or activity).Markets develop phases, and a phase is generally seen as a area ofcongestion, while this is going on a cause for the next move is takingplace. While each bar is of great importance, it still only fits into thedeveloping phase. The analyst builds up a picture of the phase that is beingdeveloped, knowing that a bear phase cannot suddenly become bullishovernight on 'good news', and that a bullish phase cannot become bearish on'bad news'. You will see sudden moves on 'news' frequently creating wellknown signals for students, like up-thrusts, testing, even shakeouts. Thetrend of the market cannot be changed overnight because of the underlying

rules of accumulation and distribution. All free markets work on ;supply anddemand, but how can we follow supply and demand? The markets are riddledwith confusing news rumours, tips? Markets moving up when you are absolutelysure the market is going to fall, and the market falling as soon as you havepredicted a rise! Even the volume does not make sense to the casualobserver. The market can be seen to go up on high volume, go sideways, oreven down on exactly the same volume! How can you possibly analysis that?The way to recognise the true balance of supply and demand, and tounderstand volume, is first to realise, and then to recognise, how themarket makers, trading syndicates, are responding to the shifts of supplyand demand. The market makers view is easily seen because the prices he iswilling to trade at is creating your chart, keeping in mind that they aretrading 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 ownaccounts. There is also a huge amount of trading going on that you willnever know about, and that is intra-market makers trading betweenthemselves. However, if there is a transfer of stock from one market makerto another it must only be to fill large buy orders that the other marketmaker has received. You have to assume that the market makers. have a verygood picture of the true balance of supply and demand and on thisinformation are trading their own accounts.

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Most of the buy and sell from around the world finish upwith the market makers who are making the market. This will tellyou that the market makers can see the true balance of supply and

demand better than most traders. These wholesalers of stockstrade 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 hasset up new rules (self regulatory) to mislead you as much as possible, andyou are expected to pay for this potentially false information! Trades canbe withheld for up to 36 hours if they want to, this includes the volume. Itis almost unbelievable that they can get away with it these days. However,itis difficult for them to hide their activities, this is why we use tickvolume 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 isweaknes in the background. It can go up on low volume if there is animmediate sign of strength in the very near background, like a shakeout forexample. The shakeout has almost created a vacuum by removing most of

available stock off the market. There is not much stock around to sell asthe 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 neverexpect to trade better than a market maker. They instinctively know wheremost of the stops are, they also know that a rapid move up will attractbuyers, and will also panic premature shorts to cover (buying). A rapid moveup 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, andis 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 onlow 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 togo down and has failed. A wide spread up to close on the highs is an effortto go up. If the next bar is down on a wide spread to close on the lows is asign 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 tosell and professional money decides to absorb this selling. This actionstops 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 tosell their holdings bought at lower levels into a surge of buying from thepublic and uninformed traders. This by its very nature has to appear on anup-bar, and is known as an end of a rising market signal. Effort via Resultsis seen frequently and arrives in many different disguises. A sudden highvolume down bar for example is some sort of effort, the following few barswill usually tell you what the results are from that effort. For example, ifthe volume on the down bar had been 'high volume' you would normally expect

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lower prices, however, an up bar/s follow and you note that the volume islow (no demand from the main players) This confirms the weakness. There isno demand because the market makers are not participating in these up-bars.

Markets are heavily influenced by background history of strength or weaknessthat has appeared. for or example, if you have seen a selling climax or ashakeout one month ago, which indicates a major shift of stock from weakholders to strong holders (always seen on a down bar) it does not matterwhat the news is over the following weeks or even months, because you willknow that the market cannot go lower than the selling climax, you will alsoknow that any down bar/s on low volume after this event indicates thatsupply has disappeared, if supply has disappeared then the market is goingto 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 thelogic behind market action. Through conversations with successful traders of his time he arrived at hismethodology which concentrated on Volume-Price analysis.

Richard D. Wyckoff modeled and found many common characteristics among the greatest winning stocksand the campaigns of some of the greatest stock market operators. After modeling the action of JesseLivermore, 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. Heanalyzed the market and determine where risk and reward were optimal for trading. He emphasized theplacement of stops and the importance of controlling the risk of any particular trade. He implemented thismodel and grew his account such that he eventually owned a mansion next door to the Alfred Sloan Estatein the Hamptons.

Wyckoffs ideas are universal and may be applied in analyzing any market. His method principally usesprice 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 intoaccount investor psychology and provides insight into how and why professional traders buy and sellstocks.

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 forsuccess are three or four times what they would be if you buck the trend. That is, if you buy in a bullmarket, the trend will, under ordinary circumstances, give you a profit; but if the trend of the market isdownward, 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 broadtendency 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 ofmoney and many opportunities are lost by traders who keep themselves tied up in stocks which are sluggishin their action.

About Stops

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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 tradewhich is made for the purpose of deriving a profit from the fluctuationsThe most successful traders havefollowed 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 orderto 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, onthe ground that his judgment was wrong as to the immediate action of the stock, and he cannot afford to betied 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 madeIhave very often delayed placing a stop order until the opportunity was lost, and in some cases these losseshave 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 hadbetter become an investor instead of a trader, buying in panics or in big declines such securities as appear tobe 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 attrading 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 intelligentinvestor instead of an unintelligent trader.

Wall Street history shows that securities more often reach their low point when some danger or disaster isthreatened, than upon the actual occurrence of these incidents, and the reason the low point is made justprior to, or at the time the event actually occurs is: By that time every one who is subject to fear-of what-will-happen, has sold out. When the thing does happen or is prevented, there is no more liquidation, and theprice 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 oruninterruptedly. My experience is no different from that of many successful Wall Street men. Like everyone 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 eachsession. I did not come to Wall Street. I had no news ticker. I seldom read the news items but judged solelyfrom the action of the market itself; hence I was not influenced by any of the rumors, gossip, information ormisinformation 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 atall 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

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me to be advised of the volume of trading in that stock or the general market, although in some instancesthis 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 aclose scale, say one point down, they do not provide sufficient capital to see them through in case thedecline 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 over-trading or lack of capital, which when boiled down are one and the same thing. And those who averagetheir investment or speculative purchases supply in a great many instances, glaring examples of the causesof 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 oryears have been unsatisfactory and unprofitable, judging from the amount of time, thought, study andcapital employed, he should suspend operations until he ascertains the cause; then he should set about andcure it. This can be done by study and practice (on paper or with ten share lots if necessary) until he isconfident 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 ananimal 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 justwhere I stood, and, if things were going wrong, why? I find that it is more important to study mymisfortunes than my triumphs.

No one can avoid having his capital tied up at times in mediums which are not satisfactory. But thereshould be no hesitation about switching, even though it necessitates the taking of a loss in your presentholdings. 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 moneyover 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 itis best to use only a small part of the total available capital for trading. To employ all or most of it is a fatalmistake, 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 enhancein 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 hispulling it down for trading purposes, he is on the wrong track and had better stop short and take account ofhimself before he travels further. A person who cannot be successful in trading with a small amount ofcapital, 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 tojudge and forecast correctly. As conditions are constantly changing, no two markets are alike and no twodaily sessions are similar; but markets and sessions and panics and booms all have certain characteristicswhich should be carefully studied and intimately understood.

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Wyckoff's Investment TheoryConception of Primary PhasesAccumulation: The establishment of an investment or speculative position by professional interests inanticipation 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, scientifictrading and investing. The ticker tape revealed price, volume and time relationships that wereadvantageously captured by charts. Comparing waves of buying and selling on the bar chart reveals thegrowing strenght of demand or supply. With the aid of schematics of accumulation or distribution, thespeculator is able to make informed decisions about the present position and probable future trend of amarket. The figure chart is added to project the probable extent of a price movement. Wyckoff alsorevealed how to interpret the intentions of the major interests that shape the destiny of stocks and how tofollow 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.

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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 ChartsIn 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.

CreekA general area of resistance. It indicates the band of prices at the top of accumulation area.

DemandBuying power.

DistributionAn 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 IceA 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 marketAny market according to Wyckoff is in one of four phases: Accumulation; Mark-up; Distribution; Mark-

down.

IceThe 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.

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Mark DownThe phase of the market where prices decline, from the beginning of a bear market to its bottom.

Mark upThe phase of the market where prices rise, from the beginning of a bull market to its top.

NewsWyckoff 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 reversalis the size of the predefined magnitude. It is indicated as the number of boxes. E.g. if the box size is 2 centsthan a reversal of 3 boxes will be 6 cents. According to Wyckoff, P&F charts measure the energy stored intrading ranges and is often correlated with the extent of the ensuing move.

RallyA phase in the market that experiences rise in price. That is, higher highs and higher lows.

Rally back to the IceThe 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.

ReactionA phase in the market that experiences decline in prices. That is ,lower highs and lower lows.

Reaction back to the creekThe 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.

ResistanceAn area where supply overcomes demand.

Right Hand SideA time zone when the processes of accumulation or distribution are likely to terminate.

Risk ManagementPart 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 theprevious trend is over.

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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.

SpringA 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 demandforces for the near future.

Stop LossAn 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.

SupplySelling power.

SupportAn 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 thedistribution 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 thestatus of supply and demand forces. It is not what the market does around a trend-line, but how it does itthat counts.

UpthrustThe 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 indicatesthe 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 whichmoves the market. An essential component in any Wyckoff analysis.

Wyckoff (W)

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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 athis methodolgy which concentrated on Volume-Price analysis, Point and Figure analysis and a process ofsifting and ranking among sectors and individual stocks or commodities within each sector (relativestrength) 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 averageswhen plotted with bar chart and volume. There is no Wyckoff wave for commodities. You have tocomprise 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 thecomputer 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, shesaid. Raschke was speaking at the Technical Analysis Group (TAG XVIII) workshop held in New Orleansand sponsored by Dow Jones Telerate.

Successful futures traders need to "get back to basics," said Raschke. She said traders that rely solely oncomputer-aided "trading systems" are overlooking a key element of the markets: "tape-reading," or thestudy 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 withover 30 years of commodity trading experience. He was one of the first to pioneer systems work usingtrend-following rules.

One of the systems Keltner presented was the "10-day moving average rule." A 10-day moving average ofthe daily trading range was added and subtracted to a simple 10-period moving average-essentially formingbands.

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 greaterdistance from the market when the price swings are wide than when they are narrow. However, they willstay 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 intentionsare to keep you in the market all the time," Raschke said.

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"I put Keltner channels set at 2.5 times the 20-day moving average daily range, centered around the 20-period moving average. This is wide enough so that it contains 95% of the price action. In flat-tradingmarkets, as indicated by flat moving averages, it serves as a realistic objective to exit positions. However, Ifind its greatest value is in functioning as a filter to signal runaway market conditions, much as a risingADX 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 momentumthrust. Thus, they can alert one much earlier to unusual volatility conditions than the ADX, which has alonger lag. On the other hand, (Keltner channels) will not capture the slow, creeping-trend market that anADX will indicate."

Raschke's rule for defining trending markets: "If the bar (on the bar chart) has a close outside the Keltnerchannels, or trades 50% of its range outside the band, with a close in the upper half of its trading range, themarket 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 accumulationand 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 atriangle formation on any bar chart-whereby price ranges and volatility are decreasing, to the point where abreakout in either direction is likely. Once the breakout occurs and a trend is under way, traders can get intothe market and follow the trend.

In her presentation to around 150 futures and equities traders from around the world, Raschke also gave thefollowing recommendations for all traders:

Always put current price action into perspective with historical price action. Raschke likes pivot points, asthey 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 amarket.

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 orlose? There is never a magic place to take profits or place stops." However, look at "swing moves" and keysupport 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'llplay a safe game and enjoy trading.

On trading psychology, Raschke says follow 3 rules: 1) Believe in "your" trading methodology. 2) Have agood attitude toward trading. 3) Concentrate. "Be 100% in the game."

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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 LarryConners, the book, "Street Smarts."

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Wyckoff once said, "Manipulation in the stock and commodity markets is aneveryday fact of life. The small-scale trader, the scalper, the skimmer, theplunger, and the big-money trader all must contend with the effects ofmanipulation in their day-to-day market campaigns. Manipulation of prices isdone by well-financed money interests who have a particular stake in a givenstock or commodity and must necessarily "manipulate" price transactions intheir 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 campaignthat 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 boughttheir initial line at since these large transactions would show up on the

tape very clearly as insider selling. Therefore, skill and manipulativemovements are required to unload a large amount of stock or commodity."

As Wyckoff explained, manipulation, per se, is a regular occurrence inthe 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 skilledtape reader or chart analyst. So how does this apply to what is going onright now in the gold market?

It is rather obvious (and no secret) thatthere are international money interests who have high stakes in the goldmarket 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 forseveral years and are just as desirous of realizing a large profit on theseinterests as the average gold investor is. These strong-handed insiders justas 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 campaignsof such magnitude. Time is always an essential ingredient in watching a bullmarket unfold. "Pullbacks" and "corrections," even steep ones, are quite thenorm in an embryonic bull market such as the one we are watching unfold ingold.

If the big-money traders and major financial interests sold all theirstake at once it would cause a parabolic blow-off in the market and wouldimmediately reverse and collapse of its own weight before achieving its

maximum upside potential. This is because the trading public, which is acrucial ingredient in any long-term bull market, would be so saturated withsupply they wouldn't have anywhere to go with it and prices would sag underthe excessive weight of supply. This is why major bull markets proceed withfits and starts and leave many inexperienced and impatient traders andinvestors in the lurch due to their lack of foresight. The present goldmarket is a prime example. Gold finally breaks above a critical benchmarkresistance ($300-$310) and even makes it above $320, yet it stalls and pullsback a few dollars and the Internet is suddenly rife with rumors of"manipulation!" and "conspiracy!"

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Quite the contrary, this is a normaloccurrence and if you will go back and check the price history of anylong-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 priceright now. Nothing that has not happened before and nothing so unusual thatit screams for our attention. It is simply a case of the insiders finding alevel where supply and demand are mostly in balance and a time when themarket needs resting after a heated run to the upside. Markets, likehigh-performance engines, need to cool down and rest at some point beforeacceleration can continue.

The action of the market correcting and pulling back is usually preceededby a flood of news articles in the popular press expressing bullish optimismor even euphoria over the market's performance. This is actually onecritical component of the manipulation campaign by the insiders since theymust sometimes plant news stories and pay media outfits to publicize a marketat 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 thefinancial press was positively brimming with new-found enthusiasm over goldand gold shares. This was a clue that a market correction was near. Whengold has "corrected" enough to where the market makers feel gold hassufficiently "cooled down" and they can begin putting up prices again throughtheir trading efforts, they will. Undoubtedly, it will be accompanied byheavy bearish sentiment in the financial press and among "weak-handed" goldtraders. Always be watchful of the message of the market as it always has animportant story to tell.---------------------------------------------------------------------------------

Swing Time

By Linda Bradford Raschke

Traditionally, there have been two major methods of forecasting market movements-the fundamentalmethod and the technical method. Fundamental factors include analyzing long-term business cycles andidentifying extremes in security prices and public sentiment. An investor looking to establish a line ofsecurities after a long-term business cycle low is said to be playing for the "long swing." Short-swingtrading, 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 theprice action to move in waves. A combination of up waves and down waves forms a trend. Once youunderstand the technical aspects of these imbalances in supply and demand, you can apply the principles ofswing 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'sswings for short-term trade opportunities or monitoring them for trade management purposes, it isimportant to understand the enduring principles of price behavior that forecast the most probable outcomefor 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 weaknessrelative to the individual market's technical position. In other words, the length and amplitude of the currentswing is compared with those of the prior swings to assess whether the market is showing signs of

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weakness or signs of strength. A trader attempts to forecast only the next most immediate swing in terms ofthe probabilities of reasonable risk/reward ratios for the next leg up or down. A swing-trading strategyshould show more winners than losers. Swing traders make frequent trades but spend limited time in thosetrades. 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 20thcentury examined both the longer-term cycles and short-term price fluctuations. Most of them practicedswing trading to some degree. By studying their work, you will understand the origins of the principles ofprice behavior (listed on the next page) that are responsible for the three basic types of swing-tradingpatterns today.

Charles DowPerhaps the best-known individual who contributed to the foundation of technical analysis was CharlesDow (1851- 1902). From 1900 to 1902, he wrote a series of editorials in The Wall Street Journal that setforth his ideas on the markets. His original theories were actually intended to serve as a barometer ofgeneral 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 hisideas in a book. Nelson ultimately collected Dow's editorials and developed his ideas into principles ofmarket 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. Thefirst was William Hamilton, who became the editor of The Wall Street Journal after Dow died, and thesecond 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 thedownswings are called secondary reactions. The greater the swing in one direction, the greater the eventualreaction 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 longerterm, 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 uptrend to be established, the price action must display both a higher high and a higher low. For an up trend toreverse, a lower high and lower low must occur. A trend will remain intact until it changes according to theabove definitions, and a trend has greater odds of continuation than it does of reversal. In a stronglytrending environment, a swing trader looks to trade only in the direction of the trend, for this is the truepath of least resistance.

The theorem for which Dow is best known is "the averages discount everything." The markets represent acomposite of all known information and prevailing emotions. This remains today the underlyingassumption 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 orpreconceived ideas. Ideally, all they have to do is identify the trend and wait for a low-risk entry in thedirection of the trend.

Dow also gave us the concept of confirmation/nonconfirmation (also known as divergence). He stated thata change in the primary trend must be confirmed by two other indexes-the Dow Industrial and theTransportation Averages. Today this principle of confirmation/ nonconfirmation is used in comparing onemarket with another market or index on both a short- and a long-term basis. It can also be used to comparethe price action with a variety of technical indicators. A nonconfirmation is one of the tools used to warn ofa "failure test" (the potential for a swing reversal).

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Finally, Dow looked at the importance of volume in confirming the movement of secondary reactions. Forexample, a market that is oversold will display light volume during sell-offs and increasing volume duringrallies. Upswings can often start on light volume and end with excessive activity. More important, volumecan also be used to confirm a breakout from a "line" or consolidation area. The three types of swing-tradingpatterns are retracements, tests, and breakouts.

The concept of a sideways line was originally defined as a sideways movement extending for a few weekswithin a 5% price fluctuation. This represents a period of accumulation or distribution. Lines often occur inthe middle of secondary swings. Small lines, or periods of consolidation, occur in just about any chart inany market in any time frame. Differentiating a breakout from a line, however, requires analyzing morefactors than just price direction. It also involves consideration of cycles in volatility-the principle thatcontraction in range is followed by range expansion.

Robert RheaRobert Rhea (1896-1939) studied Dow's work and spent much time compiling market statistics and addingto Dow's observations. He noted that indexes are more inclined than is an individual stock to formhorizontal lines or extended chart formations. He was also one of the first technicians to specify that a legmust 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 muchtrickier when the price starts trading sideways and the range narrows. The amplitude of a swing, in additionto its duration, are two of the main criteria used to assess the relative strength or weakness of the market'stechnical position. The third criterion is the volume on each swing. In a trending environment, theamplitudes of the market's reactions tend to be similar in nature. A swing trader can look for equal-lengthswings as a measuring method for a market's expected move.

Richard SchabackerWhile Dow set forth some basic principles of price behavior, including the theory that market movementsare composed of a series of swings and reactions, Richard Schabacker (1902-1938) could be called thefather of the "science" of technical analysis. Schabacker categorized concrete tools that help the techniciannot only to forecast a move, but also to recognize signs that a swing might end. He was the first to classifycommon 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 topen three huge volumes before his death at age 36. The bulk of his writings were published in the early1930s. In addition to being a consummate technician, he was also a renowned forecaster and an astutetrader. No one has written with more insight than Schabacker about the differences between short-termswing 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-swingtrader 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 difficultyin holding positions for the long run, he stated, "You'll start out with the best of intentions, but youprobably 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 themarket's technical position, the practice of chart reading is devoted to studying certain patterns to forecastfuture price movement. Schabacker grouped these patterns into two classes-continuation patterns andreversal formations. He noted that the chart patterns with the most forecasting significance do not occurvery frequently, but they are quite important when they do show up. It is important for swing traders toremember that they do not need to be in the market all the time, and that it requires a great deal of patienceto wait for the high-probability trades to set up.

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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 valueregarding the potential for the next immediate price swing. He was also one of the first to write extensivelyon both trend lines and support and resistance levels. Trend lines serve two main purposes. They helpdefine the probable limits of intermediate-term declines and recoveries within established trends. When amarket finds support or resistance at these levels, it forecasts continuation of the trend. Trend lines can alsowarn 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 marketstudent 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 basicthat the average market student glosses over it. What is most important, though, is not mere knowledge ofthese phenomena, but the practical application of them in a trader's nightly analysis. Much forecastinginformation 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 positionrelative to the previous leg or market action. For example, if the previous up leg was greater than theprevious down leg and the subsequent reaction was shallow, forming a continuation pattern, the odds wouldfavor that only the long side should be traded. This process would continue until there was a failure test andthe up leg failed to show continuation. Experienced traders can play this failure test, but the mostconservative play would be to wait until the down leg was greater than the previous upswing and then sellthe next reaction.

Schabacker understood intimately the importance of tape action. "If the market or individual stock does notact 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 WyckoffRichard Wyckoff (1872-1933) took the process of analyzing market swings one step further. He usedvolume and tape reading to analyze whether the patterns represented accumulation or distribution, and thenorganized 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 beganto publish an advisory letter as well as his research. He first published his method of technical analysis in1908. His technique used a combination of bar, point-and-figure, and wave charts to analyze marketswings. It is based on the simple approach of monitoring the forces of supply and demand for a directionalbias, and learning to select the markets that have the most immediate potential, thus making most effectiveuse of a trader's capital.

The basics of analyzing supply and demand come from studying the individual bar charts and monitoringthe market's action in relationship to volume, and using trend lines, or "supply" and "support" lines, tofollow the market's movement. Bottoms and tops are formed by a process with which Wyckoff introducedsome 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), assumethat the market has been moving down and a decline is mature. The first attempt at finding a bottom iscalled "preliminary support." On this day, there will be a definite increase in volume and the market will

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find some type of support, or make a short-term low. The ensuing rally should still be contained within thechannels of the downtrend.

After this first swing low is made and the market reacts by moving up a bit, the downtrend resumes andflushes out the last longs with a selling climax. There is extremely heavy volume on this day and the rangeshould expand. If prices rally toward the end of the day, it indicates that the last longs have been flushedout.Next there is an "automatic rally" that is made up primarily of the shorts covering. In general, the volume ismuch lighter on this rally. No large market participants or institutions have established heavy longcommitments yet. A "secondary test" then follows. This is a retest of the low of the selling climax, whichtends to take place on lighter volume. Also, the range will not be as wide as the range on the day of theselling 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. Themarket will finally indicate that it is ready to break out from this trading range by showing a "sign ofstrength." This is a strong thrust up, indicating an increase in upside momentum, accompanied by anexpansion in the volume. The reaction that follows this sign of strength is often just a sideways pause, but itis marked by a contraction in daily range and a drop-off in the volume. This is called the "last point ofsupport" and may be the last chance to get on board before a trend begins. Figure 1 shows a "WyckoffSequence" 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 andupthrusts describe the tests or false breakouts that can occur in a trading range. A spring occurs when themarket breaks below support and then quickly reverses itself. There is little volume on the breakout and themarket manages to shake out weak longs. Upthrusts occur when the market tests the upper band of tradingrange but is quickly met by overhead supply. Each of these patterns represents "price rejection" andprovides 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 marketswings. The stocks can be rotated to include the most active leaders at the time. He used a line chart (alsocalled 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 stocksshould be the most sensitive. The length and time of each wave indicates the technical strength of thebuyers and the sellers. The principles of confirmation/nonconfirmation are also used when comparing theindex of the leaders with the overall market.

Although short-term swing analysis is often used to identify a particular trading pattern, it is important tounderstand that Wyckoff's primary emphasis was on formulating a comprehensive approach to trading. Theultimate goal is to make trades with a minimum of risk, using only the best markets when all conditions arefavorable, and being conscientious about when to exit a trade after it is made. Avoiding a large loss is theguiding 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 cluesabout 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 moveobjectives from various chart formations, Wyckoff used point-and-figure charts to calculate a priceobjective. However, he strongly advised judging the market by its own action, by following the tape actionand taking what it gives you.

Ralph N. ElliottWhile Schabacker classified chart patterns that preceded the market swings and Wyckoff looked for signsof accumulation and distribution within these patterns, a third dimension was added through the work ofRalph N. Elliott (1871-1948). He saw patterns in the market's waves, or cycles, and set forth some basictenets classifying them.

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Elliott started out as a devout student of Dow Theory. He believed that market timing was the key tosuccessful investing-when to buy was far more important than what to buy. When a long illness in the late1920s and early '30s kept him bedridden, he began an intensive study of market behavior that went intomuch greater detail than Dow's work. He developed his first set of principles in 1934, and they were laterpublished as "The Wave Principle." His work eventually became known as the Elliott Wave Principle orElliott 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 thatone 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 inthe direction of the trend are called "impulse" waves. Elliott observed that the laws of nature tend to unfoldin an upward direction, and thus there is an upward bias to the cycle. Each wave or cycle can be dividedinto 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-thosethat occur in the direction of the trend-and corrective waves. Elliott looked at ranges instead of closingprices. 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 nextimpulse 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. AlthoughElliott did not analyze volume to the extent that Wyckoff did, both technicians noted that volume tends todry up during corrections.

Human emotions cause waves, Elliott said, and thus cycles are more visible when a market is broad andactive with good commercial interest. Volume and liquidity make swing-trading patterns more readilyvisible to the eye. Don't trade in dead, quiet markets.

W.D. GannW. 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 moreesoteric ideas touching on astrology and geometry. One of his main contributions to analyzing the marketswings 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 andtime periods. Many technicians use the length of a price swing to determine the trend. For example, whenthe 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 timeduration 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 thepercentage retracements of swings, and considered the 50% reaction to be one of the most importanttrading points. The wider the swing and longer the time period, the more important the halfway pointbecomes. If the market has been in an up trend, look to buy around the 50% retracement level with a stopjust underneath. A market that fails to retrace a full 50% in its reaction back down shows a sign of strength.

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Swing trading requires that a great deal of time be spent in preparation and study. Much emphasis is alwaysgiven to the initial trade setup, but the successful traders in the past all wrote an equal amount about thehabits and organization it takes to successfully swing trade. Gann felt that a successful trader must have aplan, and knowledge is key in putting it together. The more time you spend gaining knowledge, the moremoney you will make later. Gann's use of pivot points, time cycles, seasonal dates, and intricate chartingmethods were his way of "gaining knowledge." These methods keep a trader intimately involved with themarket's price action. Many successful swing traders keep charts and logs by hand, and credit this processin aiding their market "feel."

In addition to technical knowledge, Gann had separate trading rules that were essential for success: Alwaysuse 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 agood reason. Follow up with a stop-loss order to protect your profits. Never average a loss. Avoid getting inand 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 inTechnical Analysis (Bloomberg Press, 2000).--------------------------------------------------------------------------------------------

Laying Eggs:...the need for chicken feedThe last two market days have been uncommitted, light volumetrading. Today was Yom Kippur and because many investors and traders were celebrating the holiday thatcer-tainly contributed to the dullness in the market. From June 6th to August 8th the S&P 500 cash indexsaverage directional index (ADX) remained above 30 indicating a trending, volatile environment. Pricemovement was good. Since August 9th the ADX has remained below 30 thereby indicating dull, lowvolatil-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 movingto resting to moving. Price has been resting and its getting ready to move again. The last two days in theS&P have been close to NR7 (narrowest range of the last seven days) days which usually lead to a breakouttype of move.

Within the longer period of consolidation today was an inside day. An inside day is a day where the highand low are contained within the high and low of the previous daymore consolidation. Long term andshort term we are wound tight for a nice move. All this is mentioned because (and I dont have the exactfigures) about 20% of the trading time produces the vast majority of the trading profits. Some traders lostmoney in this low volatility environment because they overtraded instead of being patient for a bet-tertrading time. Now that a better trading time may be around the corner, be prepared. Its frustrating for atrader to lose money waiting for the big move and then miss it when it finally does arrive. All the signalspoint 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 toformulate a methodology to trading. For instance, he was the person who identified the trading patternsknown as springs and upthrusts. Wyckoff was referring to eliminating anxiety in trading, but the quotealso 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 ofmaterial 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 orsell because it is the thing to do not because he wants to make a profit of fears to make a loss. Wyckoffsmain 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 monthhasnt produced the right material (volatility) to make good profits. However, it appears that in the next few

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days we should have the chicken feed traders need to produce desired profits. Let the profits developnaturally. Dont force trades out of frustration or eager anticipation. Trade when its the right thing to doand not because you want to make a profit. - Bob Lord Monday, September 16, 2002

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PRIVATE TRADERS: AN ENDANGERED SPECIES? Daryl GuppyWhere do you stand as a private trader? Are the odds against you so overwhelming that you ought to stayclear 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 yourmoney.

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 cancontrol your own time and answer only to yourself. Success has many rewards, but getting there takes skilland care.

Dr. Alexander Elder, author of Trading for a Living, helped to edit this book. He is a successful New Yorkprivate 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. Ihave 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. Everymorning, after he has downloaded the previous days data, but before he looks at a