Wyckoff's Smart Market Phases
Having come to the conclusion that VSA is the approach I want to apply to chart reading, it's time to drill down to the absolute basics to get a firm foundation to build upon. So we will quickly backpedal from Tom Williams VSA to Richard Wyckoff's Model to Dow Theory. While Wyckoff's general principles and basic methods need studying to master the fundamental aspects of being a trader, I prefer the modern applications of the model, like Tom Williams "Volume Spread Analysis" (also called "Wyckoff on Steroids") which is where this is all heading.
The foudation of market theory and technical analysis originated with Charles H. Dow and has been expanded on ever since he first published his series of Wall Street Journal editorials from 1900 until he died in 1902. The followers of Dow Theory http://www.investopedia.com/universi...ry/default.asp include the likes of Elliott (fractals and waves) and Gann (angles and vibrations) who built grand schemes around it to supposedly predict market movements.
Wyckoff did the same, but instead of looking to mathematical devination, he applied his vast and greatly successful "tape reading" capabilities. He started in the business in 1888 as a 15-year-old stock runner studying the great tape readers and investment giants of the time.This, in a nutshell, is the Wyckoff Method: Dow Theory, tape reading (later to become chart reading), and understanding the mechanizations of the major players.
Dow Theory identifies three phases of major market trends. They are: the accumulation phase, the public participation phase, and the distribution phase.
"The accumulation phase (phase 1) is a period when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority absorbing (releasing) stock that the market at large is supplying (demanding). Eventually, the market catches on to these astute investors and a rapid price change occurs (phase 2). This occurs when trend followers and other technically oriented investors participate. This phase continues until rampant speculation occurs. [Excess in the chart below] At this point, the astute investors begin to distribute their holdings to the market (phase 3)."
Let's begin by assuming the market or security has come to rest on a general area of support. SM evaluates the situation and decides it's ready to reverse the trend. The price is low with little or no volume activity and they have a Target.
Phase 1: Accumulation. SM begins buying from the public at extremely low prices.
Phase 2: Mark-up. The supply from the public is exhausted. SM is long. With no resistance to the upside, price increases.
Phase 3: Distribution. Price reaches the SM Target and it's time to take profits. Now the public wants in.
Phase 4: Mark-down. The smart money begins selling to the public, then establishes short positions. With no support price falls.
Since we, as individual traders, do not have the resources to effect the market, this senario can seem like a battle. Us against them. This is not what Wyckoff intended. The idea is to separate yourself from the herd's concept of supply and demand. Not only that, but separate yourself from the herd's predisposition for greed and fear.
Understanding the concept and applying the methods changes everything. You meld with the SM. It's like you are one of them, but with indirect contact - you can't pick up the phone a call them to find out what's up next, you have to read the charts and they'll explain everything they have in mind through them.
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