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Buying Opportunities Springs

Primary Buying Opportunities: Springs

The concept of the spring was added to the Wyckoff Stock Market Course by Mr. Robert Evans.  Over the years, it has become the primary buying opportunity that is of most interest to many Wyckoff traders.  Its popularity can be traced to the fact that the stock market or an individual issue is likely to make an immediate response to the up side that may be the start of a much bigger move that unfolds over time.  By buying in a spring position, the stock market trader has the opportunity to take advantage of the entire advance.

Another reason for the popularity of springs has to do with the fact that they represent danger points.  It might seem strange to think of a danger point as being a good trading opportunity, but there is a logic to it.  When the price is in a spring position, supply has an opportunity to come pouring in an crush the price.  This is what makes it a danger point for the bulls.  However, if the price has entered the spring position in a constructive manner, the Wyckoff trader knows that the odds of supply rushing in to take control of the action are low.  Therefore, it is possible to protect maximum amount of the funds involved and still have an opportunity to realize a worthwhile profit.  In effect, the point of greatest danger becomes the point of minimum risk.

Defined in broadest terms, a potential spring position is the penetration of a support level.  The words potential spring are used because not all support levels are created equal and not all penetrations are created equal.  A support level is defined by the low point of any reaction. 

Some reactions are more important than others.  Therefore, spring that develop relative to those are more interesting to stock market bulls.  Not all penetrations of support levels unfold in the same manner.  Some are more constructive than others.  The character of the price and volume action as the price moves toward into the penetration of a support level determines the quality of the potential spring.  High quality springs that develop relative to important support levels are the ones that are likely to produce the best results.

The most important support levels are those that define the bottom of trading ranges.  A trading range is where the potential for the next move by the price is built.  If the price builds a potential and then moves into a spring position and supply does not pour into the market to crush the price, the bulls can conclude that the potential is for the up side.  They can take their positions and let the demand that is attracted as the price moves higher  provide a profit.  When the price has left the trading range to the up side and the advance is underway, the low points of reactions in the up trend also define support levels. 

If the price returns to one of these support levels on a later reaction and penetrates it, the result is also seen as being a potential spring.  Long positions can be considered on the springs that develop as the advance progresses.  However, in these cases, additional factors such as the position of the price in the trend and the remaining up side potential have to be considered and they may argue against buying the spring position. 

Wyckoff traders should beware of springs that develop during down trends.  These frequently fail or result in unimpressive responses.

There are higher quality springs and lower quality springs.  The higher quality springs are the ones that are most likely to be successful and produce the best bullish response. 

The quality of a spring is determined by the depth of penetration below the support level being sprung, the width of the price spreads as the price moves toward and into the potential spring position and the level of volume as the price moves toward and into potential spring position.

There is no particular amount be which the price can penetrate the support level and still be considered a high quality spring.  Lower priced issues need to make smaller penetrations than higher priced issues. 

Mr. Evans never indicated a certain percentage by which the price could penetrate the support level and still be considered high quality.  Therefore, each Wyckoff trader needs to make a personal choice as to how deep a penetration can be tolerated.  A penetration of one to three percent is seen as being a reasonable criteria to set.  Perhaps as much as a five percent penetration could be considered. 

The problem with selecting a percentage greater than those mentioned is that the ability of the price to climb back above the support level as it responds to the spring diminishes as the depth of the penetration increases.

Price spread is another important factor in determining the quality of a spring.  As the price approaches and penetrates the support level, the price spread needs to narrow if the spring is to be seen as being of high quality.  Situations where the price spread narrows each day as the price approaches and penetrates the support level are the best. 

However, an occasional wider spread as the price declines into the potential spring position is acceptable as long as it is not a dramatically wider spread.  Those cases where the price approaches and enters a spring position on widening spread and increasing volume should be avoided.  These indicate growing weakness and are not likely to result in the desired spring action.

The level of volume is the third factor to consider in judging the quality of a potential spring.  As mentioned above, increasing volume as the price declines into the spring normally does not result in a high quality spring. 

The Wyckoff trader should make a judgment as to what the average volume has been while the price has been in the trading range prior to the decline into the spring position.  The volumes as the price approaches and enters the spring position need to be less than average.  The best situations are those where the volumes decrease on a day to day basis as the price moves toward and into spring position.  There is one instance in which volume can increase and still be seen as resulting in a high quality spring. 

If the price penetrates the support level on a very narrow spread and that price action is accompanied by an increase in volume, the result can be a high quality spring.  This is because the combination of the very narrow spread with the higher volume with the price below the support level is an indication of demand being met to overwhelm the supply that may be present.

Many Wyckoff traders consider the spring position to be the best of the primary buying opportunities.  There is no guess work involved in determining whether the price is in a potential spring position.  There are a limited number of variables to consider in determining the quality of a potential spring. 

Defending a position that is established when the price is in spring position is easy.  The best factor about buying springs is that the trader can anticipate a prompt positive response.

Primary Buying Opportunities Tests of Springs

Primary Buying Opportunities: Tests of Springs

After the stock market or an individual issue has been in a spring position and has responded to the spring with a rally, there is likely to be a test of the spring. The test provides supply with a second opportunity to come pouring into the market to crush the price and begin a sustained decline. In these cases, the test is said to have failed.

However, in those cases where supply does not take control of the action, the test is said to have been successful. These are the tests that Wyckoff traders want to consider buying. As was the case with the spring position, successful tests of springs are likely to be followed by a rally. Most of the time, the response to the test of a spring takes the price to a higher level than was recorded on the initial response to the spring. Sometimes, the higher high is much higher

The quality of a test of a spring and its desirability as an entry point on the long side are determined by price spread and volume. A high quality test is one that unfolds on narrowing price spreads and decreasing volumes. The ideal test is one where the average volume as the test develops is less than the average volume that was seen during the days leading to the spring position.

The same is true with the price spreads. A high quality test will unfold on price spreads that on average are narrower than those leading to the spring. A third factor to consider in determining the quality of a test is where the low point of the test is in relationship to the low point of the spring. A high quality test will put in a higher bottom than was recorded on the spring.

Not all tests are of high quality. However, not all lower quality tests fail. There are three ways in which a test can reveal itself to be of questionable quality. One is by making a lower low than the spring. This is a concern especially for the trader who took an initial position on the spring because it provides supply with another opportunity to step up and take control of the action.

A test can also be considered to be of lower quality if the average volume on the test is greater than it was on the development of the spring. The lowest quality tests are those that make a lower low than the spring and are done on higher volume. As a general rule, these tests should not be traded. The risk of the test failing is too great if it is of the lowest quality.

With some tests ending well above the low point of the spring while others more nearly reach the low point of the spring and still others make new lows, it can be difficult to judge exactly where the test will end and where a position should be established. There are guidelines to consider in making these decisions.

One is the halfway point of the response to the spring. Since it is normal for a bullish rally to be followed by a halfway correction, the halfway point of the response to the spring can be used a place to open a position.

Another level to consider is the support level that was sprung. If the price respects that support level on the test, it is indicating that a position can be justified. A third level of importance is the support level defined by the low point of the spring. This is the lowest level at which a position should be seriously considered.

Those tests that are judged to be of lower quality either because of a lower low, higher volume or both will likely be tested again at a later date assuming they do not fail. These are usually referred to as being more important tests. Their quality is also determined by price spread, volume, low point and by a fourth factor. As with the initial test, the Wyckoff trader is looking for narrower price spreads, lower volumes and a higher bottom on the more important test.

The fourth factor to consider is whether the response to the first test put in a higher high than the initial response to the spring. The ability to make a higher high on the response to the first test indicates that the bulls are willing to follow the price higher. If a more important test exhibits all four factors mentioned, it can be considered to have corrected the problem or problems that were present on the first test and taking a position can be considered.

The disciplined Wyckoff trader will never take a position without at the same time placing a stop or buying some insurance. When a position is taken on the test of a spring, it is important that the stop be placed below the low point of the spring to keep the stop from being vulnerable.

If the potential indicated by the figure chart is not sufficient to allow the stop to be placed below the low point of the spring, a position should not be taken. The determination as to whether the stop can be placed below the low point of the spring is based on how many points are being risked and how many points of potential profit are indicated. At least three points of potential profit should be indicated for each point that is risked.

Some Wyckoff traders choose to take their full position on the spring. Some choose to take their full position on the test of the spring. Both groups are taking more risk than those who choose to take only a partial position on the spring and then adding a second partial position on the test. The goal is to build a winning position as the action unfolds. After the test of the spring, there are two additional opportunities that may provide places to add other partial positions.

 

Primary Buying Opportunities Back Ups

Primary Buying Opportunities: Back Ups

If a Wyckoff trader chooses not to open a long position when the market or an individual issue is in a spring position and makes the same choice or misses the opportunity to enter on the long side on the test of a spring, there is a third primary buying opportunity that can be used to begin a campaign. It is on a back up to the edge of a creek.

A creek is the zone of resistance usually near the top of a trading range defined by a series of rally tops within the trading range. It represents an obstacle to up side progress that must be overcome if the price is going to work out the potential that has been built while the price has been in the trading range. The price overcomes the resistance with a sign of strength indicated by a combination of price spread and volume action.

There are three elements to the combination of price spread and volume action needed to accomplish a jump.

The first element is wide price spreads to the up side over several days as the price passes through the zone of resistance defined by the earlier rally tops.

The second element is strong closes on those days with the wide spreads. If the price makes a wide spread to the up side and then closes at or near the bottom of the spread, the indication is that supply was met and overcame the demand that entered the market and that the price is not ready to leave the trading range.

The third element is high volume. High volume confirms the sign of strength indicated by the price action. Most potential jumps will take the price through the resistance level of the trading range and decisively into new high ground relative to all the action that occurred during the trading range. However, some will not.

If the trading range is especially wide and most of the rally tops during the range are well below the resistance level, it is possible for a jump to be accomplished without moving the price up and out of the range.

In those cases, the Wyckoff trader needs to recognize the fact that the resistance level of the range still represents an obstacle to up side progress that may derail the bullish scenario from unfolding as anticipated even though there was a jump and a back up. Some Wyckoff traders elect to avoid these situations due to the higher degree of doubt involved.

The completion of a jump is normally indicated by a dramatic narrowing of the price spreads to the up side following the wide spreads that moved the price through the zone of resistance. When this action occurs, the Wyckoff trader knows that the back up is about to begin and that it is time to start paying close attention to the day to day action so as not to miss the opportunity to take a position.

When the back up begins, the trader needs to identify in advance where it is likely to be completed. It is impossible to pinpoint exactly at what level the back up is likely to be completed. The creek that was jumped was defined by a range of values and the area in which the back up is likely to be completed is defined by a range of values.

The first step in identifying where this range of values is located is to find the halfway point of the advance that produced the jump. Wyckoff tells us that it is normal for an advance to be corrected with a reaction to the vicinity of the halfway point of the advance. The halfway point is likely to be above the zone of values that represent the creek or in that zone.

If the halfway point is above the creek, the back up is most likely to be completed between the halfway point and the top of the creek. If the halfway point is in the creek, the back up is most likely to be completed between the halfway point and the low point of the creek.

Those situations where the back up is likely to be completed above the top of the creek are the best. In those situations where the back up reenters the creek, there is a risk of the price falling back into the creek resulting in no buying opportunity.

Having an idea in advance where the price is likely to complete the back up is important. However, the most important factor on a back up is the character of the price and volume on the back up. If the back up unfolds with the same combination of wide spreads and high volumes that were present on the jump, there will be no opportunity to take a long position. In these cases, the price is most likely to fall back into the creek.

All that the potential jump accomplished was to suck in premature bulls and the bearish character of the back up tends to lock them into positions that probably will not be profitable. A bullish back up is indicated by narrowing spreads and decreasing volumes as the price reaches the pre-identified zone where the back is anticipated to end. This combination of where the price is and how it got there is what indicates to the Wyckoff trader that taking a position should be considered.

Taking a position on a back up is similar to buying the test a spring or a spring in one respect. Any position opened on a back up must be protected with a stop. Ideally, the potential up side objective will be high enough above the entry price to allow the initial stop to be placed below the support level of the trading range. The anticipated objective must be high enough above the entry price to allow the initial stop to be placed below the low point of the creek. Placing a stop so close to the entry price that it is in the creek is an invitation to be stopped out.

Theoretically, taking a long position on the back up to a creek where the jumping of the creek allowed the price to move up and out of a trading range is the best of all buying opportunities. This is because it provides the clearest indication that the preparation phase has been completed and that the price has the strength to overcome all obstacle to up side progress.

Primary Buying Opportunities Normal Corrections

Primary Buying Opportunities: Normal Corrections

Even after an issue or the market has left a trading range to the up side, jumped the creek and backed up, a Wyckoff trader may still be presented with one more type of primary buying opportunity. It or they depending on how the action unfolds develop on normal corrections in the up trend that follows the trading range.

Most advances develop as a series of thrusts rather than one sustained push toward the indicated objective. After each thrust, a correction of that portion of the advance that has just been completed is likely.

If the correction is normal and if the character of the action during the correction is bullish, a Wyckoff trader is provided with an opportunity to add to a position that was opened earlier at a lower level, or to take an initial position if the amount of remaining potential in the anticipated move is large enough to make the effort worthwhile.

What is a normal correction? A normal correction is one where the price retreats to the vicinity of the halfway point of the previous thrust to the up side. Over the years, the vicinity of the halfway point has come to be known as anything between the one third and two thirds point of the previous advance.

If the upward thrust that is being corrected was large, the vicinity of the halfway point of the thrust is also going to be relatively large. Therefore, the Wyckoff trader should not mechanically pre-select the point in the vicinity of the halfway point that will be the entry point.

Using the one third point can be too high resulting in a position being stopped out just as it is about to turn and make the anticipated advance. Using the two thirds point can be too low resulting in potentially good trades being missed. Using the halfway point will usually result in a position being opened. However, even entering at this relatively safe point can represent an error in judgment if one critically important factor has not been considered.

The all important factor in determining where in the vicinity of the halfway point that a position should be considered is the character of the action. If the price is correcting the previous thrust on wide spread and high volume, it is best to not take a position no matter where the price is in the vicinity of the halfway point.

This combination of price spread and volume is most likely to be bearish. Taking a long position during bearish action can easily lead to the position be quickly stopped out. The character of action that the Wyckoff trader wants to see in the vicinity of the halfway point is action that is most likely bullish.

Bullish action is indicated by narrow spreads to the down side on relatively low or decreasing volume. There are no mechanical guide lines as to how narrow the spreads have to be or how low the volumes have to be for the action to be considered bullish. However, if the price is in the zone defined as the vicinity of the halfway point and the spreads are the narrowest they have been on average during the whole correction and if the volumes are the lowest they have been during the entire correction, it usually safe to conclude that the correction is nearing an end.

Another consideration that can be helpful in determining where in the vicinity of the halfway point to enter a position is the position of the price in the up trend. If the price is at or above the middle of the up trend channel, it is best to avoid a position. The closer the price is to the demand line of the up trend channel the more interesting it is for a new position.

However, this assumes that the character of the action is bullish. Bearish action at the bottom of the up trend channel suggests that the trend is about to be weakened or broken. In these cases, it is best to look for another trade candidate,

If a position is established in the vicinity of the halfway point, selecting a price at which to place a protective stop order can be a challenge. Ideally, the initial stop should be placed below the bottom of the zone defined as the vicinity of the halfway point. However, this is frequently not possible do to the rule that Wyckoff traders should never risk more than one point for every three points of anticipated profit.

Due to the fact that a portion of the initial up side potential has been consumed by the time these types of positions are entered, it may be necessary to place the protective stop within the zone of the halfway point.

Since the entry point is also in this zone, there is a greater risk of being stopped out. Therefore, the trader must feel absolutely certain that the character of the action is bullish before the position is taken.

Most Wyckoff traders use the vicinity of the halfway point to add to an already wining position established at a lower level. Wyckoff traders should always strive to build winning positions rather than averaging in to losing positions.

However, the halfway point can also be used if the trader has for some reason missed out on earlier opportunities. Another time when these types of positions can be helpful is when positions taken previously in early leaders in an advance have reached their objectives and funds become available to use for new positions.

Sometimes an advance is large enough to allow for more than one normal correction of a previous advance. These later corrections of additional thrusts may provide additional entry points.

Buying Tests Part 1

Stock Market Buying Tests – Part One

How to Take a Profitable Position in the Stock Market

Wyckoff traders looking for a trading opportunity on the long side have a number of options that may be employed in an effort to identify the best trade candidates. Using the five steps of the Wyckoff method and searching for primary buying positions are two options.

A third approach is to use the series of nine buying tests that Wyckoff identifies. Each buying test is a development in the price and/or volume action that indicates that the price is preparing for an advance. It is normal for buying tests to be passed over a period of time.

A creek is the zone of resistance usually near the top of a trading range defined by a series of rally tops within the trading range. It represents an obstacle to up side progress that must be overcome if the price is going to work out the potential that has been built while the price has been in the trading range. The price overcomes the resistance with a sign of strength indicated by a combination of price spread and volume action.

There are three elements to the combination of price spread and volume action needed to accomplish a jump.

The first element is wide price spreads to the up side over several days as the price passes through the zone of resistance defined by the earlier rally tops.

The second element is strong closes on those days with the wide spreads. If the price makes a wide spread to the up side and then closes at or near the bottom of the spread, the indication is that supply was met and overcame the demand that entered the market and that the price is not ready to leave the trading range.

The third element is high volume. High volume confirms the sign of strength indicated by the price action. Most potential jumps will take the price through the resistance level of the trading range and decisively into new high ground relative to all the action that occurred during the trading range. However, some will not.

If the trading range is especially wide and most of the rally tops during the range are well below the resistance level, it is possible for a jump to be accomplished without moving the price up and out of the range. In those cases, the Wyckoff trader needs to recognize the fact that the resistance level of the range still represents an obstacle to up side progress that may derail the bullish scenario from unfolding as anticipated even though there was a jump and a back up. Some Wyckoff traders elect to avoid these situations due to the higher degree of doubt involved.

The completion of a jump is normally indicated by a dramatic narrowing of the price spreads to the up side following the wide spreads that moved the price through the zone of resistance. When this action occurs, the Wyckoff trader knows that the back up is about to begin and that it is time to start paying close attention to the day to day action so as not to miss the opportunity to take a position. When the back up begins, the trader needs to identify in advance where it is likely to be completed. It is impossible to pinpoint exactly at what level the back up is likely to be completed. The creek that was jumped was defined by a range of values and the area in which the back up is likely to be completed is defined by a range of values.

The first step in identifying where this range of values is located is to find the halfway point of the advance that produced the jump. Wyckoff tells us that it is normal for an advance to be corrected with a reaction to the vicinity of the halfway point of the advance.

The halfway point is likely to be above the zone of values that represent the creek or in that zone. If the halfway point is above the creek, the back up is most likely to be completed between the halfway point and the top of the creek. If the halfway point is in the creek, the back up is most likely to be completed between the halfway point and the low point of the creek.

Those situations where the back up is likely to be completed above the top of the creek are the best. In those situations where the back up reenters the creek, there is a risk of the price falling back into the creek resulting in no buying opportunity.

Having an idea in advance where the price is likely to complete the back up is important. However, the most important factor on a back up is the character of the price and volume on the back up. If the back up unfolds with the same combination of wide spreads and high volumes that were present on the jump, there will be no opportunity to take a long position. In these cases, the price is most likely to fall back into the creek.

All that the potential jump accomplished was to suck in premature bulls and the bearish character of the back up tends to lock them into positions that probably will not be profitable.

A bullish back up is indicated by narrowing spreads and decreasing volumes as the price reaches the pre-identified zone where the back is anticipated to end. This combination of where the price is and how it got there is what indicates to the Wyckoff trader that taking a position should be considered.

Taking a position on a back up is similar to buying the test a spring or a spring in one respect. Any position opened on a back up must be protected with a stop. Ideally, the potential up side objective will be high enough above the entry price to allow the initial stop to be placed below the support level of the trading range.

The anticipated objective must be high enough above the entry price to allow the initial stop to be placed below the low point of the creek. Placing a stop so close to the entry price that it is in the creek is an invitation to be stopped out.

Theoretically, taking a long position on the back up to a creek where the jumping of the creek allowed the price to move up and out of a trading range is the best of all buying opportunities. This is because it provides the clearest indication that the preparation phase has been completed and that the price has the strength to overcome all obstacle to up side progress.

© The Jamison Group, Inc.: Stock Market Buying Tests – Part One

Buying Tests Part 2

Stock Market Buying Tests – Part 2

How to Take a Profitable Position in the Stock Market

After an individual stock has completed a stopping action with preliminary support, a selling climax, automatic rally and secondary test, a Wyckoff stock market trader needs to see the price demonstrate relative strength. It is most desirable if the stock shows relative strength compared to other issues in the same stock market industry group and to the stock market as a whole.

There are two ways that a stock can demonstrate that it is relatively strong. One way is to look at the bigger picture. On the decline that was stopped by the selling climax, how much down side progress did the stock make? This should be measured from the top of the previous advance to the bottom of the decline that has just been stopped.

The measurement should be taken in terms of a percentage not in terms of the number of points lost. The percentage decline in the individual stock being considered should be compared to that of other issues in the same group. If an industry group index is available for that industry, it would be a good idea to compare the performance of the individual issue to that on the group index.

A similar comparison should be made to a general stock market index. Those stocks that can be determined to have performed more bullishly on the previous decline relative to other issues in the group and the general market are most likely to be the best candidates for new long positions.

Relative strength also needs to be demonstrated after a previous decline has been stopped. The tendency is to assume that the preparation following a decline is going to be for an advance.

This is not always the case. If the price of an individual stock does not continue to demonstrate relative strength during preparation for its next move, there is a good chance that the move being prepared will be in the same direction as the previous move.

Relative strength in the trading range that prepares the price for its next move can be identified by comparing the percentages of the rallies and reactions within the range to those in other stocks in the same industry group and to the general stock market.

The Wyckoff stock market trader should also consider the character of the price and volume action on the rallies and reactions during the trading range phase. If the rallies are made quickly with wide price spreads, increased volumes and strong closes, the action is providing an indication of strength.

These issues are more likely to be better long candidates than those issues that have to struggle to make their rallies. On the reactions within a trading range, relatively strong issues will struggle to make down side progress.

Their price spreads will be relatively narrow compared to those during the rallies within the range and their volumes will be relatively lower. This combination of narrower spreads and lower volumes should make the action during the reactions appear more laborious.

Wyckoff traders looking for stock trading opportunities on the long side should avoid stocks and markets that make laborious rallies during the trading range and then give back the ground gained quickly. This pattern suggests that the sellers are still in control of the action.

Traders should also beware of issues that make both high volume wide spread rallies and reactions within the trading range. These rapid swings in the trading range are more often an indication of distribution than accumulation.

When an stock or the market has stopped a decline and moved into a trading range, it is likely that the previously defined down trend will still be in tact. During this period, the down trend and the trading range are said to be in competition for control of the action. Wyckoff stock traders should wait until the trading range has won the competition before seriously considering an entry on the long side.

The trading range has won the competition when the supply line of the previously defined down trend has been broken. Many times, there is a particular set of steps that unfold in the action that lead to the breaking of the supply line. They begin with the price making a small and relatively insignificant penetration of the supply line. This is said to weaken the line.

On the day or days that this is accomplished, the price will likely spend part of the day above and below the supply line. The price will likely follow up on the weakening of the supply line with a move back into the heart of the down trend channel.

This provides the price with an opportunity to demonstrate that the down trend is still in solid control of the action or to provide an indication that the level of control has been diminished by the weakening of the supply line.

If the degree to which the down trend is in control has been compromised, the next rally should decisively break the supply line. This is demonstrated by wide price spreads on increased volumes that result in the entire spread for a day or several days is above the supply line.

The final step in breaking the supply line is when the stock’s price reacts back toward the supply line on narrower spreads and lower volumes and refuses to reenter the down trend channel.

The sixth buying test is met when the stock’s price demonstrates the ability to put in higher supports on rallies. This can be shown by the action within a trading range or after the price has left the trading range to the up side. Frequently, the rallies and reactions within a trading range will all be completed near the top and bottom of the range.

The Wyckoff stock market trader should not automatically consider this to be a bearish indication. It is actually normal action. Some times, the low points of the reactions within the trading range will put in gradually higher bottoms. This indicates a willingness on the part of buyers to pay a higher price suggesting that the price is getting ready to leave the trading range to the up side.

A pattern of higher supports in a trading range and the desirability of seeing the price move into the primary buying position of a spring seem to be at odds with each other since it is not possible for the price to maintain a consistent pattern of higher bottoms and still move into a spring position.

The development of a spring position following a pattern of higher bottoms on reactions does not neutralize the stock’s bullish indication of the higher supports. It actually confirms it by providing supply with one last opportunity to reclaim control of the action.

If supply declines to take advantage of the opportunity, the stock trader can conclude that the price is ready to make an effort to leave the trading range to the up side.

The test of higher supports can also be demonstrated after the stock has left the trading range to the up side. Two of the primary buying opportunities develop when the price is passing this buying test. Both the back up to a creek and a normal correction of a previous advance require a higher support. The entire definition of and the continuation of a stock’s up trend require a pattern of higher supports. The seventh buying test is a logical follow up to the sixth test. It and the last two buying tests will be considered in part three of this series.

Buying Tests Part 3

Stock Market Buying Tests – Part 3

How to Take a Profitable Position in the Stock Market

Wyckoff’s sixth buying test for stocks was to look for a pattern of higher supports on reactions indicating that the bulls are willing to pay gradually higher prices for the shares that they are accumulating.

The seventh stock buying buying test is passed when a pattern of higher tops on rallies is observed. This indicates that the bears are requiring gradually higher prices before they are willing to enter the stock market on the short side.

It also reflects a willingness on the part of the bulls to hold their positions longer before exiting the stock market. A pattern of higher tops on rallies can be identified while the price is in a trading range or after it has left the range and has begun to trend.

A pattern of higher tops on rallies and higher bottoms on reactions is most clearly observed after the price has left the trading range and has
begun to trend. A consistent pattern of higher tops and higher bottoms is what defines the stock’s up trend.

Perhaps the most important higher top is the one that is recorded on a jump across the creek. This is the thrust that propels the price out of the trading range and on its way toward its objective.

A Wyckoff trader wants to see a pattern of higher tops, but never buys as one is being put in place. An important rule in Wyckoff is to only buy on stock market reactions and only sell on market rallies.

If a position is established on the back up that follows a jump, the expectation is that the next upward thrust will make an even higher top than was recorded on the jump.

As long as the rallies continue to put in higher tops and the up side objective has not been reached, the position can be held. Stock traders should beware of the rally that fails to put in a higher top.

When this happens, it is an indication that the character of the action is changing. When there is a change in character, the trader should become more defensive in the managing of any position that is held.

This can take the form of raising the stop to a point closer to the current price. It can also take the form of closing out a portion of an existing position or exiting the position entirely.

Higher tops within a trading range and a consistent pattern of higher tops and bottoms in a range can signal that the price is getting ready to jump the creek and leave the range to the up side.

If a position is established in anticipation of a jump, the Wyckoff trader needs to be very disciplined in managing it. If the price does not jump on the next rally or at least continue the pattern of higher tops within the trading range, consideration should be given to closing the position. If a position is established after a pattern of higher tops has been identified and the price is still in the trading range, the trader needs to fell comfortable placing the initial stop below the bottom of the trading range.

The reason for this is the possibility that the price may need to spring the trading range before it is able to leave the range to the up side. If this happens and the stop has been placed within the trading range, it will be caught and the position will be eliminated likely at a loss just before the move that was anticipated actually begins.

The eighth buying test for Wyckoff stock traders is to identify that a base has formed on a figure chart. This is another way of saying that there needs to be a trading range following a previous decline. The trading range or base contains the potential for the next move. Without that potential, meaningful up side progress is unlikely even if the action in the trading range appears constructive.

There are no rigid rules in Wyckoff as to how large a base should be before consideration is given to establishing a position. This determination has to be based on the type of stock market operation the trader is conducting.

Some traders get nervous easily. They are uncomfortable holding positions for a long time. They do not want to make the extra effort to defend a position as needed so as to allow a bigger move to be completed. They are looking to take a smaller profit quickly and then move on to another opportunity. These traders can be satisfied with a base that only indicates a five to fifteen percent move.

Most Wyckoff traders are looking for an intermediate sized move. These are usually identified as being in the range of offering a 25% to 40% profit potential. Traders who are looking for these opportunities are going to be less active. The least active traders are those who require the largest bases before they will consider taking a position. Usually, these are bases that offer the possibility of at least a 50% move. Whatever profit potential a trader establishes, it is important that the requirement be met before a position is established.

The final stock market buying test is one of the most important. Wyckoff teaches traders to never take a position unless the anticipated profit is at least three times the indicated risk.

The figure chart of the action indicates what the profit potential is, but the trader determines what the indicated risk is. This is accomplished by the placement of a stop or alternate defensive measure. Some Wyckoff traders require a higher ratio of potential profit to indicated risk.

These traders use closer stops. Closer stops will limit the potential loss on trades but they increase the vulnerability of being stopped out. The three to one ratio provides the position with an ample amount of wiggle room while at the same time providing a high level of protection.