Richard D. Wyckoff worked in New York City during a “golden age” for technical analysis that existed during the early decades of the 20th Century. Wyckoff became wealthy through trading in the stock market, but he also became altruistic about the public's Wall Street experience. He turned his attention and passion to education, teaching, and in publishing exposés such as “Bucket Shops and How to Avoid them”, which were run in New York’s The Saturday Evening Post during the 1920’s.
As a trader and educator in the stock, commodity and bond markets throughout the early 1900s, Wyckoff was curious about the logic behind market action. Through conversations, interviews and research of the successful traders of his time, Wyckoff augmented and documented the methodology he traded and taught. Wyckoff worked with and studied them all, himself, Jesse Livermore, E.H. Harriman, James R. Keene, Otto Kahn, J.P. Morgan and many other large operators of the day.
Wyckoff's research claimed many common characteristics among the greatest winning stocks and market campaigners of the time. He analysed these market operators and their operations, and determined where risk and reward were optimal for trading. He emphasized the placement of stop-losses at all times, the importance of controlling the risk of any particular trade, and he demonstrated techniques used to campaign within the large trend (bullish and bearish). The Wyckoff technique may provide some insight as to how and why professional interests buy and sell securities, while evolving and scaling their market campaigns with concepts such as the "Composite Operator".
Wyckoff felt that an experienced judge of the market should regard the whole story that appears on the tape as though it were the expression of a single mind. He felt that it was an important psychological and tactical advantage to stay in harmony with this omnipotent player. By striving to follow his footsteps, Wyckoff felt we are better prepared to grow our portfolios and net-worth.
Wyckoff was a keen observer and reporter who codified the best practices of the celebrated stock and commodity operators of that era. The results of Richard Wyckoff’s effort became known as the Wyckoff Method of Technical Analysis and Stock Speculation. Wyckoff is a practical, straight-forward bar chart and point-and-figure chart pattern recognition method that, since the founding of the Wyckoff and Associates educational enterprise in the early 1930’s, has stood the test of time. Around 1990, after ten years of trial-and-error with a variety of technical analysis systems and approaches, the Wyckoff Method became the mainstay of The Graduate Certificate in Technical Market Analysis at Golden Gate University in San Francisco, California, U.S.A. During the past decade dozens of Golden Gate graduates have gone to successfully apply the Wyckoff Method to futures, equities, fixed income and foreign exchange markets using a range of time frames.
The following are the three fundamental laws of the Wyckoff Method will be defined and applied
1. The Law of Supply and Demand – states that when demand is greater than supply, prices will rise, and when supply is greater than demand, prices will fall. Here the analyst studies the relationship between supply vs. demand using price and volume over time as found on a bar chart.
2. The Law of Effort vs. Results – divergences and disharmonies between volume and price often presage a change in the direction of the price trend. The Wyckoff “Optimism vs. Pessimism” index is an on-balanced-volume type indicator helpful for identifying accumulation vs. distribution and gauging effort.
3. The Law of Cause and Effect – postulates that in order to have an effect on you must first have a cause, and that effect will be in proportion to the cause. This law’s operation can be seen working as the force of accumulation or distribution within a trading range works itself out in the subsequent move out of that trading range. Point and figure chart counts can be used to measure this cause and project the extent of its effect.