Lessons from legendary traders: “the master of tape reading” richard wyckoff

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“Listen to what the market is saying about others, not what others are saying about the market.” – Richard Wyckoff.

• Richard Demille Wyckoff was born November 2, 1873.
• Wyckoff became a stock runner at the age 15 years.
• At the age of 25, he opened his own brokerage firm.
• He specialized in market trading operations and followed mostly the works of Jay Gould, Jesse Livermore, J.P. Morgan and Andrew Carnegie.
• He developed his own approach on how the market operates.

Wyckoff believed that the market operated under a set of three laws:

The Law of Supply and Demand. When there is an excess amount of supply, the value of supply is reduced to draw in the demand needed to absorb it. Alternatively, if there is a scarcity of something, then the value of that item will increase to create the supply that will meet that demand.

The Law of Cause and Effect. In order for there to be a change in price, there needs to be a cause. The price movement will be in direct proportion to that cause. Direct price moves occur when there has been enough time for accumulation or distribution.

The Law of Effort vs. Results. Simply stated, if there is an effort, the result must be in proportion to that effort and cannot be distinguished from it. If it is not, it is an indication of other principles in action. If you have a lot of volume, you should see a lot of move.

Based on this foundation, Wyckoff has developed a five-step investment method.

1. Determine the present position and probable future trend of the market.
2. Select those stocks that are in harmony with the market, in a bull market stronger, in a bear market weaker, using the idea of relative strength.
3. Select those stocks that have built a cause for a potential move in keeping with our goals. Use point and figure charts to determine how far the stock is likely to move.
4. Trade only those stocks that are ready to move.
5. Time your commitments with a turn in the general market using the three laws that govern all market behavior.