My good friend and new partner, Todd Butterfield, recently made a very insightful comment about very short-term trading. He said, “it’s like throwing quarters in front of a steamroller”. The quarters are the profits. The steamroller represents large losses. They are inflicted on very short-term trader who lose control of trades. Then they try to emotionally justify the trades that are moving in the wrong direction. Their losses are compounded and they are crushed by the steamroller.
The risk/reward ratio is extremely important. It’s never how much you make. It’s how much you don’t lose.
Successful short-term trading requires market discipline and sometimes it’s better not to make a trade, even though the market ends up moving in the expected direction.
That happened this past week. After a two-day reaction, accelerated by the Brexit news, the Wyckoff Wave began to rally. On Monday, our daily Pulse of the Market report, that is e-mailed to charting service subscribers, suggested short positions be closed and profits taken. This was a good place to take profits, as on Tuesday the Wyckoff Wave began its rally.
By Friday, the Wyckoff Wave had regained almost all the ground it lost during the Brexit reaction. In hindsight, very short-term traders should have gone long on Tuesday. However, was that really the correct thing to do?
Let’s start with the Wyckoff Wave’s vertical line chart that began in May. Was it possible that the sideways movement from points A to C could’ve been a minor period of distribution? Distribution trading ranges do not need to end with an Upthrust. They can simply end with a Sign of Weakness. Was the move off point C a Sign of Weakness?
In addition, the Wyckoff Wave did react through the bottom of that little trading range on wide price spread and increased volume. Was this a “Fall through the Ice”?
Wyckoff students needed to seriously include these possible scenarios in their market analysis. If that scenario played out, the Wyckoff Wave would experience a poor quality rally back to the bottom of the trading range. This could result in a Last Point of Supply and another short term opportunity to enter the market to the downside. Therefore, any short-term trade to the upside would have a terrible risk/reward ratio.
A review of the Wyckoff indicators showed that the Optimism – Pessimism Index was in harmony with the Wyckoff Wave. The Technometer was in a neutral condition and the Force Index was producing strong negative readings. There was nothing in these important Wyckoff tools that suggested there were opportunities to the upside.
In light of those scenarios, it is difficult to justify taking a short term long position at point D?
As the rally, off point D, progressed, it was not nearly as strong as the reaction off point C.
The reaction only lasted for two market days on wide price spread and volume. The subsequent rally lasted four days. Notice the volume. It was noticeably less than on the reaction.
If there is going to be a strong move to the upside, one would expect demand to come into the market. The Wyckoff Wave rallied on Tuesday on narrower price spread and lower volume. This suggested a lack of demand. Wednesday was also a lack of demand day. While some demand was present on Thursday, it dried up on Friday as the Wyckoff Wave rallied on narrower price spread and lower volume.
Although lower volume can be expected on the day before a holiday weekend, this still suggests the Wyckoff Wave will have a difficult time moving through the resistance at the top of the trading range.
Another scenario would be that the Wyckoff Wave reacted and had a Spring of the minor trading range. However, a Spring requires that strong demand comes into the market immediately and any rally is demand driven. As demand did not appear until Thursday, it is difficult to justify calling the reaction to point D a Spring.
At week’s end, the Wyckoff indicators were more positive and they are sending different signals. The Optimism – Pessimism Index has moved into a negative divergence with the Wyckoff Wave, when compared with the top of the trading range. The Technometer remains in a neutral condition. The Force Index is producing positive readings, but these aren’t as significant because the Technometer is in a neutral condition.
So, when the market opens on Tuesday, the Wyckoff Wave is right back to where it was before being impacted by the news from Great Britain.
The Wyckoff Wave is at the top of a fairly extensive trading range, that is most probably accumulation. This would suggest it will continue to move sideways until there is ending action.
If short-term traders had made a decision to go long at point D, they would’ve been rewarded with a reasonable profits. However, Wyckoff discipline suggested there was there wasn’t enough justification to take a position.
One does not need to be trading in the market every day. It is much better to pick your spots, increase your probability of success and take your profits.