Wyckoff’s chart-based methodology rests on three fundamental “laws” that affect many aspects of analysis. These include determining the market’s and individual stocks’ current and potential future directional bias; selecting the best stocks to trade long or short; identifying the readiness of a stock to leave a trading range; projecting price targets in a trend from a stock’s behavior in a trading range.
These laws inform the analysis of every chart and the selection of every stock to trade.
1. The law of supply and demand determines price direction. This principle is central to Wyckoff’s method of trading and investing. When demand is greater than supply, prices rise, and when supply is greater than demand, prices fall. The trader/analyst can study the balance between supply and demand by comparing price and volume bars. This law is deceptively simple, but learning to accurately evaluate supply and demand on bar charts, as well as understanding the implications of supply and demand patterns, takes considerable practice.
2. The law of cause and effect helps the trader and investor set price objectives by gauging the potential extent of a trend emerging from a trading range. Wyckoff’s “cause” can be measured by the horizontal point count in a Point and Figure chart. The “effect” is the distance price moves corresponding to the point count. This law’s operation can be seen as the force of accumulation or distribution within a trading range, as well as how it works itself out in a subsequent trend or movement up or down. Point and Figure chart counts are used to measure a cause and project the extent of its effect. (See TAGD 11: Wyckoff Point and Figure (P&F) Count Guide )
3. The law of effort versus result provides an early warning of a possible trend change in the near future. Divergences between volume and price often signal a change in the direction of a price trend. For example, when there are several high-volume (large effort) but narrow-range price bars after a substantial rally, with the price failing to make a new high (little or no result), it suggests that big interests are unloading shares in anticipation of a change in trend.
“May your longs go up, your shorts go down and your flat positions stay sharply unchanged. Safe trading.”
Nick