Wyckoff developed a uniquely effective method to identify price targets for both long and short trades using Point and Figure (P&F) charts. This method embodies Wyckoff’s fundamental law of Cause and Effect, where the horizontal P&F count within a trading range represents the Cause and the subsequent price movement out of the trading range represents the Effect.
The Wyckoff Count Guide shows the trader how to calculate the cause built during a trading range so as to be able to project future price targets. The process consists of the following:
- Use a bar chart and a P&F chart encompassing the same trading range(s) and timeframe.
- Choose an appropriate box size for the P&F chart: e.g., for low-priced stocks, the box size could be 0.5 to 1 point, whereas for high-priced (> $200) stocks, a box size of 5 points would be more appropriate. The box size for the Dow Jones Industrial Average could be 100 points.
- After identifying a sign of strength (SOS) towards the right side of the TR on the bar chart, locate the last point at which support was met on a reaction—the last point of support (LPS). Locate this point on your P&F chart also and count from right to left at the price level of the LPS, taking your most conservative count first and moving further to the left as the move progresses. These increments in counts should be based on phases corresponding to specific Wyckoff events within the TR.
- In moving to the left, turn to your bar chart and divide the area of accumulation into phases, adding one complete phase at a time. Note that P&F phases are NOT the same as Phases A – E used in the analysis of trading ranges described in previous sections on Accumulation and Distribution. Never add only part of a P&F phase to your count. Volume and price action will usually show where the phase began and ended. For instance, the first phase can consist of the P&F count from the LPS back to the spring, while the second phase covers the count from the spring to a clearly defined ST.
- In the case of a longer-term count involving multiple P&F phases, the LPS often appears at the original level of preliminary support or the SC. When the LPS occurs at either of these levels, this tends to validate the count.
- A spring may also serve as the LPS from the perspective of the P&F count. Usually a spring is followed by an SOS, and the low of the reaction following that SOS is also a valid LPS.
- As the trend progresses, you will often see price consolidation, or a new trading range, forming at a higher (or, in a downtrend, lower) level. Very often, this will produce a “stepping stone confirming count” of the original P&F count. Thus, as the new TR forms, you can often get a timing indication by watching the action of the stock as the potential count begins to confirm the original count. In other words, as the price target projected from the stepping-stone TR approaches that of the original TR, the upward or downward trend may be ready to resume.
- Because the price swings within these stepping-stone consolidations are typically narrower than those in primary accumulation or distribution TRs, it is preferable to use a smaller box size to measure P&F counts within the former. For example, long-term counts on three-point and five-point charts are frequently confirmed by subsequent minor counts using a one-point chart in re-accumulation TRs.
- For longer-term price targets, you should add the P&F count to the exact low of the trading range in which the count is being measured, as well as to the halfway point between the low and the price level of the count line. You will thus be using the most conservative count(s) as a guide so as to estimate more realistic minimum price targets.
- Price targets derived from Wyckoff P&F counts represent points where you should “stop, look and listen.” These targets should never be looked upon as exact points of where a trend will change; instead, use them as projected points where a turn could occur. Additionally, you can use the bar chart to observe the price action and volume as these points are approached.
- In case of three-point or five-point charts, the same count line should be used as for one-point charts.
“May your longs go up, your shorts go down and your flat positions stay sharply unchanged. Safe trading.”
Nick