Wyckoff on reading the mind of the market

As he recounts in Wall Street Ventures & Adventures through Forty Years, Wyckoff was besieged by people claiming to have a system to beat the market. “Few had any money. Always there was some reason why they had not made their fortune, even though they possessed the magic key.” (pp. 163-64) Wyckoff studied hundreds of plans and even seriously considered one trend following system that looked promising, but in the end he concluded that “methods of this kind, which substitute mechanical plays for judgment, must fail. For the calculations on which they are based omit one fundamental fact, i.e., that the only unchangeable thing about the stock market is its tendency to change. The rigid method sooner or later will break the operator who blindly follows it.” (pp. 164-65) This indeed happened to the method Wyckoff contemplated, especially after September 1909 when, with the death of E. H. Harriman, “the whole character of the market changed.” (p. 165)

In a series of articles entitled “Studies in Tape Reading” (still available in book form and essential reading for wannabe tape readers) Wyckoff outlined ways the stock market, “by its own action, continually indicates the probable direction of the immediate trend.” (p. 174) Wyckoff wanted to emulate the methods of floor traders and follow the big money. “If one were to become sufficiently expert to judge by the action of stocks what was in the mind of the insider or manipulator, one could scent the moves, go with them, and benefit by having these big operators working for one.” (p. 175)

Wyckoff suggested two models for understanding the market. First, the market is a collection of individuals, each with his own modus operandi. This is obviously a difficult model to apply because there are so many variables—traders, operators, and investors with unique styles and stocks with their own individual peculiarities. Second, and more useful, the market has only a single trader, the so-called composite operator. “The successful trader must endeavor to ascertain what is in the back of the head of that fellow and to anticipate his moves; for he is constantly expressing his intentions by what he does and the way he does it; by the urgent or leisurely character of his buying or selling; by the volume of the stocks he deals in, the width of their swings, especially in the leaders.” (p. 177) In the second model there’s only a single mind to read, though stock movements still need individual attention.

Wyckoff’s composite operator seems to come from the ranks of the manipulators, the smart money that starts campaigns. It is his mind that the trader must read. The only way to accomplish this task is through long study and continuous practice, practice “in actual trading.” Paper trading, Wyckoff argues, lacks the element of risk. Of those that study and practice, however, only a fraction will be able to develop the intuition necessary to be a truly successful trader. “Something in the very nature of most men seems to work against them.” (p. 179)