Monday, April 29, 2013

Weis, Trades About to Happen

If you like drawing lines on charts you’ll find a soul mate in David H. Weis, author of Trades About to Happen: A Modern Adaptation of the Wyckoff Method (Wiley, 2013). As he writes, “I cannot stress enough the importance of drawing lines all over your charts. … They define the angle of advance or decline within a price trend, alert one to when a market has reached an overbought or oversold point within a trend, frame trading ranges, depict prices coiling to a point of equilibrium (apex), and help forecast where to expect support or resistance on corrections.” (p. 27)

Weis has long been considered an expert on the Wyckoff trading method as well as on Elliott Waves. Technical traders may know him from his Weis Wave indicator.

In Trades About to Happen Weis, like Wyckoff, touts skill in tape reading as the key to trading profitability. His charts include only price and volume—with, of course, the mandatory lines (support and resistance levels, trend lines, and channels). Most of his charts, by the way, are bar charts, although in his analysis of Wyckoff’s methodology he includes volume-figure charts and, later on, more traditional point-and-figure and renko charts.

To read the tape is to read a fascinating story, a story of supply and demand, of shifting sentiment. It is not simply to read a succession of letters (or bars), as some bastardized forms of tape reading would have us believe. As Wyckoff himself wrote in Studies in Tape Reading (p. 95), “Successful tape reading is a study of Force; it requires ability to judge which side has the greatest pulling power and one must have the courage to go with that side. There are critical points which occur in each swing, just as in the life of a business or individual. At these junctures it seems as though a feather’s weight on either side would determine the immediate trend. Anyone who can spot these points has much to win and little to lose.”

Weis explores key tape reading concepts such as springs, upthrusts, and absorption. In fact, he claims that “You can make a living by trading springs and upthrusts.” For those not familiar with the terminology, a spring is “a washout (penetration) of a trading range or support level that fails to follow through and leads to an upward reversal.” (p. 73) An upthrust is a failed upside breakout. Both the spring and the upthrust offer trading opportunities “at the danger point where the risk is the least” (p. 95), although Weis considers the upthrust a trickier trade. After all, many breakouts are spectacularly successful.

Trades About to Happen is a carefully crafted book with an abundance of detail. It’s essentially a textbook (without all those annoying qualities of so many textbooks) for the would-be tape reader. Traders who are floundering in a sea of indicators would do well to learn some of the tales the tape tells. And learn to use their own judgment.

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