How Livermore Judges the Turning Points | Richard D. Wyckoff

Judging the main turning points in the long swings is the most important thing that he does, and if he could accomplish nothing else in between the panics and booms and accurately judge the right time for changing his position, he knows that he has a starting point for the rolling up of tremendous profits during the intervening year or two while the market is on its way from nadir to zenith. It is perfectly clear why this is so. A man who loads up at the low point of a panic has a certain amount of working capital. If he succeeds in selling out near the top of the boom, he has not only his original capital but his aggregate profits as well. If he then takes a short position with the line increased by reason of these profits and successfully rides this short line down to the next panic, he will find his resources vastly increased.

 

Quotation Board Girls copying the latest numbers calculated by the
Composite Man to the quotation board
in Waldorf Astoria's lobby to be acknowledged by the crowd as
the price and nothing but the price; New York, 1918.

 

These lines of stocks which Livermore takes on at the low points are not of course, always sold at the topmost prices. As the market executes its series of intermediate swings and begins to approach the level when an important turning point is likely to occur, he looks for more frequent reactions, and, therefore, will very often liquidate all or part of his line on some of the strong bulges which occur in the upper stages of the market, or in what is known as the selling zone. He does not consider it good policy to try and get the last point, for many things can happen which might bring the ultimate turning point nearer than he anticipated. 

 

He knows that all stocks do not make their tops simultaneously. Some reach their apex months before the last of them have exhausted their lifting power. The bull forces may be likened to an army which is carrying the defenses of the enemy: it can advance just so far without becoming exhausted and falling back. He knows that the principal bull ammunition is money and that general conditions govern and limit the extent of any move; also that it is not so much the news, the statistics, the dividends, etc. that are important but what is of dominating importance is the effect of the developments on the minds of men and the extent to which traders and investors are thereby induced to buy or sell. The market is not affected by what a million people think about the market, but it is immediately affected by their actual buying and selling or their failure to do either. 

 

 

While the long swings are of the utmost importance to him, they do not by any means constitute all of his operations. He is an active trader, for long ago he cured himself of jumping in and out of the market day after day.  

 

Next in importance to the trades which he makes are the intermediate swings running from ten to thirty points and from a week or two to a few months in duration. Let us say that the market is getting into the upper levels and although not at the turning point becomes overbought and the technical position is such that a reaction of ten to fifteen points is imminent. He decides that under such conditions it is best for him to reduce his line of long stocks in order that he may take advantage of whatever decline occurs by replacing them at lower prices. He may have twenty or thirty points profit in a certain lot of stock which he believes will sell at a higher figure eventually, but if he can close this out on the verge of a sharp reaction and replace it ten points cheaper, he has thereby reduced the original cost by that much. His judgment of the time and the direction of these intermediate swings can only be formed accurately by the action of the market as recorded on the tape of the ticker. He cannot gauge it properly in any other way. Where else can he see the gradual alteration from strength to weakness in the market; the complete supply of the absorption power; the ultimate weakening of support and the numerous other characteristics of such an episode.

Wyckoff started as a stockbroker's runner at the age of 15,
became a brokerage firm auditor a few years later,
and at age 25 opened his own brokerage firm.

Just as the market displays to his practiced eye the downward phase, so it forecasts the end of the reaction and the time to resume the long side. These indications appear in the leading stocks of important groups and in many individual issues - usually the most popular trading mediums. The principles of judging the market by its own action, Livermore learned long ago and he found that they operate over the whole wide range of stock market movements, from the little half-hourly ripples back and forth to the great swings in prices running from one to three years. It is a question of supply and demand and once recognized and properly applied, it goes a long way toward solving of most stock market problems.

The market moves along the line of least resistance and when demand is greater than supply this line is upward. To detect the momentary changes as well as those taking a longer time to work out, is the daily task of Mr. Livermore, just as it is the business of every manufacturer and merchant to judge the future course of his particular industry.

Quoted from:
Richard D. Wyckoff (1920s) - Jesse Livermore's Methods of Trading in Stocks.

 

See also:

Richard D. Wyckoff (1910) - Studies in Tape Reading.

Richard D. Wyckoff (1922) - Exposing and Killing the Bucket Shops. 

Edwin Lefèvre (1923) - Jesse Livermore - Reminiscences of a Stock Operator.

Edwin Lefèvre (1925) - The Making of a Stockbroker. 

Richard D. Wyckoff (1930) - Wall Street Ventures & Adventures through Forty Years.

 Richard D. Wyckoff (1931) - The Wyckoff Method of Trading in Stocks.