The Arithmetic of Pump & Dump Patterns | Jesse Livermore

Jesse Livermore was born in 1877 in Shrewsbury, Massachusetts, to a poverty-stricken farmer family. He learned to read and write at the age of three-and-a-half. At the age of 14 his father pulled him out of school to help with the farm. However, with his mother's blessing, Livermore ran away from home to begin to live on his own behalf and responsibility aged 14 as a quotation board boy at a Boston stock brokerage business earning $5 per week. By 1923 Livermore was one of the richest people in the world. He was, he believed, particularly suited to his first job because of his strong abilities in mental arithmetic and number memorization.

 

The 1870 census in the US found that 1 out of every 8 children below 14 years old
was a wage slave. By 1910 it was 1 out of 5.

 

Stock and commodity prices came into his broker’s office on a ticker tape, a continuous strip of paper. It was Livermore’s job to read, to memorize and to transfer all the price numbers as they come in to the quotation board outside for all the broker’s different clientele crowds in and around the trading pits and lobbies to be seen and to animate them to act in that very specific foolish way they were expected to act: buying and selling and placing buy-, sell- and stop orders at certain levels. This is exactly what generates these constantly repeating tremendous opportunities, profits and cuts for the broker and for the invisible Composite Operator over there in New York and in Chicago. He realized that for the rest of his life his destiny became aligned to this information of the ticker tape and his ability to understand the message of the algorithm. Livermore literally saw patterns in the waves of numbers that flowed each day from the tape and aligned his activity accordingly. He began to write those numbers in his own notebook and tested himself, predicting the direction that different stock prices would take at certain levels, times and days. 

 

Patterns in the Waves of Numbers:
Arithmetic of the Pump and Dump.

 

Price delivered by Composite Man for the broker through the broker to the broker's different clientele crowds. Livermore realized that scheme generates more profit than any other business activity ever known to man. For the Composite Operator. Hence he aligned himself to the tune of the invisible Composite Operator's price algorithm coming in on the ticker tape from New York and Chicago. The cumulative price range of all one minute price bars of any instrument traded by any broker on any given day nowadays exceeds what is called The Average Daily Price Range by the factor of fifty. Fifty times the so called average daily trading range during each and every single trading day. Up and down. Every day. Say the average daily price range of a given instrument is 1,000, the cumulative price will range around 50,000 during any trading day. Up and down. From balance to imbalance back and forth in this very specific manner and sequence through time and price.

 

He used breakouts to a high degree of success. He would wait for price to break above a certain pivot level and then go long to ride on the emerging trend. Daily and weekly highs and lows, session highs and lows, measured moves and Floor Trader's Daily and Weekly Pivot Point Levels provide all clues for Livermore's pivotal levels. He would exit a trade only when a similar breakout occurs in the opposite direction, signifying a potential reversal in trend after a peak formation high or low, that is a change of structure and direction of price. If the reversal signal is strong enough, he would take a short trade and ride the bear market.

 

"Many years of my life had been devoted to speculation before it dawned upon me that nothing new was happening in the stock market, that price movements were simply being repeated, that while there was variation in different stocks the general price pattern was the same." Livermore used to say: "Whatever happens in the stock market today has happened before and will happen again". 

 

In his notebook Livermore fills prices into columns headed Secondary Rally  -  Natural Rally -  Up Trend  - Down Trend  -  Natural Reaction, and Secondary Reaction.

 

Trend Change Rules

Livermore’s approach to swing trading required two filters: (1.) a larger swing filter and (2.) a penetration filter of one-half the size of the swing filter. Penetrations were significant at price levels he called pivot points. A pivot point is defined in retrospect as the top and bottom of each new swing. The pivot points in the below swing chart are marked with letters. Positions are taken only in the direction of the major trend. A major uptrend is defined by confirming higher highs and higher lows, and a major downtrend by lower lows and lower highs, and where the penetration filter (swing filter) is not broken in the reverse direction. That is, an uptrend is still intact as long as prices do not decline below the previous pivot point by as much as the amount of the penetration filter. Once the trend is identified, positions are added each time a new penetration occurs, confirming the trend's direction. A stop-loss is placed at the point of penetration beyond the prior pivot point. Unfortunately Livermore never revealed how the penetration point was calculated. It seems however to be a percentage of the current swing size (e.g. 16%, 20%, 25%, 33%,50%) . 

 

Failed Reversal in the Livermore Method

In Livermore's system the first penetration of the stop-loss (a swing high or low depending on the direction of the trade) calls for liquidation of the current position. A second penetration is the necessary confirmation for the new trend. If the second penetration fails (at point K) it is considered a secondary reaction within the old trend. The downtrend may be re-entered at a distance of the swing filter below K, guaranteeing that point K is defined, and again on the next swing, following pivot point M when prices reach the penetration level below pivot point L. It is easier to re-enter an old trend than to establish a position in a new one.

 

This is Jesse Livormore's insight and conclusion:

1. Markets are never wrong opinions often are. Back your judgment and don't trust your opinion, until the action of the market itself confirms your opinion.
2. Few people ever make money on tips, beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.
3. Money is made by sitting, not trading. It takes time to make money. Don't give me timing; give me time.
4. Buy right, sit tight. Big movements take time to develop. Men who can both be right and sit tight are uncommon.
5. Money cannot consistently be made by trading every day or every week during the year.
6. Nothing new ever occurs in the business of speculating or investing in securities and commodities.
7. Never average losses.
8. The human side of every person is the greatest enemy of the average investor or speculator. Wishful thinking must be banished.

 

References:

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

Edwin Lefèvre (1923) - Reminiscences of a Stock Operator.
Jesse Livermore (1940) - How To Trade In Stocks.

Jesse Thompson (1983) - The Livermore System. In: Technical Analysis of Stocks & Commodities. 

Mark B. Fisher (2002) - The Logical Trader.

 Richard Smitten (2005) - Trade Like Jesse Livermore.

Franklin O. Ochoa Jr. (2010) - Secrets of a Pivot Boss - Revealing Proven Methods for Profiting in the Market.

The Inner Circle Trader (2021) - Optimal Trade Entry Pattern Recognition Series.

Stacey Burke Trading - YouTube Channel: Pump And Dump Day Trading Setups.  

TPR (Feb 24, 2023) - Time Frames - Price Ranges - Time-Price Proportions - Some Observations. 

The Daily & the Weekly Market Maker Cycles | ICT Intraday Trading Templates

All financial markets are dominated by investment banks, so called institutional traders or smart money. To be more precise: All financial markets are dominated by JP Morgan, Deutsche Bank, Citi, XTX Markets, UBS, State Street Corporation, HCTech, HSBC, BoC Merrill Lynch and Goldman Sachs. Their positions represent up to 80% of the total volume of the Forex market, the bonds market, the stock market and the commodity market. And yes, they also do take their own speculative positions. But the vast majority of their volume is simply called 'market making activity' because they are buying and selling for their clients. Their main clients are hedge funds, pension funds, commercial banks, corporations, other financial institutions and central banks. In fact central banks are their dearest clients. They practically own the markets. The sheer volume of their orders could never be bought or sold in single lots in any market. Hence the 'market making' and hence the 'liquidity provision'. Big banks do this for commission and they risk their client's money for market manipulation and extra profit.  

This is critical information for the small retail trader as it tells one very important clue: If the big banks are primarily market makers and liquidity providers then they will by default drive the market at will to and from areas of liquidity. Intention, logic, strategy, measures. Price is not random and price levels are predictable. Michael J. Huddleston, the Inner Circle Trader (ICT) and author of most of the smart money trading concepts, comments: 

"There is always a puppeteer. There is always someone pulling the strings. It's never being left to randomness of buying and selling. There is no support and resistance in the marketplace. These are all notions that promote the idea of free trade. When it comes to the truth of the markets: It's complete and utter control and manipulation. It's a very simple approach. It's about price: It's the open, the high, the low, and the close of the daily, weekly, monthly and quarterly bars. It's not support nor resistance what is moving the price order flow. It's all about where the money is. The retail textbooks will never teach you this: Price moves to where the money is. And the money is at the levels where most retail traders have their entry and stop loss orders - just to get harvested by the smart money during false moves and false breakouts." 

The good news is that the market makers continuously leave footprints in their accumulation-manipulation-expansion-distribution framework: order blocks, imbalances, fair value gaps and liquidity voids, liquidity pools, stop runs, and equilibrium (HERE - HERE - HERE)

Big banks do not use a lot of indicators and they employ more software engineers and programmers than technical analysts. Both for one good reason: Market making and order processing is completely automated by algorithms that guarantee maximum return. They use daily, weekly, monthly, quarterly and yearly charts, and completely ignore popular retail indicators, forecast methods, and trading systems. Their market making strategy is exclusively focused on how to break down huge orders into tiny chunks, how to buy and sell these continuously and most efficiently and on how to fool the retail trader crowd most profitably. Smart money drives the markets in daily and weekly cycles around the clock and accumulation, manipulation, expansion and distribution is the business model. The typical weekly market maker cycle looks like this: 

(1.) The week starts with a trap move on Sunday night or early Monday morning. 

(2.) Then follows an 'accumulation phase' and the setting up of an initial high and an initial low in the Asian session, during which price is usually held in a narrow range. 

(3.) The accumulation phase is followed by what Wyckoff coined the 'spring', an engineered false breakout against the real intention of the market maker to 'support or resistance levels' to harvest the retail traders' entry and stop loss orders there. The market maker considers these levels as 'liquidity pools'.

(4.) Next the market maker initiates the actual planned market move. This results in the formation of a trend that can be slow and steady, or it could be swift and furious. In the cash market a trend can be just a few hours, in the futures market up to 8 or 10 hours. On the chart the trend will be seen as a series of drives or pushes in the market maker's intended direction.

(5.) Towards the end of the day or the end of the session, there will be a corrective distribution phase and pattern of some type (wedge, pennant, head and shoulders, M or W formation), when price pulls back from the high or the low of the day because the market maker liquidates positions (see also HERE).

There are very high odds for the weekly low or high to form before the opening of the New York session on Wednesday. The odds further increase between Tuesday and Wednesday, focusing on Tuesday's London session to Wednesday's opening of the New York session. Even the market maker doesn't have infinite amounts of capital. Therefore he has to orchestrate retracements to book some profit before to continue. This is why sudden aggressive pullbacks seemingly occur out of nowhere.  

 

To get a more detailed picture of how the smart money's manipulation actually works on a day-to-day basis, Michael Huddleston elaborated six ICT Intraday Trading Templates. They provide an idea of when to expect what, clues related to the daily and weekly bias and range, and a perspective on the internal structure of the daily and weekly market maker cycles: 

1. The Classic Buy or Sell Day Template: This is the best template to make money since it is a wide range trending day that unfolds mostly on Monday, Tuesday and latest on Wednesday during the London session. The New York session will eventually give a retracement to continue with the trend that was set during the London session. The daily range will last for 7 to 8 hours once the profile is established. 

Mostly it will give a rally or drop from the daily opening price to the low or high of the day during the London session. The trend usually lasts into 11:00 EST.

2. The London Swing to Z Day Template: This template is found in the middle of a larger price swing when the trend is exhausted after a large explosive move. It is a narrow range day and ideally occurs on Thursday. 

Price will initially drop below the opening price, then run above the opening price and go back to the range into consolidation. It first appears to unfold as the Classic Buy or Sell Template. But if it continues consolidating, do not look for continuation into the New York session. Take profits.

3. The London Swing to New York Open / London Close Reversal Template: The bullish version of this template always begins like a Classic Buy or Sell template with a decline below the opening price before price starts rallying. Once price drops, a buy entry forms, price rallies to a higher time frame Point of Interest (POI), e.g. a bearish order block (OB), into a Fair Value Gap (FVG), etc. If this happens during the New York session, it indicates a classic market reversal. 

The template is used to either reach for a bearish order block on a higher time frame, for a turtle soup raid or to close a range. On a bullish day it will first create an initial low of the day during the London session, run up and create the high of the day during the New York session around the London Close, then run back down and clear the initial low that was created during the London session. Ideally it can pan out after the market is in exhaustion based on the higher time frame's dominant trend.

4. The Range to New York Open / London Close Rally Template: Generally this template is to be expected on days with high or medium impact news events like interest rate announcements, etc.

Ahead of these events price will remain in consolidation during the Asian and London sessions. Lows will be cleared initially and after the news price explodes into a directional move.

 

5. The Consolidation Raid on News Release Template: Unfolding during the New York session on days with high impact news, mostly FOMC press releases. During and shortly after the news old highs and lows of prior consolidation levels will be taken out. Ideally buy when a low is taken out and sell when a prior high was breached.

 

 

 

6. The London Swing to Seek & Destroy Template: This is the kind of day that won’t make you money. The Market Makers clear intention is to take out both buyers and sellers. Initially it would give you a London Open opportunity and setup, but very likely that won’t come to fruition. The narrow range zig-zag template lasts throughout the New York session and will oftentimes create an inside day. The template is usually applied in the middle or at the end of a larger price swing. 

 

 

References:

The Inner Circle Trader

 Stacey Burke - Simple Method to look at Weekly Market Maker Template

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

Market Makers Method 

The Bullish & the Bearish Market Maker Cycle

  

The weekly pattern does not imply the use of a weekly time frame. It refers to the pattern that is seen in a 15, 60 or 240 minute chart over a period of a week. However, market makers also have seasonal variations of price movement and so it can be seen on longer time frames, though it is probably too slow to be traded effectively.

 

 

A typical pattern of behaviour particularly when examining the Three Day Cycle is to be able to identify a peak high followed by three moves down and a reversal which forms the peak low. Each time price moves down a level they can be referred to as achieving or making either a Level I, Level II or a Level III move. Level I and Level II have relatively similar patterns of behaviour (1-2-3 stop hunt). However Level III tends to be choppy with a wide range and represents an area of profit-taking for the institutions and signifies the beginning of an accumulation period for another cycle. 

 

The reasons for this behaviour can be understood if you consider what happens during the rundown:

1. On day one the retail traders are selling and the institutions buying from the retail traders.
2. On day two the retail traders are selling and again the institutions are buying.
3. However, on day three the retail traders are again interested in selling and the institutions are buying up heavily.
4. Now price moves up aggressively triggering stops and taking a profit. (In effect, the market makers are using a scaling-in method to book their profit).
5. Following a Level III pullback price becomes choppy and continues because of what happens with the trader’s psychological adaptation to loss. After the market has run down for three days and traders have taken losses, these individuals react by pulling away from the market quite literally and having a few days off before coming back to trade. During this period the market is choppy and relatively stagnant until the traders have returned to play in the game again.

To remember the patterns the following phrases are useful:

1. "After a big drop the market must chop"
2. "After three days of drop the market must chop"
3. "After a big rise the market needs more guys"
4. "After three days of rise the market needs more guys"

These patterns are similar in different time frames. The areas of reversal are often synchronized so that they occur at the same time in different time frames. Using this knowledge it is possible to convert a spot trade into a swing trade when you enter it from a peak formation high to a peak formation low. 

Count the levels to know what part of the cycle price is currently in. Entering trades at peak reversals is best. One should only take a long position when the Low of the Day (LOD) or High of the Day (HOD) is clear. This is the only place that has a high level of certainty in directional movement. Look for a midweek reversal which will generally correlate with one or both of the intraday reversals. With an awareness of the longer cycle and assuming one is in the correct place within the cycle, it is possible to convert a spot trade to a swing trade from one of the 3 day cycle peaks to the other given an appropriate entry. This would involve going from one peak formation high to the next peak low and may take several days.

On an intraday trade, it is still important to understand the current position within this larger cycle. This will help to make a judgement about how far a run may last. For example, if price has just passed the peak high and is at a Level I accumulation then an intraday long trade after a bearish stop hunt, while valid, will not be likely to produce consistent results. Hence, it is a good idea to not take trades against the longer trend at a Level I accumulation.

 

The Accumulation Phase: This phase commences with the resetting of a daily high/low. It occurs at 5pm ET which is the beginning of the “Dharma” period. The Dharma period occurs after the US markets have closed and before the London markets have opened. During this period there tends to be little activity and the market just cycles back and forth between two price points. This occurs because Bank A will buy a quantity of currency from Bank B [1]. This causes price to rise. This is followed by bank B selling the same currency to Bank C [2] and this causes price to fall. This process goes around in circles and so the price simply oscillates back and forth. After a while, the range begins to widen [3]. This has the effect of triggering pending orders placed by breakout traders. So positions become committed and gradually accumulate as more and more traders begin to ‘take the bait’. However, when they are triggered, price is quickly pulled away and they will often be stopped out on the other side of the range which is also widening. 

 

The Stop Hunt - also defining the HOD and LOD: Sometimes between 1 – 4am ET, the market makers make a stop hunt. The stop hunt involves a deliberate movement outside of the range to what will become the high or low of the day. The move usually occurs in three pushes which can be as simple as three candles though you will sometimes see a small pause in the form of a pullback in the middle of this. The stop hunt has two main objectives:

1. Take out existing stops, that is: collecting buy side and sell side liquidity.
   
2. Encourage traders to commit to positions in a direction that is opposite to where the real trend is going to be.

This represents the high/low of the day (HOD/LOD). Once the HOD/LOD has been hit:

1. The spread is opened up by a few pips. This allows traders orders to be triggered outside their normal boundaries and they will be holding negative positions from the outset.
2. It is common to see price undergo a further period of accumulation lasting 30 to 90 minutes which encourages traders to take further positions. When there are enough positions, the price is moved in the direction of the true trend and their stops will be triggered.
3. There is often a second move to the HOD/LOD though most of the time it will fail to take it out (so as to not give those who got in a profitable position to escape from). This forms the typical W or M pattern.

This is the preferred point of entry for most of these trades, particularly the second leg of the M or W. It is relatively slow moving and so there should be no reason to rush or impulsively take a trade. 

 

 

Other behaviors at the HOD and LOD Reversal: Market makers induce traders to take the wrong direction by using sharp and aggressive moves near the high or low of the day. One of the ways of identifying that you are in the right place is that the market will seem to be quiet, in consolidation and make a sharp move out of the range, faking "the breakout".

If a trade is taken in the area of the HOD/LOD one might notice that price is moving around but the position changes little. Looking at the price board one will see that it is "flickering red and blue" with lots of changes suggesting that there is lots of activity but in fact there is little and a reversal is imminent. Another observation during this period is that the spread widens. This is done so that a broader range of orders can be collected and accumulated during this period, making it even more difficult for traders to take profit as they are in a losing position right from the outset. The diagram below demonstrates what happens to the spread during this period.

 

But these patterns do fail sometimes. This occurs when there has not been enough volume to make it worth their while to take a reversal. In these situations that price is moved to the next level to further induce positions to be taken in the wrong direction, against what is to become true trend. This is called the extended stop hunt.

 

Extended Stop Hunt: When price is pushed outside of the Asian range and comes to rest 25 to 50 pips beyond the range, the market makers' motivation is to generate a stop hunt. However, if as a result of this move the accumulation of positions is inadequate for their purposes, then the stop hunt will be extended. This means that price will be pushed beyond this Level in the direction of the technical trend in an effort to induce more traders to enter positions and build up the positions required.

Like before, this move will be in the 25 – 50 pip range and be comprised of 3 candles or 3 pushes. But also like before this is not necessarily the case and more or less are also possible. Again the trader must use their own judgement and discretion. Therefore, identifying that after a period of time the stop hunt has not led to a reversal one should scratch the trade. An appropriate period of time is 2 hours following the second leg of an M or W pattern. It the trader has not moved in the expected direction by this time, something is wrong and they have not been able to build up enough volume to make it worthwhile to reverse the market.

 

The True Trend: The stop hunt is followed by a reversal and a slower trend that continues against the ‘faked’ trend toward the opposite high/low for the day. This trend tends to move in three waves, the pause between each wave representing a new opportunity to fake out traders by reversing direction and then moving against them again. These pauses are often characterized by sideways movement rather than a significant retracement though both are possible.

 

 

The Opposite LOD / HOD and Reversal: Ultimately the opposite LOD/HOD will be reached and there will be another reversal. This often occurs in the NY session, called the NYC Reversal Trade. This trade is likely to return a smaller profit than the initial stop hunt reversal trade though it is still worth taking particularly if you are not able to enter a trade following the London open.

 

 

Return to Accumulation: Once the reversal has occurred, price tends back toward the center, often not far from the starting point and recommences a new period of accumulation to lead into the new Dharma period and tomorrow’s cycle.

 

Quoted from:

Anonymous - The Market Maker Method

 

See also:

ICT - Smart Money Technique

ICT - Market Maker Primer Course
ICT - Market Maker Forex Series

ICT - Core Content Lectures
Stacey Burke - Peak Formations