“Smart Money” Trading Strategy Exposed

Wyckhoff Publication
Still relevant!
Richard D. Wyckoff was a the legendary trader who, in the 1930s, wrote a manifesto that gained him a cult following on Wall Street.

Most interesting, in Section 9M of his book The Richard D. Wyckoff Method of Trading and Investing in Stocks, Wyckoff exposes the process of how a large operator (professional fund manager, etc.) will manipulate a stock up or down. I believe that these insights are still valid today and applicable in financial markets — including bitcoin. Fund managers, it is said, still swear by this strategy.

One of the key takeaways from the book is that if you want to succeed, you have to learn to recognize the professionals and understand what they are doing in the markets. That’s what traders who follow Wyckoff do — they watch the large operators, the “Composite Man.”

That next time that you, the trader, sees this kind of strategic engineering unfold as price action in your charts, you can react accordingly. It takes a bit of experience, though.

Wyckoff points out that the stock market is like any other merchandising business. Liquidity is an important issue for professional fund managers and high net worth individuals. Those insiders buy only when prices are low with the idea of selling when they are high as they operate only in the stocks or commodities which they can move best so they may secure the highest possible rate of turnover of inventories.

The following is an excerpt of Section 9M of Wyckhoff’s fabulous book. (They were reading stock tape in the 1930s, while I am looking at bitcoin charts in Tradingview instead. Some things have changed…)

THEORY

Wolf of Wall Street
Composite Man: friend and/or enemy?
Like individuals, stocks have certain characteristics with which one becomes more and more familiar as he studies intensively their past and current movements. The market is made by the minds of men, and all the fluctuations in the market and in all the various stocks should be studied as if they were the result of one man’s operations.

Let us call him the Composite Man, who, in theory, sits behind the scenes and manipulates the stocks to your disadvantage if you do not understand the game as he plays it; and to your great profit if you do understand it.

Not all of the manipulators’ moves can be detected. Not all of the moves are made by manipulators. In fact it does not matter to the tape reader or the chart reader whether the moves are real or artificial; that is, the result of actual buying and selling by the public and bona fide investors or artificial buying and selling by large operators.

Most of the important moves moves in the market are prepared, executed and concluded, and a large number of these trading and investment opportunities may be spotted in time to take advantage of them.

The preparation of an important move in the market takes a considerable time. A large operator or investor acting singly cannot often, in a single day’s session, buy 25,000 to 100,000 shares of stock without putting the price up too much. Instead, he takes days, weeks or months in which to accumulate his line in one or many stocks.

He prefers to do this while the market is weak, dull, inactive and depressed. To the extent that they are able, he, and the other interests with whom he works, bring about the very conditions which are most favorable for accumulation of stocks at low prices.
Our Stop Loss orders are targeted for liquidity.

When he is ready to go forward with his campaign, he waits for a favorable market and then proceeds to mark the price up, gradually or rapidly, as the situation warrants. If he knows of some favorable announcement that will appear in thirty or sixty days, his operations will be timed so that the rise will culminate about that time.

That’s why we buy the rumors and sell the news.
You have often noticed that a stock will sell at the highest price for many months on the very day when a stock dividend, or some very bullish news, appears in print. This is not mere accident.

The whole move is manufactured. Its purpose is to make money for inside interests — those who are operating in the stock in a large way. And this can only be done by fooling the public, or by inducing the public to fool themselves.

When an operator wishes to attract buying from the public, he advertises his stock on the tape by making many transactions, great activity, and by trading in a large number of shares. This creates what is termed a “broad market.”

Great activity and breadth induces trading in large quantities by big operators on the floor and outside. Such a market enables the manipulator to unload a large line of stock.

When he wishes to accumulate a line, he raids the market for that stock, makes it look very weak, and gives it the appearance of heavy liquidation by sending in selling orders through a great number of brokers.
Observe buy and sell walls in order books.

The large operator does not, as a rule, go into a campaign unless he sees in prospect a movement of from 10 to 50 points.

EXAMPLE

smart money strategy
Smart money really appreciates retail donations.
Suppose a stock is fluctuating between 30 and 35 and an operator believes that it should sell at 60 in the next few weeks or months. And say he decides to accumulate, if he can, 50,000 shares between 50 and 35. First he picks up what he can in the market by placing buying orders, say from 33 down to 30, on a scale.

Then he forces the price down to around 30 by offering large amounts of stock and inducing floor traders and other people to sell their long holdings or go short because the stock looks weak.

By putting the price down, he may sell 10,000 shares and buy 20,000; hence he has 10,000 shares long at the lower prices of his range of accumulation.

By keeping the stock low and depressed, he discourages other people from buying it and induces more short selling. He may, by various means, spread bearish reports on the stock. All this helps him to buy.

Using this method, the pro will accumulate a large enough position to effectively remove almost all would-be sellers from the market.

When he is thus buying and selling to accumulate, he necessarily causes the price to move up and down, forming the familiar trading ranges, or congestion areas.

Finally he completes his line. The stock now stands at 35, and, as he has absorbed 50,000 shares below that figure and other operators have observed his accumulation and have taken on considerable lines for themselves, the floating supply of the stock below 35 is greatly reduced.

At 36 the stock is prepared for the “mark-up.” It is ready to go up as soon as he is willing to allow it.

Then, he starts pumping the price up to $60 by buying more shares – and he really ramps it up toward the end to coincide with the “Good News” he is expecting in a few days’ time.

Next, suppose the above operator has, by means of his own manipulation, aided by favorable market conditions, been able to mark the price of his stock up to 50, and that he knows of the intention of the company’s management to make a favorable announcement five days hence. In these intervening five sessions on the Stock Exchange, he will mark the price of that stock up with increasing rapidity.

If the announcement is to be made after the close of the market on the fifth day, he will run the price up from say 56 to 60 on that day and close it at the highest point it has touched in the whole campaign, with great activity in the stock and a large volume of trading.

The process of distributing calls for much publicity so that the attention of the public will be attracted to the stock. The rise to 50 started a whole crop of rumors. Brokers who are close to the bankers or the management of the company have been trying to find out what is going on to make the stock so strong.

Insiders have hinted vaguely that “something good is coining out,” and without knowing just what this expected favorable news is, the brokers have put their clients into it. Considerable outside public following has been gained during the rise. The market for the stock is broadening.

Then, when the news hits, the pro can instantly unload 20-30K shares as retail investors rush in to buy.

When the announcement appears in the papers that evening and next morning many people are thereby induced to place buying orders and the market absorbs, that morning, 20,000 or 30,000 shares of the operator’s holdings.

After this the price may recede a few points, but he, having sold a large part of his line, is willing to take a small percentage of it back at 57 to 56, and after this has been accomplished, and the activity has quieted down, he will mark the price up to 60 or 61 again.

At that point he either turns seller, and markets the balance of his stock on the way down; or he works it up and down in a range of a few points from the top, till he has completed his selling.

The operator has now disposed of his entire line and, as the news is now known to the public and many people have bought and thus taken the stock off his hands, the stock may be regarded as technically in a weak position, for it is in what is called “weak hands.

By this I mean it is held mostly by those who have bought at the top of a 30 point rise, when the news was bullish; most of these purchases being made on margin, the holders can be shaken out or tired out.

So, it’s time to sell short at $60! The pro can initiate a large short position, while fooling retail folks by putting on good-sized buy orders at $56, supporting the asset and inducing the crowd to keep buying.

The operator now sees a chance to make a turn on the short side, so while the market is in this range of say 56 to 60, and after he has completed selling his long line, he sells short, say 25,000 shares.

In doing this he makes the stock swing back and forth over this range, keeping good-sized supporting orders in around 56 to fool the floor traders, the specialists and the public, who see on the floor and on the tape evidence of his support on the reactions. Thus they are led to believe the stock is going still higher.

Then, he pulls out the rug – canceling all his buy orders and leading a raid on the asset. That’s how its done – he plays it in both directions.

When the operator has sold all of his 25,000 shares short, he cancels all of his buying orders. The specialist in the stock then tells some of the more important floor traders that the stock is in a weak technical position and that there is no support for the next 8 or 10 points and they all get together and raid it down to 50, at which point the operator covers his shorts.

Excerpted from
The Richard D. Wyckoff Method of Trading and Investing in Stocks