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Wisdom From Richard Wyckoff

For a biography about Richard Wyckoff  >>>

About Trends

The Main Factor Is The Trend. If you work in harmony with the trend of the market, your chances for success are three or four times what they would be if you buck the trend. That is, if you buy in a bull market, the trend will, under ordinary circumstances, give you a profit; but if the trend of the market is downward, and you take a long position, the only way you can get out is on the incidental rally.

…even when a purchase is not well-timed, it is likely to show a profit at sometime or other if the broad tendency of prices is upward. Even poor weak stocks advance to some extent in a bull market.

Dealing Should Be in The Active Stocks. In order to make a profit, a stock must move. A great deal of money and many opportunities are lost by traders who keep themselves tied up in stocks which are sluggish in their action.

About Stops

Risk Should Almost Invariably Be Limited.

The best way to limit your risk is to form a habit of placing two- or three-point stops behind any trade which is made for the purpose of deriving a profit from the fluctuations…The most successful traders have followed this rule and its importance cannot be overestimated.

Profits can often be protected by moving stop orders up or by selling one-half of the commitment in order to mark down the cost of the remaining half.

Unless a stock shows … a profit within two or three days after he buys or sells it short, .. close the trade, on the ground that his judgment was wrong as to the immediate action of the stock, and he cannot afford to be tied up. Whenever I find myself hoping that a trade will come out all right, I get out of it.

Cut your losses…(have) a mental stop and when it is reached close out the trade.

I can trace most of my principal losses to my failure to place stop orders when the trades were made…I have very often delayed placing a stop order until the opportunity was lost, and in some cases these losses have run into five or ten points when they might just as well been limited to two or three.

About Risk

Anticipated Profits should Be At Least Three or Four Times the Amount of the Risk.

About Short Selling

One Should Be Able To Deal Freely On Both Sides Of The Market. Any one who is unable to do this had better become an investor instead of a trader, buying in panics or in big declines such securities as appear to be selling below their intrinsic value.

About Trading

You should either make a business of trading or else not try to be a trader. You cannot be successful at trading any more than you can be at mining, manufacturing, doctoring or anything else, unless you are trained for it…unless you are peculiarly adapted to the business you are better become an intelligent investor instead of an unintelligent trader.

Wall Street history shows that securities more often reach their low point when some danger or disaster is threatened, than upon the actual occurrence of these incidents, and the reason the low point is made just prior to, or at the time the event actually occurs is: By that time every one who is subject to fear-of what-will-happen, has sold out. When the thing does happen or is prevented, there is no more liquidation, and the price rallies on the short interest, or else on the investment demand created by the improved situation

I have yet to find a man, in or out of Wall Street, who is able to make money in securities, continuously or uninterruptedly. My experience is no different from that of many successful Wall Street men. Like every one else, I have my good and bad periods. Sometimes it appears as though everything I touch pans out well, and at other times everything seems to go wrong. It is much like any other line of business.

The best work I ever did in judging the market was when I devoted one hour a day in the middle of each session. I did not come to Wall Street. I had no news ticker. I seldom read the news items but judged solely from the action of the market itself; hence I was not influenced by any of the rumors, gossip, information or misinformation with which the Street is deluged day after day.

But all he needs is the highest, lowest and last prices of the stocks which he is watching. Without being at all egotistical I believe I could go around the world and having arranged to have these few details of a stock … cabled to me daily, I could cable my orders and come back with a profit. It would not be necessary for me to be advised of the volume of trading in that stock or the general market, although in some instances this might help. Certainly I would not care to have any news of any kind included in the cables.

Most people make their mistake when averaging (down), by starting too soon; or if they are buying on a close scale, say one point down, they do not provide sufficient capital to see them through in case the decline runs two or three times as many points as they anticipate.

Eight-five or ninety per cent of business, investment and speculative mortalities are due either to over-trading or lack of capital, which when boiled down are one and the same thing. And those who average their investment or speculative purchases supply in a great many instances, glaring examples of the causes of failure.

Everyone should occasionally sit down and take account of stock – not securities, but his own ability, judgment, and what is most important, results thus far obtained. If he finds that the past few months or years have been unsatisfactory and unprofitable, judging from the amount of time, thought, study and capital employed, he should suspend operations until he ascertains the cause; then he should set about and cure it. This can be done by study and practice (on paper or with ten share lots … if necessary) until he is confident that he has overcome the difficulty.

It may be that he is a chronic bull and finds himself in a bear market. I have frequently discovered that I was out of tune with the market, although I am never a chronic bull or bear, but always the kind of an animal the situation seems to call for.

It has been a great advantage to me, however, to have gone off by myself at times and figured out just where I stood, and, if things were going wrong, why? I find that it is more important to study my misfortunes than my triumphs. 

No one can avoid having his capital tied up at times in mediums which are not satisfactory. But there should be no hesitation about switching, even though it necessitates the taking of a loss in your present holdings. A good security will make up this loss much faster than one which is mediocre.

I cannot afford to let my money sleep, nor have it work slowly. I am a merchant: I must turn my money over as often as I can, so that the average yearly return will be at its maximum.

One’s capital should be made to do the greatest service in the shortest length of time. … I have found that it is best to use only a small part of the total available capital for trading. To employ all or most of it is a fatal mistake, for in the case of an unforeseen situation, causing a large loss, one is obliged to begin over again; whereas if the bulk of the capital is invested where it is safe, returns an income, and will probably enhance in value, then in case of a calamity a part of it can be turned into cash in order to renew trading operations.

When a man finds that he has a certain sum invested and that this sum is diminishing on account of his pulling it down for trading purposes, he is on the wrong track and had better stop short and take account of himself before he travels further. A person who cannot be successful in trading with a small amount of capital, will unquestionably lose a large amount if he employs it.

It is better to depend on your own judgment than on that of any other person. If you have not reached a point where you can do this, better continue your studies and practice until you can form a sound, independent judgment on which you can base your commitments.

The longer your experience, the better background you have for comparison and the greater your ability to judge and forecast correctly. As conditions are constantly changing, no two markets are alike and no two daily sessions are similar; but markets and sessions and panics and booms all have certain characteristics which should be carefully studied and intimately understood.

For more About Richard Wyckoff and his Day Trader's Bible   >>>

Source: The Magazine of Wall Street © 1924

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