Anatomy of a Trading Range by Jim Forte In the following article I will dis cus s the analysis of a Tradi ng Range, emplo ying terms and principles develop ed by Richard Wyck off in the 1920s and 30s and more recently by the “Sto ck Market Institute”. In technic al analysis, there are a variety of methods used to analyze trading range formations and fore- cast the expected directio n and extent of the move out of a trading range. Most practitioners of techni- cal analysis, whet her fam iliar wit h the Wyck off method or not, will be able to relat e many of the poi nts and principles being disc usse d to those they are al- ready fami liar with . Much of Wycko ff’ s analysis and worki ng prin- ciples wer e based on wha t he iden tifie d as three fundamental laws: 1. The La w of Supply and Demand-wh ich simply states tha t when de man d is greater tha n sup- ply , prices will rise and when su pply is greater than demand, prices will fall. 2. The La w o f Cause and Effect-postulates that in ord er to have an effect you must first have a cause, and that effect will be in proportion to the cause. This law’s oper atio n can be seen workin g, as the force of accum ulation or distribution within a trading range wo rk s itsel f o ut in the subsequent move out of that trading range. Po int and figure chart counts can be used to measure this cause and project the extent of its effect. 3. Th e La w ofEf fort vs. Result-helps us evalu - ate the relative dominan ce of supply vs demand, through the divergence or disharmony betwe en volume and price, whe n considering relative strength, comparative price pro gres s and trading volume. An objective of Wyckoff analysi s is to aid in establishing a speculative position in correct an- ticip ation of a coming move w her e a favorable re- ward /ri sk rati o exits (a t least 3 to 1) to justif y tak- ing that position. Tradin g Ranges (TR’s) are places whe re the previous move has been halte d a nd there is relative equi libri um between supply and de- mand. It is here within the TR that do minan t and better informe d interest s conduct campaigns of accumulation or distribution in preparatio n for the distribution that can be said to bui ld a cause whi ch unfolds in the subseque nt move. Because of this bu ildi ng of force or cause, and because the price action is well defin ed, trading ranges represent special situations that offer trad- ing opportunities wit h pote ntial ly very favorable reward/risk parameters . To be successf ul however, we must be able to correctly antic ipate the direc- tion and magnitude of the coming move out of the trading range. Fortunately, Wyck off offer s us some guideli nes and models by which we can examine a trading range. A prev iew of the guidelin es and model schemat- its presented here, alon g with the accompanyin g expla nation of the term s and principles represented in the schemati cs, will go a long way to further the reader’s understanding of the text. It is through the iden tific ation and analysi s of the price and volume action and certain principles in action within the various phas es of the trading range (TR) that the trader can become awa re and conclude that supply or demand is becomin g domin ant and correctly antici pate the coming move. It is through the analysis of the phas es of the TR that we can distinguish accumul ation/rea ccumula tion from dis- tribution/redistribution. The Wyck off method employs bar chart s along wit h certain term s and principles in action to de- termine the expecte d direction and timing of a com- ing move. It also employs poin t and figure chart counts to aid in projecting the extent of the move. For those interested in explorin g the use of point and figure charts , refere nces are avai lable from the Wyckoff “Stock Market Institut e” (SMI) and from other so urc es on techni cal analysis. Our emphasis here will be primaril y on the analysi s of bar chart formations. The following illustrations represen t an idea lized Wyck off mode l of market cycle s invol ving supply and demand, accumulation and distributi on, and a con- ception of the primary market phases. Accumulation Schematic 1 is a basic Wyckoff mode l for accu- mula tion . While this bas ic model does not off er us a MTA JOURNA L I SUMMER - FALL 1994 47 Split by PDF Splitter
