What Wyckoff Failed to Take From William Gann Tool Chest
Richard Wyckoff interviewed William Gann as part of his market research, we feel Wyckoff should have added a few Gann tools to his own methodology. You may or may not concur, have a read.
The Richard Wyckoff method has 5 phases (A, B, C, D, E) to determine if the accumulation or distribution pattern is about to break out into a price mark up or down phase. You can refresh yourself on the detail of these phases via our 'Richard Wyckoff Method' page. We have marked on the chart below the 5 phases next to each price reversal action. Once the 5 phases have been confirmed and price breaks through the ice (support) or the creek (resistance) the Wyckoff trader must then draw a trading channel to navigate the price mark up or down. Wyckoff would execute positions in the market after reference points 1, 2 and 3 on the chart subject to favourable price and volume action.
The Richard Wyckoff method is a solid technique but in our view could use a little adjustment when the trader is working through phase D and E. We wish to highlight some minor issues that require a little tweaking:
The Wyckoff trader must determine in phases D and E through price and volume action that either demand has over come supply (bull case) or supply has overcome demand (bear case). When the chart allows this to be clear this process is easily done, however some times the price and volume patterns are not so clear and confusion and fear as to a false break out will plague the Wyckoff trader mind.
After determining that a mark up or mark down period is about breakout with a good 3 to 1 profit ratio the Wyckoff trader doesn't know if the profits will be made within 10 days or 10 weeks. Time is money and the application of price channels to the price action is not a true measure of time to price as the slope of the channel is not a factor in the Wyckoff method.
The Wyckoff channel is not a definitive tool to determine whether price action will maintain a status of mark up or down. For example, if the slope of the channel is relatively flat then the price action may be just moving into a new trading range and thus be more accumulation or distribution.
The construction of the Wyckoff channel requires three pivot points (as shown by the three solid dots on the chart). Sometimes there is no correlation between the price mark up or down to the channel and constant re drawing of the channel (or trend lines is required).
The above issues are not major and if the reader wishes they can be ignored to maintain the purist view of Wyckoff trading style. But if the reader is open to a possible fix then consider the following.
Gann angles drawn on an equal time (xAxis) to price (yAxis) scale are a true measure of price appreciation or depreciation to time. You can refresh yourself on the detail of Gann Angles via our 'William Gann Method' page. Let's review.
Bullish Angles: When price is above a positive sloping Gann Angle it
is in a corridor of price appreciation.
Bearish Angles: When price is below a negatively sloping Gann Angle it is a corridor of price depreciation.
Our discussion will cover the bullish Gann Angles, the inverse is true for bearish Gann Angles.
|Black Corridor||When price is over of the black line it is appreciating at better than 12 units of price for 1 unit in time (1x12).|
|Gray Corridor||When price is over of the gray line it is appreciating at better than 8 units of price for 1 unit in time (1x8).|
|Green Corridor||When price is over of the green line it is appreciating at better than 4 units of price for 1 unit in time (1x4).|
|Blue Corridor||When price is over of the blue line it is appreciating at better than 2 units of price for 1 unit in time (1x2).|
|Red Corridor||When price is over of the red line it is appreciating at better than 1 unit of price for 1 unit in time (1x1).|
Quickly the reader will realise that price action in the steeper corridors will generate quicker profits that when it is not.
When price action is within a mark up or down phase it can consolidate into different degrees of re accumulation or re distribution. The generic patterns the chartist sees are patterns like flags, symmetrical triangles and small rectangles. These continuation patterns can be a few days or several weeks in time. The time span of the continuation pattern is the 'degree' of concern, the longer in time the continuation pattern are the greater the risk the re accumulation pattern morphs into a full distribution pattern and price reverses ( like wise for re distribution patterns).
Please refresh your self with the Wyckoff Phase chart. Re accumulation patterns begin their life with minor distribution (as some players take profits), but as time goes on the re accumulation pattern breaks into a further mark up of prices. Time may or may not be the friend of the re accumulation phase as fundamentals can change for better or for worse (like wise for re distribution patterns).
Let us review the floating variables within the Wyckoff channel tool to monitor price mark up or down.
Price can be marked up or down at any pace (as the slope of the Wyckoff Channel can be very different degrees of pace).
Price may suffer during the mark up or down phases re accumulation or re distribution phases of different time spans.
You can conclude that the Wyckoff Channel is not definitive when price action is within its boundaries will be a pure mark up or down phase, as the mark up process can be troubled with an unknown degrees of re accumulation or re distribution. It is important for the investor know for sure when price is in a pure mark up or down phase as this has direct implications on capital allocation and or portfolio profitability (Alpha or relative strength return).
Therefore the investor requires a tool to identify pure price mark up (or down). The tool is required to be 80% plus accurate for when price stays within its boundaries price would continue to be in a mark up (or down) phase with only minor periods of re accumulation (or re distribution).
If price stays above the Blue corridor (including the Green, Gray and Black corridors) then price is appreciating at better than 2 units of price for every 1 unit in time, then it is very unlikely that price will suffer any serious re accumulation until the blue corridor is broken (or 1x2 Gann Angle). A lesser test, but by no means poor, if price stays above the Red corridor (1x1 Gann Angle) then the price mark up phase may suffer a moderate re accumulation before continuing on. Price breaching of the Blue or Red corridor will require a re evaluation of price action as price may be just shifted sideways and not breaking down. Each case must be judge on its merits.
That's it then. We have our tool so let's go hunting for pure mark up or down phases on the SP500 ETF or SPY. We will swing back later on how to see how the Blue and Red corridor work within Wyckoff method.
NOTE: To use Gann Angles within readtheticker.com the chart must setup with a 1x1 price to time axis. See red box under the symbol name of the chart.
By placing the bearish Gann Angles on major pivots highs we can see how period1 and period2 performed as a pure mark down phase with only few minor re distribution phases. Both period1 and period2 were under the blue corridor (or the 1x2 Gann Angle). There was a minor price test, when price challenged the blue corridor (see yellow circles). The pink zone with the X is where the trend changed. The down trend from 10/09/2007 was under the red 1x1 corridor and as we stated above you can expect the re distribution phases to be more serious than those under the blue 1x2 corridor.
By placing the bullish Gann Angles on major pivots lows we can see how period3 and period4 performed as a pure mark up phase with only few minor re accumulation phases. Both period3 and period4 were over the blue corridor (or the 1x2 Gann Angle) and for a short while over the green corridor (or 1x4 Gann Angle). The pink zone with the X is where the trend changed. The up trend from 03/09/2009 was above the red 1x1 corridor and as we stated above you can expect the re accumulation phases to be more serious than those above the blue corridor (1x2 Gann Angle). There blue corridor suffered a few shifts to the right, but soon re established the pure mark up trend.
As you can see below the blue corridor (1x2 Gann Angle) has been very important to the SPY chart. When the blue corridor has broken it has signalled a major trend change. Note: Charts will differ as to which corridor (Gann Angle) will dominate.
We hope you agree that the Gann Angle can assist the Wyckoff investor as to the location of pure price mark up or down. Here is how we overcome the four Wyckoff D and E phase issues we posted above:
Place the Gann Angles on the last pivot point within phase D, if price is beginning a mark up or down phase then price should stay in the Blue Corridor (or 1x2 angle), or at the very least stay within the Red Corridor (or 1x1 angle).
The Gann Angles are drawn on a chart scale of equal time and price therefore if price action is in the Red Corridor or better you have secured one unit of price to one unit of time at the very least.
We hope the example on the SPY charts above prove to you that Gann Angles are excellent for highlighting the pure price mark up or down phases. Knowing this should keep the Wyckoff investor out of troublesome accumulation or distribution phases.
The Gann Angle only requires one pivot point and not three. The selection of the pivot point should be the one just prior to the impulse move expected within the Wyckoff phase D and E. As price moves along, move the angle to the next pivot point.
To conclude we would place Gann Angles at location 1, 2 and 3 on the first chart of this post. Then decide if the trade is warranted by judging price performance to stay within the desired Gann Angle corridor.
Gann Angles Advance: You can have a positive stock trend on a Gann Angle of 2x1 (or two units of time to one unit of price), but as this is under our minimum requirement of 1x1 or better we will leave the tricky and poor rewarding setups to others.
NOTE: Members can use both the QuickDraw (Ctl Z, Ctl X) and Object Gann Angles.