Trading the Wyckoff Terminal Upthrust and Spring Method

Trading in trending markets is very easy and on contrary, trading in side ways market is most challenging. Richard Wyckoff's theories may help trading sideways markets efficiently. His methods define the sideways markets, how and why there are formed and how to trade in side ways markets. Wyckoff Terminal Up-Thrust and Swing is one such methods for trading the range bound markets.

Markets tend to move in both the directions based on the relative compatibility between the bears and bulls. After moving in certain trend, it starts moving in sideways direction to catch a breath, for example, consolidations etc. When markets are in the consolidation mode, trading ranges are formed. Wyckoff defined a techniques called Terminal Up-Thrust and Swing, which has a clear entry, stoploss and exit levels.

Initially a trading range is formed as the supply and demand are in certain equilibrium. Where high of the range is treated as supply line and the low of the range is defined as demand line. Now the trading opportunities are formed in certain criteria specifically like price tries to move above the supply line or below the demand line and unable to sustain. They can provide a good trading opportunity as there is a strong probability of returning into the opposite side of the Accumulation/Distribution ranges.

In Up-Thrust, prices break above the resistance line, and failed to move further up. One can go short in the next confirmation bar, by keeping the high as the stop loss. Price target would be the retest of the lower or support line of the trading range. This kind of false breakout above resistance range is called up-trust, and the bearish candlestick indicator is an invoking opportunity to enter the trade. Opposite of this up-trust is spring where prices give false breakdown from the support trend line and bullish candlestick indicator like hammer or few times a bullish engulfing may also confirm the trading opportunity.

Here in the above example trading range is formed between A and B. There was an up-thrust at “C” where the candle broke the highs of the trading range and failed to hold. The failure brings the bears into action, and the other bearish signal from the candlestick shooting star or doji gives a powerful sell signal, which leads us to the target at the support area.

Here in the above example, at the terminal up-thrust a shooting star and a bearish 123 pattern is formed, helping the down move.

Anatomy of Chart Patterns: An interesting note about geometric patterns

Geometric patterns formed systematically, with minimum or no influence from external factors on the market show interestingly predictable moves as seen in the below chart

The pattern shows symmetry in the price and time it took to reach to the target

Anatomy of Chart Patterns: Ascending Triangle

Ascending triangle is a Bullish pattern and is exactly the reverse of the Descending Triangle. Like descending triangles form near support zones, Ascending triangles form near the resistance zones. We can see this kind of pattern usually after a swift up move and price is near strong resistance zones. In Ascending triangles supply is distributed at single price level, so here the resistance line is horizontal and the support line is up-sloping and touches the resistance at the apex.

How the pattern is formed:

1. Whenever price comes to resistance level, it tends to move down from that point as it witnesses more supply.
   
2. When the demand is in an increasing trend, the price takes support from a level above previous support point.
   
3. Price ping-pongs between the support and resistance line giving a visual impression of a right-angled triangle.
   
4. Since there is no clarity in the price trend, market participation declines and should be clearly visible with draining volumes
   
5. After some supply tests at the resistance line, if the supply is totally absorbed by the buyers and price will break the resistance line.
   
6. As the critical resistance line is taken out, the increased demand accelerates the up move.
   

Criteria for a successful Ascending triangle:

• Should give breakout or break down in between 50% to 80% of the distance to the apex. If prices break out after 80%, probability of the pattern success declines.
  
• Volumes should drain while the pattern is forming, which indicates thrust buildup
  
• Note the volumes when ever the price meets the resistance line. A lower volume from previous price-resistance point is a good indication that pattern might give break out.
  
• At the break out, higher volumes and wider spread of the candle gives confirmation.
  
• While drawing the resistance and support lines of the triangle we need to go with highs/lows. If we lines are breaking some candles we need to look for the error percentages and volume. Low volumed errors can be ignored, but not high volumed. Tick data helps here some times.
  
• More white space should not be visible, between the waves.
  

Below is the 5 min chart of JP Associates, as an example of a reversal:

• Our analysis starts only after two highs and two lows are formed and joining the trend lines through them resembles a right angled triangle, where the right angle is on the left top.
  
• Notice the falling volumes. It is OK to have some random high volume bars, but the overall, volumes should confirm to a diminishing look visually.
  
• Price moving in a very narrow range and the volumes are almost dried up due to uncertainty of the trend.
  
• At one point, price gave the breakout with and heavy volumes confirm this.
  
• Price bounced back to retest the supply line. The retest may not always touch the trend line, and in some cases may not happen at all. But retest acts as a push back from the resistance line and adds more thrust to the up move.
  
• Now the bulls clearly won the battle, demand is increased drastically and as the losing side close there short trades and new participants came in price moves up with wide spreads and increasing volumes.

An example of Ascending Triangle as continuation pattern:

Anatomy of Chart Patterns: Descending Triangle

Descending triangle it’s a bearish pattern, where the support line is horizontal and the resistance line is down sloping and touches the support line at the apex. Generally we can see this kind of pattern after a swift move near strong support zones, when price enters a phase where the uncertainty causes loss of interest in market for a brief period.

Supply is clearly visible and meets the demand at certain price level (support line). When the supply continues and the demand being distributed at certain price level, whenever price comes to support level prices tend to move up from that point (as it witnesses more demand). After some spiral moves, demand will finally be absorbed totally by the sellers and price will break the support line. As the critical support line is taken out, the increased supply accelerates the down move.

Criteria for a successful Descending triangle:

• Price will give breakout or break down in between 50 % to 75 % of the distance to apex, if prices don’t break out before that I personally don’t trade on that pattern. If prices move in side ways pattern tend to lose its efficiency after certain stage. 
  
• Volumes should drain while the pattern is forming.
  
• Note the volumes when ever the price meets the support line. Lower volumes from previous price-support point is a good indication that patter might break down.
  
• At the break down volumes and spread of the candle or bar should be more.
  
• While drawing the resistance and support lines of the triangle we need to go with highs/lows. If we lines are breaking some candles we need to look for the error percentages and volume. Low volumed errors can be ignored, but not high volumed. Tick data helps here some times.
  
• More white space should not be visible, between the waves. 
  

Example: Below is the 5 min chart of nifty futures

• Our analysis starts only after two highs and two lows are formed and joining the trend lines though them resembles a right angled triangle, where the right angle is on the left bottom.
  
• Notice the falling volumes. It is OK to have some random high volumes bars, but the overall, volumes should confirm to a diminishing look visually. I use DEMA(15) or EMA(15) for better visual. ROC(cum(v), 15) also gives reasonable indication, but not good if the volumes are too choppy.
  
• Price moving in a very narrow range and the volumes are almost dried up due to uncertainty of the trend.
  
• At one point, price gave the breakout with and heavy volumes confirm this.
  
• Price bounced back to retest the demand line, which is a good sign. The push back from the demand line adds more thrust to the down move here.
  
• Now the bears clearly won the battle, supply increased drastically and as the losing side close there longs and new participants came in price zoomed down with wide spreads and increasing volumes.
  

Anatomy of Chart Patterns: Consolidations

One of the important aspect of price movements is consolidations. Strong movements give rise to trends, where as the weaker ripples will form ranges (consolidations). The ranges are like a compressed spring, they are just waiting for an opportunity to release and break free. The price oscillates with out a clear trend developing the thrust that leads to next trend. At some point, the thrust reaches stage where it cannot be contained with in the range and break out. Examples are flag, channel, triangle etc

Anatomy of Chart Patterns: Support and Resistances

Bulls guard the support line and bears guard the resistance line. As the price moves towards the support line, bulls are challenged by bears and the strongest one wins.

For example, at a resistance line, if bears are strong, they will be able to push the price back down and guard their resistance line. Else, price will be able to break the resistance line and move forward.



Where does the thrust come after the resistance line is take out? Because there are bulls just after the resistance line and add up to the price move. For example, stop losses, fresh long entry traders, adders and are taken just above the resistance line.

Anatomy of Chart Patterns: My view on patterns

Most of the patterns in price moves are some what easy to identify because of their close visual resemblance to a well known patterns (geometric etc). But price pattern is formed because of the supply & demand actions inherent to the auction market. So to successfully identify a pattern that works (mostly), one should aim to decipher the supply-demand actions along with price move and not just the highs and lows on the chart. Otherwise, the pattern is just a mere coincidental pattern, like we see random patterns in the clouds.

Price action + Volumes + Time is the key to identify the demand-supply. Most of us simply look at price action, ignoring Volume and Time. If we are not following volumes and time, we are missing 66% feedback which market is giving us.

Anatomy of Chart Patterns: Introduction

When I started learning chart patterns, the first few questions I asked myself were, why do chart patterns work? Is it because the book said so, then every body follows the book and makes it a self fulfilling prophesy? Or is it just a statistical observation made by some one that a particular pattern of price moves gives clues for the next price move? Or is there some thing not-so-obvious behind the scenes? Or just random? I guess a lot of us might have the same questions, may be some answered and some unanswered.

This is one of my attempts to find my answers. So, lets lay down the rules and what you can expect from the "Anatomy of Chart Patterns" series.

No copy-paste from books, I will write what my experience taught me and I believe about the pattern
Postmortem on failed patterns
Points that helped for a pattern to be successful

Hope you will find this useful in your journey of learning patterns