"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. Livermore once told me he never touched anything unless there were at least 10 points in it according to his calculations."
So writes Richard Wyckoff, the legendary trader who in the 1930s wrote a manifesto that gained him a cult following on Wall Street.
His 1931 book, "The Richard D. Wyckoff Method of Trading and Investing in Stocks – A Course of Instruction in Stock Market Science and Technique," is out of print and somewhat difficult to find these days (not impossible), but even in 2014, hedge fund managers still swear by it.
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. That's what those who follow Wyckoff do — they watch the large operators.
Wyckoff walks us through the process of how a large operator will manipulate a stock up or down — so that next time one sees it unfolding on the screen before his or her own eyes, he or she can react accordingly.
This, you could say, is real technical analysis ...
First, some context: trading is a lot like any other merchandising business, and liquidity is important
Wyckoff writes, "When you have learned to take a wholly impartial viewpoint, unbiased by news, gossip, opinions and your own prejudices, you will realize that the stock market is like any other merchandising business.
"Those who understand it buy only when prices are low with the idea of selling when they are high; and 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."
Source: Wyckoff (1937)
It takes a while for a pro to accumulate a position in advance of a big move – buying too many shares at once would cause the price to rise too quickly
"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."
Source: Wyckoff (1937)
Instead, here's how he sets it up: first, he'll "shake out" the little guys by forcing the stock lower in order to get a better price
"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...
"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."
Source: Wyckoff (1937)
See the rest of the story at Business Insider