After a Wyckoff bias, rank leftover cause and keep three-to-one stops

Bias first, then leftover cause

The first two Wyckoff steps set a long or short bias and a candidate list. The next steps rank which of those names still qualify as opportunities.

The Wyckoff method is a stepwise screen that first sets directional bias and a candidate list, then ranks leftover cause and acceptable risk before later checks of readiness to move.

How a cause becomes an objective range

A point-and-figure cause is a horizontal cluster of postings at one level or across a narrow band during a trading range, measured by the number of chart divisions it occupies.

Point-and-figure is a price-scale chart of those postings. It measures a sideways horizontal cause in divisions and projects a matching vertical effect. The count is the number of divisions across that buildup, treated as a one-for-one estimate of later vertical movement.

The objective range is the price band formed by adding the count both to the measurement level and to the trading-range low.

A 1990 count from 52

In the 1990 example, a January-to-April range of about 51 to 55 was counted at 52, the last reaction low before the upside break. That cluster spanned 17 divisions and was recorded as a 17-point cause at that level.

The 17-point horizontal cause was projected as a 17-point vertical effect and added both to the 52 count level and to the range low. That produced an objective band of 68 to 69, or about 33 percent of the value at the count level.

Measure remaining potential from the current price

Remaining potential is the unused share of the objective measured from the current price, not from the original count level. Leftover move is the distance from the current price to the objective.

The same 52-level count implied about a 30 percent advance if price was still 52, but only 13 percent leftover if price had already reached 60.

Larger counts are treated as larger leftover potential. When many names survive the earlier steps, a floor such as 50 percent remaining potential is used to shorten the list.

The strongest or weakest names are least likely to still sit in a trading range and most likely to have left their count levels behind. They can fail the remaining-potential screen even if they ranked well on earlier steps.

Keep only stops that clear three to one

A stop is required to cap a loss or protect an open gain. It must sit beyond previously defined support, and it must keep anticipated points to the objective at least three times the points to that stop.

The risk-reward ratio taught here is a pre-entry filter that compares points to the leftover objective with points to a support-anchored stop. The floor is three to one. A support-anchored stop is an exit placed beyond a previously defined support level so that risk stays smaller than the leftover objective under that floor.

With 16 points of potential from 52 to 68, the three-to-one floor allowed as much as 5 1/4 points of risk. Because the range printed 51 and did not trade below 50 1/8, a stop as high as 49 7/8 against a 52 entry risked 2 1/8 points, or 16 to 2.1.