Trading Psychology

The Composite Operator

Over sixty years ago, Richard Wyckoff gave us this insight:

“The market is made by the mind of man, and all the fluctuations of the market and all the various stocks should be studied as if they were the result of one man’s operations. Let us call him the Composite Operator, who, in theory, sits behind the scenes and plays a stock to his advantage. “

In studying, understanding, and interpreting the tape, we should consider all market activity as a purposeful operation in which informed interests exert continuing control over stocks and the market. These large interests, such as banks, mutual funds, investment trusts, hedge funds, specialists, and position traders are best thought of as a Composite Operator.

It should be your objective to think of the Composite Operator as the primary force in the market. Within this framework, your goal becomes to determine what he is up to, from evidence the Operator provides you through the tape.

Here is how you can profitably employ the concept of the Composite Operator. When you study the price and volume evidence offered by your chart, step back for a moment and ask yourself the following questions:

  1. What is the motive of the Composite Operator?
  2. What is the Composite Operator attempting to carry out or conclude? Is he accumulating, distributing, testing the the market, pushing price into an uptrend or instigating a downtrend?
  3. What is the Composite Operator attempting to do to the public, and for what purpose?
  4. If I were the Composite Operator, what would I be doing now?

Wyckoff reminds us that “like individuals, stocks have certain characteristics which become familiar as past and present action is studied. It is to your advantage to understand the unique personalities of the issues you trade.”

Wyckoff also instructs us not only to see the intent of the Composite Operator through the action of the tape, but also to learn to think and act like him.

  1. Study charts with the purpose of judging the behavior of the stock and motives of those who dominate it.
  2. An active market is created by the Composite Operator advertising his stock on the ticker tape.
  3. Most of the important trades in the market are prepared, executed and brought to a purposeful conclusion. The Composite Operator carefully plans, executes and concludes his campaigns.

Van K. Tharp, the market psychologist, advises that the trader “imagine a super investor. How would that person handle the situation that is before you? What would that person look like? How would that person feel? What state of mind would your superior investor be in to deal with the situation confronting you?”

A final point. Wyckoff developed his notion of the Composite Operator before the idea of Contrary Opinion caught on with traders. The Theory of Contrary Opinion states that the public is always wrong, and that success in trading comes by fading the public.

Both ideas have merit. Each encourages a disciplined, realistic approach. Perhaps a contrary approach to market operations works because, as one observer notes, those who possess a more pessimistic, contrarian, skeptical view of life tend to be more realistic. “Perhaps,” Seligman writes, “pessimism corrects for something we do only poorly when we are optimistic and not depressed, namely, appreciating reality accurately.” (Seligman, Learned Optimism)

Contrary opinion, however, implies a negative approach to market operations and counsels the trader to swim against the flow of common opinion. Well and good, if the market happens to be amenable to a contrarian approach. But common opinion is shaped by, and therefore more often than not consistent with, the market’s trend.

It is far more productive for the trader to develop a positive framework for his operations. I do not mean merely that traders should adopt a positive attitude, but rather a positive model of the market.

Traders respond to input based on the model of the market they have built for themselves. A positive response grounded in Wyckoff’s theory of the Composite Operator will have distinctly different–and I would argue, consistently more profitable–outcomes than will a negative response to input based on the theory of Contrary Opinion. Understand and work with the Composite Operator–rather than against the Public.

The upshot: whether the market is in a trend-following or contrarian mode, a positive model of the market based on Wyckoff’s Composite Operator will serve the trader well.

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