The Wyckoff Method: A Complete Guide for Traders and Investors

Trading
03 October 2023
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When it comes to trading the market, it is impossible to avoid mentioning Richard Wyckoff - a trading legend and the creator of the Wyckoff Method. His ideas about market movements and trading principles are considered to be among the most effective and time-tested.

The Wyckoff method is one of the most popular and effective approaches to analyzing market cycles. With its help it is possible to determine the market phase and more accurately predict future price movements.

Richard Demille Wyckoff

Річард Деміль Вайкофф

Richard Demille Wyckoff was one of the most influential traders of the early 20th century. He was not only a successful investor, but also an educator, actively teaching others the secrets of the market. Wyckoff was convinced that in order to trade successfully, one must understand the motivation of major participants and use this information to one's advantage.

A five-step approach to the market

The Wyckoff method identifies five stages that reflect the different phases of the market cycle:

  1. Accumulation: The stage when smart money starts actively buying indicates that the market has bottomed out.
  2. Uptrend: A period when assets are increasing in value.
  3. Distribution: A time when the big players start selling assets, believing the market has peaked.
  4. Downtrend: When asset prices are heading downward.
  5. Consolidation: The market is slowing down and many traders are waiting for developments.

Based on this, Wyckoff identifies the basic steps in the analysis:

  1. It is important to determine if there is a major player in the market, if so, what are their goals?
  2. For more effective analysis, it is desirable to choose those assets where full-fledged cycles are already visible, it will help to better determine the current and future trend.
  3. Choose strong assets that have potential, technology, fundamentals and other factors that can help the asset.
  4. Focus more attention on those assets that can show more dynamic movements. Volumes can help with this. 
  5. It's important to get into the trade on time. Understanding cycles and predicting the future will help. 

Wyckoff price cycle

To understand the essence of the Wyckoff price cycle, it is necessary to dive into the market dynamics and its phases. This cycle is based on the assumption that large institutional participants or "smart money" can manipulate the market in their favor.

Ціновий цикл Вайкоффа (Wyckoff)

Accumulation

At the accumulation stage, large participants begin to accumulate assets. This process may take a long time. The price of an asset often remains within certain limits, forming so-called "trading ranges". This range becomes a kind of "base" from which the future uptrend will start. On the charts, it looks like a long period without significant fluctuations in price.

Uptrend

After the accumulation phase is over, the uptrend begins. "Smart money" has already entered the market, and now retail investors and traders start to buy assets more actively, noticing growth. This accelerates the upward price movement.

Distribution

At the allocation stage, large players start selling assets. They do it gradually so as not to cause panic in the market. Thus, similarly to the accumulation phase, a trading range is formed, but already at the top of the trend.

Downtrend

Once the distribution is complete, a downtrend begins. As a rule, this stage develops faster than an uptrend, as panic and fear spread faster than optimism. "Smart money" has already exited the market, and retail investors and traders are trying to minimize losses.

Consolidation 

After a downtrend, the market enters a consolidation phase. Here prices can fluctuate in a narrow range until the market decides on a new direction.

Understanding the Wyckoff Price Cycle gives traders and investors a unique advantage. It allows you to anticipate future market movements by analyzing the current phase and the actions of major participants.

Asset valuation test for purchase

There are a number of tests with questions that need to be answered before buying. The right questions help to better assess the asset and its cycle, here are some questions:

  • Are you satisfied with your risk/reward ratio? The minimum recommended ratio is 1 to 3, which means a potential loss of one dollar with the possibility of earning three.
  • Can it be argued that the past downtrend is over?
  • Did the asset complete all phases of the last cycle? Was there a final sales phase with a retest?
  • Is there the presence of increasing volumes with growth/decrease?
  • Does the asset react more strongly to market growth than most other instruments?

Richard Wyckoff's Laws of the Market

Wyckoff identified three basic laws governing market movements:

Law of supply and demand

Law of Supply and Demand: It is the basic driving force of any market.

Demand > Supply = Price rises
Demand < Supply = Price falls
Demand = Supply = No significant price change, low volatility

These laws work and apply in all markets, not just the Wyckoff method.

The law of cause and effect

The law of cause and effect: For every movement in the market, there is a cause.

Inside a trading range creates a reason for further price movement, so it is important for us to correctly identify which phase is now being realized. Wyckoff phases give more insight into how the average investor and large participants act. Large capital gains a position when small investors lose hope by buying all of their assets. Then growth occurs and the large player begins to sell off his asset at higher prices to the same investors who returned after seeing the growth.

The law of effort and result

The Law of Effort and Outcome: Results in the marketplace often correlate with the effort expended to achieve them.

A price move must be confirmed by volume.

If the price goes up easily, but the volume does not confirm the strength of the move, it is most likely a manipulative move for subsequent selling. If the price is easily going down, but the volume does not confirm the strength of the move (low volume), it is most likely a manipulative move for subsequent buying.

Analysis of trading ranges

Trading ranges play a key role in the Wyckoff method. Wyckoff believed that analyzing the ranges in which an asset is trading can provide a deep understanding of the current market phase

Formation phases in the range

Identifying the phases of market formation is key to Wyckoff's methodology. These phases allow traders to predict future market movements based on the current state of the market.

Аналіз торгових діапазонів

Phase А: (PS + SC + AR + ST) End of previous trend. 

Phase В: (UA + STB) Construct potential motion. 

Phase С: (Spring) Testing the previous extremum.

Phase D: (LPS + SOS + BU) Confirmation of a new trend.

Phase E: Out of range.

Wyckoff schemes

The schemes or patterns that Wyckoff developed are specific patterns of price behavior that typically appear at different stages of the market cycle. They include various patterns such as "signs of strength" and "signs of weakness".

Weikoff phase abbreviations

PS (Preliminary support/supply - preliminary price stop in accumulation or distribution) - the first attempt to stop a trend movement before consolidation begins, often support or resistance fails in this phase.

SC / BC (Selling/Buying climax) - the first sign of buyer's interest in accumulation and seller's interest in distribution, occurs on increased volumes. It is created by traders able to initiate price changes. 

AR (Automatic rally / automatic reaction) - a sharp impulsive movement after the culmination of buying / selling, usually shows the boundaries of the trading range (sideways) in which the asset will be set or distributed. A transition from a market that is controlled by one party to a market in a state of equilibrium.

ST (Secondary test) - a test of the strength of a buyer's or seller's intentions at the culmination of buying (SC) or selling (BC). After ST we can say that the downtrend or uptrend has been stopped and we have moved into a state of consolidation, where a major player is ready to gain/allocate his positions.

UA (Upthrust action - sign of strength) / mSOW ( minor Sign of Weakness - preliminary sign of weakness) - does not always appear on the chart, the movement with the purpose of liquidity removal from AR (upper or lower boundary of the sidewall).

STB / UT (Secondary test B / Upthrust) - withdrawing liquidity from SC / BC, if there is no break in the local structure, we may later see Spring / Utad to collect the last liquidity.

Spring / UTAD (Springboard/Upthrust after distribution - the last manipulation of a large player) - is performed with the purpose of dropping all the extra players from the market and the final set of position by a large player. As a consequence, there is an exit from consolidation and a true upward or downward movement.

Test - testing Spring / Utad. Opportunity for aggressive market entry after a local break of the structure.

SOW / SOS (Sign of weakness/Sign of strength) - price exit beyond the sidewall, this movement is a confirmation of our accumulation/distribution scheme.

LPS / LPSY (Last point of support/last point of supply) - an opportunity to enter a deal conservatively after the price exits consolidation.

BU (back-up) - impulse movement for the last set of positions before the trend movement.

Ground rules:

  1. Never trade against the main trend.
  2. Determine the current market phase before making a trading decision.
  3. use volume to confirm price movement.

Accumulation

Accumulation is the phase when the "smart money" begins to actively enter the market. Traders should be alert to signs of accumulation, such as increased volume as prices rise.

Schematic example

Схеми Вайкоффа
  • Any accumulation is formed after a downward movement.
  • Stopping the trend movement (formation of points SC, AR, ST).
  • In accumulation, we will always be interested in dealing with liquidity from below (this is the availability of STB and Spring).
  • Decreasing volatility and volume levels as the range develops.
  • After the final manipulation, an important aspect is the presence of a change of character (choch), the presence of increased volumes and the beginning of the birth of an uptrend.  
  • Accumulation can be considered completed and confirmed once price moves out of the sideways range and an SOS is formed.

 

Graphic example

Abbreviations of Wyckoff phases

Distribution

At the distribution stage, smart money starts to exit the market. This can lead to a sharp drop in prices. The main thing for a trader is to see the signs of distribution in advance.

Schematic representation

The importance of volumes and their analysis in the Wyckoff method
  • Any distribution is formed after an upward movement.
  • Stopping the trend movement (formation of points BC, AR, ST).
  • In distribution, we will always be interested in dealing with liquidity from the top (this is the availability of UT and UTAD).
  • Increasing levels of volatility and volume as the range develops.
  • After the final manipulation, an important aspect is the presence of a change of character (choch), the presence of elevated volumes and the beginning of a nascent downtrend.  
  • A distribution can be considered completed and confirmed once the price moves out of the sidewall and an MSOW is formed.

 

Graphic example

Wyckoff's method for cryptorink

Importance of volumes and their analysis in the Weikoff method: expert opinion of the Cryptology team

Volume analysis helps to determine the strength or weakness of an asset. Growth without volumes may signal manipulative movement, growth accompanied by volumes indicates strength.

Does this method really work?

The Wyckoff method is well suited to the new market realities. Despite the fact that the method is more than a hundred years old, it is good and applicable. The laws, cycles and phases of markets have remained the same. Naturally, the market has become more dynamic and changed recently, but we do not stand still, adapting ourselves and adapting the tools we use to the realities, but the fundamentals remain the same. The essence of the markets has remained the same, which allows us to continue using this method in combination with other tools. 

Can the Wyckoff method be used in the crypto market?

You can find a lot of arguments about this topic on the internet. Yes, the crypto market is more volatile and younger than the classical markets, but it has a number of advantages, thanks to which the assets can better lend themselves to the Wyckoff method, which has already proved its efficiency in the cryptocurrency market. It is important to take into account that the crypto market is not standing still, more and more institutional investors and capital from traditional markets are coming here, which affects its dynamics. Regulatory actions will also lead to changes. The overall capitalization is gradually growing and this is another argument for the fact that the market will be better analyzed. 

Application of Wyckoff method in crypto market trading

The more liquid the asset, the better the method works. It can be a waste of time to analyze undercapitalized assets, as they do not lend themselves well to analysis. Market cycles are always unique and unrepeatable, but they always have specific stages that also apply here in the crypto market.

Conclusion

The Wyckoff method remains one of the most effective tools for understanding market cycles and forecasting future price movements. Although the method was developed over a hundred years ago, its principles are still relevant today. Successful application of this methodology requires an understanding of the basic principles and careful market analysis.

Note: This is just the tip of the iceberg of Wyckoff's methodology. Deeper understanding requires detailed study and practice.

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Frequently asked questions about the Wyckoff Method

What is the Wyckoff method?

The Wyckoff method is an effective type of chart analysis that helps you find entry and exit points by correctly identifying phases in the markets.

How did Wyckoff trade?

Demil Wyckoff became a famous trader and analyst due to his method of analyzing charts and volumes, which still works today. He identified the main market phases and developed methodologies for determining favorable entry and exit points.

What is Wyckoff's Composite Man?

A composite person refers to the concept of large, smart capital. The goal of such groups of people is to multiply profits at the expense of less experienced traders and investors. The Wyckoff method helps to participate in the market at the right time and in the right direction.

What is the accumulation phase according to Wyckoff?

At the accumulation stage, large participants begin to accumulate assets. This process may take a long time. The price of an asset often remains within certain limits, forming so-called "trading ranges". This range becomes a kind of "base" from which the future uptrend will start. On the charts, it looks like a long period without significant fluctuations in price.

What is the Wyckoff distribution cycle?

At the allocation stage, large players start selling assets. They do it gradually so as not to cause panic in the market. Thus, similarly to the accumulation phase, a trading range is formed, but already at the top of the trend.
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