THE WYCKOFF METHOD: A COMPLETE GUIDE FOR TRADERS AND INVESTORS

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

FIVE-STAGE APPROACH TO THE MARKET

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

1. Accumulation: The stage when "smart money" starts to buy actively indicates that the market has bottomed out.
2. Uptrend: A period when assets are growing in value.
3. Distribution: The time when big players start selling assets, believing that the market has reached its peak.
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 main steps in the analysis:

1. It is important to determine whether there is a major player in the market, and if so, what are its goals?
2. For more effective analysis, it is advisable to choose assets where full cycles are already visible, which 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 on those assets that can show more dynamic movement. Volumes can help with this.
5. It's important to enter the market in time. Understanding the cycles and forecasting the future will help.

WYCKOFF PRICE CYCLE

To understand the essence of the Wyckoff price cycle, it is necessary to dive into 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.

Accumulation

During the accumulation phase, large participants begin to accumulate assets. This process can 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 begin. On charts, this looks like a long period without significant price fluctuations.

Upward trend

After the accumulation phase is over, an upward trend begins. "Smart money has already entered the market, and now retail investors and traders are beginning to buy assets more actively, noticing the growth. This accelerates the upward movement of prices.

Distribution

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

Downward trend

After the distribution is complete, a downward trend begins. As a rule, this stage develops faster than the uptrend, as panic and fear spread faster than optimism. "The smart money has already left 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 determines a new direction.

Understanding the Weikoff price cycle gives traders and investors a unique advantage. The method allows you to predict future market movements by analyzing the current phase and the actions of major participants.

Valuation test of an asset for purchase

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

• Are you satisfied with the risk-to-return ratio? The minimum recommended ratio is 1 to 3, which means a potential loss of one dollar with the possibility of earning three.
• Can we say that the previous downward trend is over?
• Has the asset completed all phases of the previous cycle Was there a final sales phase with a retest?
• Are there volumes that increase during growth/decline?
• Does the asset respond to market growth more strongly than most other instruments?

RICHARD WYCKOFF'S LAWS OF THE MARKET

The law of supply and demand

The law of supply and demand: This is the main 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 are applied in all markets, not only in the Wyckoff method.

The law of cause and effect

The law of cause and effect: There is a reason for every market movement.

Within the trading range, a reason for further price movement is created, so it is important for us to correctly identify which phase is currently being realized. The Weikoff phases provide more insight into how the average investor and large participants act. Big capital gains a position when small investors lose hope, buying all their assets. Then there is growth and the big player starts selling off its assets at higher prices to the same investors who came back after seeing the growth.

The law of effort and result

The law of effort and result: Results in the market often correlate with the effort spent to achieve them.

Price movements should be confirmed by volume.

If the price goes up easily, but the volumes do not confirm the strength of the movement, it is most likely a manipulative movement for further sales. If the price goes down easily, but the volumes do not confirm the strength of the movement (low volumes), it is most likely a manipulative movement for further purchases.

ANALYSIS OF TRADING RANGES

Trading ranges play a key role in the Wyckoff method. Wyckoff believed that analyzing the ranges in which an asset trades can provide insight into the current phase of the market

Formation phases in the range

Identifying market formation phases is a key point in the Wyckoff methodology. These phases allow traders to predict future market movements based on the current state.

Phase A: (PS + SC + AR + ST) The end of the previous trend.

Phase B: (UA + STB) Building a potential movement.

Phase C: (Spring) Testing of the previous extreme.

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

Phase E: Out of range.

WEIKOFF SCHEMES

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

Abbreviations of Wyckoff phases

PS (Preliminary support/supply) is the first attempt to stop the trend movement before the consolidation begins, and most often support or resistance fails in this phase.

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

AR (Automatic rally/automatic reaction) is a sharp impulse movement after the culmination of buying/selling, usually showing the boundaries of the trading range (sideways) in which the asset will be gained or distributed. Transition from a market controlled by one party to a market in equilibrium.

ST (Secondary test) - a test of the strength of the buyer's or seller's intention at the culmination of purchases (SC) or sales (BC). After the 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/distribute its positions.

UA (Upthrust action) / mSOW (minor Sign of Weakness) - does not always appear on the chart, a movement to withdraw liquidity from the AR (upper or lower sideways boundary).

STB/UT (Secondary test B/Uptrust) - liquidity withdrawal from SC/BC, if there is no hacking of the local structure, then we may see Spring/Utad to collect the last liquidity.

Spring/UTAD (Springboard/Upthrust after distribution - the last manipulation of a major player) - is performed to drop all unnecessary players from the market and to finalize the position of a major player. As a result, there is a way out of consolidation and a true upward or downward movement.

Test - Spring/Utad testing. An opportunity for aggressive entry into the market after a local hack of the structure.

SOW/SOS (Sign of Weakness/Sign of Strength) - the price goes beyond the sideways, this movement confirms our accumulation/distribution pattern.

LPS/LPSY (Last point of support/last point of supply) is an opportunity to enter a trade conservatively after the price breaks out of consolidation.

BU (back-up) - an impulse movement for the last position gain before the trend movement.

Basic rules:

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

Accumulation

Accumulation is the phase when smart money begins to actively enter the market. Traders should be on the lookout for signs of accumulation, such as an increase in volume when prices rise.

Schematic example

THE IMPORTANCE OF VOLUMES AND THEIR ANALYSIS IN THE WEIKOFF METHOD: EXPERT OPINION OF THE CRYPTOLOGY TEAM

Volume analysis helps determine the strength or weakness of an asset. Growth without volume can signal the manipulative nature of the movement, while growth accompanied by volume indicates strength.

Does this method really work?

The Wyckoff method fits well with the new market realities. Despite the fact that the method is more than a hundred years old, it is still effective and efficient. The laws, cycles, and phases of markets remain the same. It is logical that the market has become more dynamic and has changed recently, but we are not standing still, adapting ourselves and adapting the tools we use to the realities, but the basics remain the same. The essence of the markets remains, 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 debate on this topic on the Internet. Yes, the crypto market is more volatile and younger than the classical markets, but this has a number of advantages, thanks to which assets can be better subjected to the Wyckoff method, which has repeatedly proven its effectiveness in the cryptocurrency market. It's important to keep in mind that the crypto market is not standing still, with more and more institutional investors and capital from traditional markets coming in, which affects its dynamics. Regulatory actions will also lead to changes. The total capitalization is gradually growing and this is another argument that the market will be better analyzed.

Application of the Wyckoff method in trading on the crypto market

The more liquid the asset, the better the method works. It can be a waste of time to analyze undercapitalized assets because they are not easily analyzed. Market cycles are always unique and unrepeatable, but they always have specific stages that are also applicable here in the crypto market.

CONCLUSION

The Wyckoff method remains one of the most effective tools for understanding market cycles and predicting future price movements. Although the method was developed more than a hundred years ago, its principles remain relevant today. Successful application of this methodology requires an understanding of the basic principles and thorough market analysis.

Note: This is just the tip of the Wyckoff methodology iceberg. A deep understanding requires detailed study and practice.