A complete guide to the Wyckoff Method, one of the most popular trading techniques used by professionals in stocks and crypto markets.
What Is Wyckoff Method?
Richard Demille Wyckoff and his colleagues formulated a valuable set of tests, schematics, and laws as a method of efficient trading and market analysis during the 1930s, known as the “Wyckoff Method of trading". This method is further elaborated by Hank Pruden in his book named “The Three Skills of Top Trading.” The method mainly involves points-and-figure and price charts to determine the trading volume and other relevant information to make informed decisions.
Join us in showcasing the cryptocurrency revolution, one newsletter at a time. Subscribe now to get daily news and market updates right to your inbox, along with our millions of other subscribers (that’s right, millions love us!) — what are you waiting for?
Wyckoff’s Analysis of Trading Ranges
One of the primary reasons for using the Wyckoff method is to improve the market position by predicting the upcoming price movements, especially where a major risk/reward ratio is involved. Trading Ranges (TRs) is another concept used by the method which is used to determine the accumulation and distribution zones. These are those zones where the prices bounce between specific high and low points and a relative balance exists between demand and supply. Different institutions and traders prepare themselves for the next bull run by making buy and sell decisions using these ranges. In both the accumulation and distribution process, a composite man/mediator actively buys and sells. This volume or extent of distribution and accumulation further reveals the next moves for traders.
Market Analysis Techniques in Wyckoff Method
The Wyckoff method comprises a five-step process for market analysis and decision-making. These steps mainly involve:
- Determining the current position and future trends in the market to make a profitable strategy for investments. Mostly it involves the use of bar charts and price history to analyze the market index.
- Selecting the crypto asset according to the current market trends. If you want to make long-term investments, wisely select the coin/token that you think is stronger than the others.
- Choosing those crypto projects that are equal or at least exceeding the minimum objectives. In this case, it is suggested to choose those assets that are accumulating or under accumulation process.
- Determining those coins/tokens that are ready to move. In this regard, ranking the assets in your desired order will be more useful. Prefer using point-and-figure charts and bar charts for all assets. Besides, it is recommended to use the nine important tests outlined by Hank Pruden in “Three Skills of Top Trading”.
- Give some time to your chosen asset to offer you a favorable return. Put stop-losses and relax. However, do follow-up every now and then until you fully close the current position. Here you should use price charts for further observations.
The Laws of Wyckoff Method
There are three primary laws of the Wyckoff method, namely:
- The Law of Supply and Demand
- The Law of Cause and Effect
- The Law of Effort Vs Result
The Law of Supply and Demand
The first law in the Wyckoff method, the law of supply and demand, primarily assumes that if the demand increases, the prices will increase. But if the demand is lower than supply, the prices will decrease. An increased price indicates that more traders are buying, and the decreased price indicates that there are more sellers than buyers in the market..
Wyckoff method involves a simple charting method to determine the effects of the cause. In simple terms, Wyckoff introduced useful techniques of representing trading targets primarily based on the duration of both accumulation (gathering the coins) and distribution periods. As a result, a trader can determine the extension of market volume after breaking out of the period where price breakdown is expected to pause (Trading Range).
The Law of Cause and Effect
The law of cause and effect assumes that certain events cause the non-random difference in supply and demand. In other terms, the distribution period leads to a downtrend, and the period of accumulation results in an uptrend. Traders use this as a filter to set their price targets. This is one of the most important laws described by the Wyckoff method and is regularly used in financial markets.
Precisely, the law of cause and effect indicates that the demand is higher than supply since the prices increase as it shows that more people are buying the coins. On the other hand, if demand is less than supply, prices fall indicating that fewer people are interested in that product (coins).
The Law of Effort vs. Result
The third law in the Wyckoff method, the law of effort vs. result, argues that differences between price and volume indicate a variation in the market trend. If there is a harmony between volume and price action, the trend will continue. However, if there is any difference between price and volume, the market trend will eventually stop or change its direction.
For example, the Ethereum market strengthens with a higher volume after a long bear trend. This higher volume indicates a strong effort and low volatility. So despite the continuous variations, there are no more notable price drops. These types of trends are a clear indication that the downtrend is over.
Wyckoff Schematics
The distribution and accumulation are considered as the most important part of the Wyckoff method in the cryptocurrency community. These schematics are divided into two sections, named distribution and accumulation. These sections are further divided into five sub-sections (ranging from A to E).
Accumulation Schematics
Accumulation schematics by Wyckoff represents a primary model for accumulation (coin collection). It works to represent and examine the accumulation process. Besides, accumulation schematics also provide important phases to guide us through the trading range to avail the ideational position.
Phase A
Phase A of Wyckoff’s accumulation schematics indicates the pause of the downtrend (trading range). Till this point, supply remains dominant, which is witnessed in a decrease in coin prices for a short time accompanied by a heavy trading volume. You can see these events on price charts where heavy volumes are visible due to large transfers of coins by the traders. Here selling pressure also results in a slow downtrend and an increased trading volume indicates the beginning of this phase.
Phase B
Phase B of the accumulation schematics is based on Wyckoff’s law of cause and effect, as it is normally seen as a cause that results in an effect. The composite man gathers the highest volume of coins during phase B. During this stage, the market tests both support and resistance levels of the trading range (TR). In simple terms, the price changes are wild and affected by higher volumes. Eventually, when the supply of coins is exhausted, the crypto token is ready to switch to Phase C.
Phase C
During phase C, Spring (the price below the support level of the trading range) quickly reverses and moves back into the trading range. You can consider spring as a period of the coin below the support zone to attract traders and investors. It is a final attempt to purchase the tokens at the lowest rates before the rates rise again.
It is also notable that the bear trap attracts inexperienced investors to sell coins at low rates and wait for “the dump” which eventually does not occur and prices instead rise from that point without actually reaching that dumping point. In simple terms, spring is not always useful as trading volume remains unpredictable.
Phase D
The phase D of accumulation statistics is a transition between the cause and effect, as it stands between phase C (accumulation zone) and the break out of the trading range (phase E). During phase D, an investor should keep the dominating demand over supply under consideration. During this phase, the price rises to the top of the trading range. During phase D, you should strictly follow the potential dominance of demand over supply. During this phase, the price normally moves to the top of the trading range and last point support (LPS) provides excellent platforms for making a hefty profit. However, it is also notable that there can be more than one point where a downtrend is expected to be paused due to an increased buying demand (last point support) in Phase D.
Phase E
Phase E of accumulation schematics is the final stage in which the coin leaves the trading range and the demand comes into action. You can observe some typical reactions during these phases, such as most investors temporarily quitting their coins and others.
Distribution Schematics
Although, distribution schematics work opposite to accumulation schematics, yet the phases are slightly different. However, it is also notable that prices remain sidelined in the distribution phase and large investors give up their positions, which further results in lower prices.
Phase A
Phase A of distribution schematics occurs when the uptrend is near its end. Demand remains dominant until the end of this phase. Increased rates due to heaving buying (Buying Climax) and temporary stop of upward trend (Preliminary Supply) support the first prominent evidence that the sellers are entering the market.
Phase B
Phase B of Wyckoff distribution schematics works as a cause of strengthening the zone that leads to a downtrend effect. The composite man usually sells the coins, declines, or absorbs the market demand during this phase. In other words, Phase B is seen as preparing for a trend to get ready for a downtrend. This is a good time for the big investors as they begin their short positions and renew their portfolios according to the prediction regarding the next markdown.
Normally, both the lower and upper bands of the trading range are tested repeatedly, which may involve short-term false information about declining prices. Often, the market moves above the resistance level generated by heavy buying (Buying Climax), which further leads to a Secondary Test (ST) or a point where there should be less selling on the selling climax.
Phase C
Phase C is considered as one of the most interesting phases of Distribution Schematics. It involves significant events, such as closing in a trading range, the move of price above the trading range, strong variations in the price direction, and others. Notably, sometimes the market also creates one last bull trap in this phase before approaching the next one.
Phase D
You consider phase D of distribution schematics as the mirror reflection of the accumulation schematics. Many traders consider phase D as the final gasp of demand. The price goes towards the support level of the trading range.
Phase D is normally the last point of supply where the price downtrend is expected to begin, formulating a lower high. The new last point of supply is created from this point either below or around the support zone. In this phase, the market experiences multiple signs of weaknesses as soon as the price breaks the main support zones.
Phase E
Finally, as the last stage of the distribution schematics, phase E indicates the start of the downtrend with a visible break below the trading range (TR) caused by an increased dominance of supply over demand.
In a Nutshell
Richard Wyckoff introduced simple yet very important financial techniques to determine market trends. Even after decades, these primary principles to check tops, bottoms, tape reading, and trends are useful. These concepts are timeless and continue to educate and guide even crypto investors and traders in the best possible manner.
This article contains links to third-party websites or other content for information purposes only (“Third-Party Sites”). The Third-Party Sites are not under the control of CoinMarketCap, and CoinMarketCap is not responsible for the content of any Third-Party Site, including without limitation any link contained in a Third-Party Site, or any changes or updates to a Third-Party Site. CoinMarketCap is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement, approval or recommendation by CoinMarketCap of the site or any association with its operators. This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice. The views and opinions expressed in this article are the author’s [company’s] own and do not necessarily reflect those of CoinMarketCap. CoinMarketCap is not responsible for the success or authenticity of any project, we aim to act as a neutral informational resource for end-users.
