The event that confirms the bias of the structure
When the breakout event appears, it is only “potential” since the confirmation comes from your test. As with jolts, signs of Strength or Sign Of Weakness need to be tested.
If we have a successful test, we are now in a position to label the previous move with greater confidence and the latter, your test, is the confirmation event. In other words, the test will confirm whether or not we are facing a true intentionality movement.
In terms of methodology, just as the upward rupture movement is labeled as Sign of Strength (SOS) or Jump Across the Creek (JAC), the reverse movement confirming the rupture is labeled as Last Point of Support (LPS) or Back Up to the Edge of the Creek (BUEC).
For the bass example the break as we know it causes a sign of weakness (Sign of Weakness – SOW) and the backward movement that would confirm it is labeled as Last Point of Supply (LPSY) or Fall Through the Ice (FTI), although the latter term is less well known. We remember that the Ice is the support zone in the structures and this term comes from an analogy similar to the Creek.
But how can we know if we can wait for the confirmation event? Obviously we can’t know. It’s about adding clues that make it more likely that a scenario will occur rather than the opposite one. In this case, to wait for the confirmation test we first want to see that the price makes an impulsive movement, evidenced by an expansion in the price ranges and an increase in the volume traded. At this point our main scenario should be to wait for a reversal movement to look for a trading opportunity.
How the confirmation appears on the graph
As we have already mentioned, this is the most delicate moment because it is a question of examining whether we are facing a potential event of rupture or shaking.
It is recommended to go back to the section of the previous chapter where the keys of the breaking event are commented. In this action of confirmation we seek to make exactly what is exposed there happen:
- That the market travels a significant distance in the breaking movement.
- Let the test movement be done with narrow range, interlaced and low volume candles.
- That the price does not re-enter the range.
As we have seen, the breakthrough movement will give us greater confidence if it is accompanied by an increase in price ranges and volume; likewise, we want to see that the reverse movement that will test the broken structure is accompanied by a decrease in price ranges and volume in comparative terms.
This is the natural action for all movements that make up a trend: impulsive movements that show intentionality and corrective movements that denote lack of interest.
Warning signal after breakout
If there is a relatively high volume on the confirmation test, it is best to proceed with caution as this volume indicates that there is latent interest in that direction.
And as we know, the big trader will not initiate the expected move until he has made sure that the road is free of resistance. Therefore, we should wait for successive tests to be developed over the zone.
A corrective move with wide price ranges and high volume cancels out the likelihood that the first move will be a break and most likely at this point the price will re-enter the range leaving the potential break finally as a shaking.
This confirmation event appears in an ideal location to enter the market or to add to an open position.
Originally this was the preferred position for Richard Wyckoff to enter the market because in our favor we have identified all the price action on our left where we can see the effort of professionals to carry out an accumulation or distribution campaign and therefore offers us an opportunity with a relatively lower risk.
To buy, a good option would be to wait for a fortress candle (SOSbar) to appear and place a market entry order, or a stop order at the break of the candle, or even a limited buy order at a certain level waiting for the price to fall back to it. Place or move the stop loss of the entire position under the Last Point of Support and the broken Creek.
To sell, wait for a good weakness candle (SOWbar) to appear and enter the market using the order that best suits your personality as a trader. Place or move the stop loss over the Last Point of Supply and the broken Ice line.
Quantify the entry trigger
Unfortunately, all discretionary approaches by their very nature have a great disadvantage due to the subjectivity required when carrying out analyses and presenting scenarios.
This subjectivity is the reason why methods with a real underlying logic such as the Wyckoff methodology may not be winners in the hands of all operators.
As you may have read somewhere else, human participation in a trading strategy is considered to be the weakest link, and this is obviously due to the emotional section that governs us.
To mitigate this, many recommend trying to objectify our trading strategy as much as possible. But this is not a simple task, much less for Wyckoff traders. There are so many elements to bear in mind when considering scenarios that it would seem impossible to create a strategy with 100% objective rules that always operates in the same way.
One solution that is in our hands is to try to quantify the trigger that we will use to enter the market. It is undoubtedly a simple measure that can help us to incorporate some objectivity into our strategy.
If you are only trading using bars or candles, you may want to quantify what happens when a certain price pattern appears. For example, to buy, we could quantify a simple price turn composed of a bearish candlestick followed by a bullish candlestick. And from there we can complicate it as much as we want. We can add other variables such as that some moving average is below, that the second bullish candle is higher than a number of pips, that a stop purchase order is used at the break of the candle and so on.
If you are also trading using volume based tools, you may want to add other variables such as the price being above the POC (Point of Control), VAH (Value Area High), VAL (Value Area Low) or VWAP (Volume Weighted Average Price); or that the bull candle is also accompanied by a significant increase in the Delta (Difference between Bid and Ask).
The options are endless, from the simplest to the most complex; the only limit is our creativity. But this is hard work because if you don’t know how to do it through code (programming a robot), you will have to do it by hand and this will require a lot of time. In addition, when doing a Backtest you have to take into account other aspects such as data quality, expenses in commissions (spreads, commission, swap), latency problems (slippage), as well as other points concerning the optimization of strategies.
Last Point of Support
The Last Point of Support (LPS) is the immediate action that precedes a Sign of Strength (SOS). It is an attempt by sellers to push the price lower but fails when buyers aggressively appear, giving rise to a new bullish momentum.
Based on the movement that precedes the Last Point of Support, we can find different types:
- Last Point of Support after shaking. In case the price comes from developing a Spring/Shakeout, the Last Point of Support would be the test of those two events.
- Last Point of Support within the range. If the price comes from developing a Sign of Strength, the Last Point of Support will appear in the bearish reversal.
- Last Point of Support out of range. Here we have on the one hand the test movement after the break (the confirmation event, the Back Up to the Edge of the Creek); and on the other hand all the setbacks we found during the uptrend Phase out of range.
As we know that the market moves by waves; after the bullish impulse (Sign of Strength) we expect a bearish retrocession (Last Point of Support). This retracement is the last point of support for demand. It is a price point where buyers appear to stop the fall, generating a higher minimum. This higher minimum is a previous stop before starting with a new upward impulsive movement.
Many traders guided by their lack of understanding will be buying during the development of the strength signal (SOS). But this action is not correct, it is best to wait for the next reaction (LPS) at that point to start looking for a trigger to enter the market.
Sometimes the Last Point of Support will occur at the same price level on which the Preliminary Support appeared because that’s where the big operators started buying the asset.
Last Point of Supply
The Last Point of Supply (LPSY) is the immediate action that precedes a Sign of Weakness (SOW). This is an attempt to raise the price but is blocked by the big sellers, who are already positioned short and appear again to protect their positions.
Based on the movement that precedes the Last Point of Supply, we can find different types:
- Last Point of Supply after shock. In case the price comes from developing an Uptrust After Distribution, the Last Point of Supply would be its test.
- Last Point of Supply within the range. If the price comes from developing a Sign of Weakness, the Last Point of Supply will appear in the bullish retreat.
- Last Point of Supply out of range. Here we have on the one hand the test movement after the break (the confirmation event, the Fall Through the Ice); and on the other hand all the setbacks we found during the downtrend Phase out of range.
After breakout the Ice (support) with a sign of weakness (Sign Of Weakness), we want to see an upward movement with narrow price ranges, which would denote the difficulty of the market to keep rising. Preferably we will expect the volume to be low, indicating a lack of interest from buyers; but we have to be careful because a high volume could signal an increase in selling interest by shorting the zone.
Last Point of Supply are good places to start or add short positions as they are the last distribution waves before a new bearish momentum begins.
The price reached in the Last Point of Supply will sometimes coincide with the level above which the Preliminary Supply appeared. This is so because if the structure is distributive, it is on the Preliminary Supply where the distribution initially began.