What do we mean by Wyckoff 2.0?
The aim is to combine the main ideas of the Wyckoff methodology, the principles of auction theory and help us with the Volume Profile and Order Flow tools in order to propose the most robust scenarios possible.
It is the cornerstone on which the trading approach is based mainly because it is based on a real underlying logic, because it provides us with a context with which to propose scenarios and because it offers us different analytical tools with which to evaluate who may be in control of the market.
On the one hand, we talk about underlying logic because of the theoretical framework behind it. There are many concepts that Richard Wyckoff tried to disseminate, but without doubt the most relevant have been the three fundamental laws and the processes of accumulation and distribution.
Among the three laws, if there is one that stands out as a standard associated with the Wyckoff methodology, it is the Law of Supply and Demand. It is the true engine of financial markets even though they have evolved. Regardless of the type of participant, intent, valuation or anything to do with the positioning of an order, in the end it is all about executing a transaction, buying and selling; and this is universal.
Furthermore, the processes of accumulation and distribution, going hand in hand with the law of cause and effect, give us a very genuine picture of how the market moves. There is no doubt that in order to visualize an effect in the form of an uptrend it will first be necessary to develop a cumulative cause; and that for a bearish effect to take place it will first be necessary for a distributive process to take place. How such processes will develop is quite another matter.
On the other hand, we must emphasize the importance of having a clear context to guide us. This is one of the most important sections of the strategy since it allows us the possibility of considering certain movements based on how the price is behaving up to the present moment.
We understand that the interaction between supply, demand, buyers and sellers creates structures that, although not in form but in substance, are constantly repeated. The genuine identification of these structures helps us to recognize the context in which we find ourselves in order to favor the development towards one side or the other. At this point it is important to emphasize what we understand by fractality and how minor structures fit into other major ones.
Finally, the Wyckoff methodology approach provides us with a series of analytical tools with which to evaluate who is taking control of the market during the development of the structures.
Most market actions provide us with information about the commitment of buyers and sellers to take control. The fact of developing a move in a specific way or simply failing to develop a certain move leaves us with very subtle clues with which to assess underlying strength or weakness.
Finally, the analyses under the Law of Effort and Result are very useful in order to determine the harmony or divergence in the movements. In the end, it is a matter of making the most objective analysis possible and adding up the traces in favor of one side or the other to determine who is more likely to be in control.
Although Richard Wyckoff did not use these concepts in his studies, the balance and imbalance are still the reasoning behind lateral and trend movements.
An accumulation and distribution range, terms that Wyckoff did use, are exactly balancing zones where buyers and sellers exchange their contracts as a sign of market efficiency, a term used by auction theory. The same is true of upward and downward trending movements, which in essence represent inefficiency and imbalance.
Ultimately the underlying logic of the principles of the Wyckoff methodology are based on exactly this, on auction theory, the acceptance and rejection of certain areas; and this is what I am trying to convey to anyone who alludes to this approach as an outdated and totally inoperative method for today’s markets.
In addition, we incorporate the principle that the market, in order to facilitate trading among its participants, will always seek to go to former zones of high activity where both buyers and sellers exchanged a large number of contracts. This principle is tremendously useful for more accurate analysis and for locating logical zones for profit taking.
The Volume Profile is a tool that objectively identifies the most important trading zones and volume-based trading levels.
For Wyckoff traders the analysis of the profiles helps us to improve the identification of structures mainly for those cases in which they develop in a more erratic way where the events are not so easily identifiable.
Other interesting uses it offers us is the determination of market bias through the analysis of trading zones and trading levels; in addition to the analysis of trend health through the continuous evaluation of the evolution of value areas.
For those traders who do not take into account the Wyckoff methodology approach, the Volume Profiles also provide a context for setting scenarios based on the operating principles with the value areas. While it is true that taking into account all the analytical tools offered by the Wyckoff methodology can help us in favor of trading one way or the other, these Volume Profile operating principles also serve as a roadmap with which to expect specific price movements.
Finally, it can also be tremendously useful to take it into account to calibrate the position management; everything that has to do with the entry of the trade, the location of the stop loss and the establishment of the profit taking.
After studying in depth everything that has to do with the crossing of orders and evidencing the problems of its analysis in isolation, we are in a position to limit its use only on the key operating zones.
Due to the discretion involved, using any type of Order Flow analysis without taking anything else into account does not seem to be the most solid way to approach it. If it is a subjective tool in itself, not having a clear roadmap can turn the trade into a coin flip.
This is where the importance of having a clear context and an established directional bias comes in again. Only when we are in a potential entry situation is it time to, if anything, look at how the crossing of orders is occurring to validate our entry trigger.
Taking imbalances as a fundamental basis, the proposed Footprint analysis would mainly involve identifying the two key behaviors in market turns: absorption and initiative, right at the moment of the trigger search.
Also, in the event that we have not been able to enter such a turn, we still have the possibility of proposing an entry with a continuation pattern through the identification of controls plus test.