Test

Secondary Test

The Secondary Test is the fourth event within the Wyckoff methodology schemes. Establishes the end of Phase A, stopping the previous trend, and gives rise to the beginning of Phase B, construction of the cause.

Secondary Test

 

Functions of the Secondary Test

As with every event, one of the important points of its identification is that it identifies us with the context of the market; it gives us an indication of what to expect from now on. In this case, we went from being in a context of a downward trend to migrate to a context of lateralization in price.

This is very interesting since, as we know, the price behavior within Phase B will be a continuous fluctuation up and down between the limits of the structure.Secondary Test in B

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Preliminary Stopping

Discover the Event that signals the First Entry of Smart Money into the Market


This is the first Wyckoff method event that appears to initiate the Phase A stop of the previous trend.

In the case of accumulation schemes, it is called Preliminary Support (PS), which together with the Selling Climax (SC), the Automatic Rally (AR) and the Secondary Test (ST) produces the change in character with which it makes the price evolve from a downward trend environment to a lateralisation environment.

In the example of the distribution structures it is called Preliminary Supply (PSY), which in conjunction with the Buying Climax (BC), the Automatic Reaction (AR) and the Secondary Test (ST), puts an end to Phase A, stopping the previous upward trend and initiating Phase B, the construction of the cause.

As we know, the processes of accumulation and distribution require time and on rare occasions the price will develop a hypodermic scheme visually leaving a V turn. This accumulation process begins with this first event, with Preliminary Support and Preliminary Supply.

Before this event takes place, the market will find itself in a clear trend. At some point, the price will reach a level attractive enough for large traders that they will begin to participate more aggressively.

Preliminary Support

The observation of this event on the chart is generally misinterpreted as it is not necessarily necessary to observe a bearish bar with increased volume and expansion in the ranges.

It can also be seen on a set of bars with a relatively narrower range and a constant high volume during all of them; or even on a single bar with high volume and a large wick at the bottom. These representations in the end denote the same thing: the first relevant entry of the big operators.

Volumen de parada

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Effort and Result

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The law of effort and result is one of the three basic laws that Richard Wyckoff introduced into financial markets. This law states that every action must have an equal and opposite reaction.


The importance of volume

Price is not the only important factor in financial markets. Perhaps even more important is the character of the volume.

These two elements (price and volume) are part of the cornerstone of the Wyckoff methodology.

Volume identifies the amount of stock (stocks, units, contracts) that has changed hands. When large traders are interested in a security, this will be reflected in the volume traded.

This is the first key concept: the participation of large operators is identified by an increase in volume.

The law of effort vs. result

The effort is represented by the volume, while the result is represented by the price.

This means that the price action must reflect the volume action. Without effort it can’t have worked.

The aim is to assess the dominance of buyers or sellers through convergence and divergence between price and volume.

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