The Wyckoff Method
The Wyckoff Method
What is the Wyckoff Methodology?
The Wyckoff Method is based on the premise that stocks and markets move in predictable cycles. Wyckoff identified nine primary cycles, each of which has a characteristic pattern of price movement.
The approach is simple: when well-informed traders want to buy or sell, they carry out processes that leave their traces on the chart through price and volume.
The Wyckoff Methodology tries to identify that professional intervention to try to elucidate who is most likely to be in control of the market and enable us to pose judicious scenarios of where the price is most likely to go.
With Wyckoff pattern help, traders and investors can use these cycles to their advantage by timing their purchases and sales accordingly. Wyckoff also emphasized the importance of risk management, and taught his students how to identify and price risk appropriately.
This timeless advice is still essential for those looking to make successful investments in the stock market. Whether you’re a veteran trader looking to refine your skills, or a beginner trying to get started, the Wyckoff Method is a valuable resource.
Table of Contents
Richard Wyckoff: the origin of Wyckoff theory
Richard Wyckoff (1873-1934) became a Wall Street celebrity.
He was a forerunner in the investment world as he started as a stockbroker at the age of 15 and by the age of 25 already owned his own brokerage firm.
The method he developed of technical analysis and speculation arose from his observation and communication skills.
Working as a Broker, Wyckoff saw the game of the big operators and began to observe through the tape and the graphics the manipulations they carried out and with which they obtained high profits.
He stated that it was possible to judge the future course of the market by its own actions since the price action reflects the plans and purposes of those who dominated it.
Richard Wyckoff carried out its investment methods achieving a high return. As time passed his altruism grew until he redirected his attention and passion to education.
He wrote several books as well as the publication of a popular magazine of the time “Magazine of Wall Street”.
He felt compelled to compile the ideas he had gathered during his 40 years of Wall Street experience and bring them to the attention of the general public. I wanted to offer a set of principles and procedures about what it takes to win on Wall Street.
These rules were embodied in the 1931 course “The Richard D. Wyckoff Method of Trading and Investing Stocks. A course of Instruction in Stock Market Science and Technique” becoming the well known Wyckoff method.
Fundamental principles
Many of Wyckoff Methodology basic principles have become basic foundations of technical analysis. For instance:
- Supply and Demand, Cause and Effect and Effort and Result
- The concepts of Accumulation and Distribution
- The supremacy of Price and Volume when determining price movements
The Wyckoff method has passed the test of time
More than 100 years of continuous development and use have proven the value of the method to trade all kinds of financial instruments.
This achievement should not come as a surprise as it relies on the analysis of price and volume action to judge how it reacts to the battle between the real forces that govern all price changes: supply and demand.
What makes it different from other methods?
The real logic behind Wyckoff Methodology
It is the cornerstone of this technical methodology for trading, which makes it stand above any other form of technical analysis; it is the only one that informs us about what is really happening in the market in a logical way through its three fundamental laws:
- Law of Supply and Demand. It is the true engine of the market. You will learn to analyze the traces left by the interactions between the major traders.
- Law of Cause and Effect. The idea is that something cannot happen out of the blue; that for the price to develop a trend movement (effect) it must first have built a cause previously.
- Law of Effort and Result.It is about analyzing price and volume in comparative terms to conclude whether the market actions denote harmony or divergence.
Universality
Another of its main benefits is that the reading is applicable:
- To any financial market with the only requirement that it has sufficient liquidity.
- In any timeframe. Whether you decide to do Day Trading or long term investment, the trading principles are exactly the same.
Wyckoff Methodology Advantages
Provides context and roadmap
Thanks to the accumulation and distribution structures, we will be able to identify the professional’s participation as well as the general market sentiment up to the present moment, enabling us to propose truly objective scenarios.
The Events and Phases are unique elements of the Wyckoff methodology and help us to guide the development of the structures. This puts us in a position to know what to expect the price to do after the occurrence of each of them, providing us with a roadmap to follow at all times.
Setting high-probability trading zones
The Methodology provides us with the exact zones on which we are going to act, as well as examples of triggers to enter the market, making it as easy as possible to know where to look for trades.
Wyckoff Methodology Structures
Financial markets are a living thing, they are constantly changing due to their continuous interaction between buyers and sellers. This is why it would be a mistake to use fixed patterns or schemes to try to read the context of the market.
Aware that it is practically impossible for price to develop two identical structures, the trading approach proposed by the Wyckoff methodology is flexible when analysing the market.
The price can develop different types of structures depending on the conditions in which it is found. This is why we need an approach that gives some flexibility to price movements but at the same time is governed by certain fixed elements that provide as much objectivity as possible to the reading.
These fixed aspects of the methodology are the events and phases that make up the development of the structures. Below we present two basic schemes of accumulation and distribution to provide a very general idea of the dynamics in which price moves under the premises of the Wyckoff methodology.
As we have just said, these schemes can be considered as ideals. The important thing to keep in mind is that the market will not always present them this way.
Recommended books on the Wyckoff method
Before I begin to explain in more detail the structure of this methodology, I want to leave you my three essential recommendations to know it in depth:
Wyckoff schematics
Here you will learn in a simple way the main concepts to understand the Wyckoff trading strategy and how to apply it.
Basic accumulation structure #1
- Accumulation. The process by which large operators absorb available stock from the market. This is a transfer from retail traders or "weak hands" to strong traders or "strong hands".
- Creek. Resistance level for accumulation or reaccumulation structures. It is established by the maximum generated by the Automatic Rally and by the maximums that can be developed during Phase B.
- CHoCH. Change of Character. Change of character. It indicates the environment in which the price will move soon. The first CHoCH is established in Phase A where the price moves from a downward trend to a consolidation environment. The second CHoCH is set from the minimum of Phase C to the maximum of SOS in which the price moves from a consolidation environment to an upward trend environment.
Phase A. Stopping the previous bearish trend.
- PS. Preliminary Support. Preliminary support. It's the first attempt to stop the downward movement that will always fail.
- SC. Selling Climax. Sales climax. Climate action that stops the downward movement.
- AR. Automatic Rally. Bullish reaction. An upward movement that sets the maximum range.
- ST. Secondary Test. Test of the level of supply in relation to climate action. Establishes the end of Phase A and the beginning of Phase B.
Phase B. Construction of the cause.
- UA. Upthrust Action. Temporary breakage of the resistance and re-entry into the range. This is a test at the maximum generated by the AR.
- ST as SOW. Secondary Test as Sign Of Weakness. Sample of weakness in test function. Temporary break of the support and re-entry to the range. This is a test at the minimum generated by the SC.
Phase C. Test
- SP. Spring Shaking bassist. It is a test in the form of breakage of the minimums of Phases A and B. There are three different types of Springs.
- Test Spring. Downward movement towards lows of the range in order to check the commitment of the sellers.
- LPS. Last Point of Support. Last level of offer support. Test in the form of a bearish movement that fails to reach the minimum range.
- TSO. Terminal Shakeout or Shakeout. Final shake. Abrupt movement of minimum breakage that produce a deep penetration of the level of support and a fast recovery.
Phase D. Bullish trend within the range.
- SOS. Sign of Strength. Sign of strength. Bullish movement generated after the Phase C Test event that manages to reach the top of the range. Also called JAC. Jump Across the Creek. Creek jump.
- LPS. Last Point of Support. Last level of offer support. These are the rising troughs we find in the upward movement towards resistance.
- BU. Back Up. This is the last big reaction before the bull market starts. Also called BUEC. Back Up to the Edge of the Creek. Back to the creek.
Phase E. Bullish trend out of range.
Succession of SOS and LPS generating a dynamic of rising highs and lows.
Basic accumulation structure #2
Second variant of the methodology in which the test event in Phase C fails to reach the minimums of the structure.
It usually occurs because current market conditions denote background strength.
The objective of the price is to visit this liquidity zone but the big operators support the market entering aggressively in purchase. They don’t let the price go any lower so no one else can buy any lower.
This type of ranks are more complicated to identify because by not being able to assess that jolt action, the bullish approach loses a point of confidence.
The primary trading zone is in the Spring potential; then, when buying in a possible LPS we will always be in doubt if, as is most likely, the price will visit that minimum zone first to develop the Spring.
In addition to this, that first sign of bullish strength that produces range breakage is usually lost.
Therefore, the only viable purchase opportunity in this type of structure can be found in the BUEC. This is where we must pay more attention to look for entry in lengths.
Basic distribution structure #1
- Distribution. The process by which large operators distribute (sell) stock. This is a transfer from the strong operators or "strong hands" to the retail operators or "weak hands".
- ICE. Level of support for distribution or redistribution structures. It is established by the minimum generated by the Automatic Reaction and by the minimums that can be developed during Phase B.
- CHoCH. Change of Character. Change of character. It indicates the environment in which the price will move soon. The first CHoCH is established in Phase A where the price moves from an upward trend environment to a consolidation environment. The second CHoCH is set from the maximum of Phase C to the minimum of the SOW in which the price moves from a consolidating environment to a downward trend environment.
Phase A. Stop the previous trend.
- PSY. Preliminary Supply. Preliminary resistance. It's the first attempt to stop the climb that will always fail.
- BC. Buying Climax. Shopping climax. Climate action that stops the upward movement.
- AR. Automatic Reaction. Bearish reaction. Bearish movement that sets the minimum range.
- ST. Secondary Test. Test of the level of demand in relation to climate action. Establishes the end of Phase A and the beginning of Phase B.
Phase B. Construction of the cause.
- UT. Upthrust. Same event as accumulation UA. Temporary breakage of the resistance and re-entry into the range. This is a test at the maximum generated by the B
- mSOW. Minor Sign of Weakness. Sample of minor weakness. Same event as ST as SOW of accumulation. Temporary break of the support and re-entry to the range. This is a test at the minimum generated by the AR.
Phase C : Test
- UTAD. Upthrust After Distribution. Bullish shake. It is a test in the form of breakage of the maximums of Phases A and B.
- UTAD test. An upward movement that goes up to check the level of commitment of the buyers.
Phase D. Bearish Trend Within Range.
- MSOW. Major Sign of Weakness. Sample of major weakness. Bearish movement originated after the Phase C Test event that manages to reach the bottom of the range generating a character change.
- LPSY. Last Point of Supply. Last level of demand support. These are the decreasing highs we find in the bearish movement towards support.
Phase E : Bearish trend out of range.
Succession of SOW and LPSY generating a dynamic of diminishing maximums and minimums.
Basic distribution structure #2
Second variant of the methodology in which the test event in Phase C fails to reach the maximums of the structure.
Inverse reasoning than for the example of cumulative scheme #2.
Denotes a greater weakness in the background.
The price tries to reach the liquidity that there are in maximums but the big traders that are already short positioned prevent it,
Structures with a loss of confidence due to the absence of shaking. When going short on the possible LPSY we will always be in doubt as to whether the price will shake to highs before falling.
The sign of weakness (SOW) that breaks the structure is lost. Unique opportunity to the breakage test (LPSY).
If you liked this information and you want to go deeper into the Wyckoff Pattern and internalise all the Wyckoff Schematics, please click here. I encourage you to buy my book in physical or PDF format and you will see how it helps you during your trading career.
And remember that the most important thing to apply a proper Wyckoff Trading Strategy is to put into practice everything you will see in my book, because the experience will help you to refine this methodology.
The Wyckoff Scheme is a technical analysis approach that involves studying market trends and manipulating price data to identify buying and selling opportunities in the financial markets.
The effectiveness of the Wyckoff methodology is subjective and may vary depending on the analyst or trader applying the technique.
The accuracy of the Wyckoff method is also subjective and cannot be guaranteed. However, traders who have become proficient in applying the method may be able to achieve above average success rates.
The three rules of the Wyckoff methodology are:
– The law of supply and demand states that price will move in the direction with the highest supply or demand.
– The principle of cause and effect states that a significant price movement must be preceded by a period of accumulation or distribution.
– The law of effort versus outcome states that the amplitude of the upward or downward price movement is proportional to the amount of buying or selling pressure exerted.
The Wyckoff technique is a market analysis technique that can help investors determine which stocks to buy and the ideal time to buy them. The Wyckoff market cycle represents the approach by which a stock’s price fluctuates, according to his theory. The cycle consists of four stages, comprising accumulation, increase, distribution and decrease.
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