What is the Wyckoff Method? #2 Distribution Schematic

Distribution Schematic
In essence, the Distribution Schematics works in the opposite way of the Accumulation, but with slightly different terminology.

Wyckoff method distribution schematic

Phase A
The first phase occurs when an established uptrend starts to slow down due to decreasing demand. The Preliminary Supply (PSY) suggests that the selling force is showing up, although still not strong enough to stop the upward movement. The Buying Climax (BC) is then formed by an intense buying activity. This is usually caused by inexperienced traders that buy out of emotions.

Next, the strong move up causes an Automatic Reaction (AR), as the excessive demand is absorbed by the market makers. In other words, the Composite Man starts distributing his holdings to the late buyers. The Secondary Test (ST) occurs when the market revisits the BC region, often forming a lower high.

Phase B
Phase B of a Distribution acts as the consolidation zone (Cause) that precedes a downtrend (Effect). During this phase, the Composite Man gradually sells his assets, absorbing and weakening market demand.

Usually, the upper and lower bands of the trading range are tested multiple times, which may include short-term bear and bull traps. Sometimes, the market will move above the resistance level created by the BC, resulting in an ST that can also be called an Upthrust (UT).

Phase C
In some cases, the market will present one last bull trap after the consolidation period. It’s called UTAD or Upthrust After Distribution. It is, basically, the opposite of an Accumulation Spring.

Phase D
The Phase D of a Distribution is pretty much a mirror image of the Accumulation one. It usually has a Last Point of Supply (LPSY) in the middle of the range, creating a lower high. From this point, new LPSYs is created - either around or below the support zone. An evident Sign of Weakness (SOW) appears when the market breaks below the support lines.

Phase E
The last stage of a Distribution marks the beginning of a downtrend, with an evident break below the trading range, caused by a strong dominance of supply over demand.

Outcome:
Naturally, the market doesn’t always follow these models accurately. In practice, the Accumulation and Distribution Schematics can occur in varying ways. There may be delays in some phases.

Still, Wyckoff’s work offers a wide range of reliable techniques, which are based on his many theories and principles. It is certainly much more than a TA indicator.

In essence, the Wyckoff Method allows investors to make more logical decisions rather than acting out of emotions. The extensive work of Wyckoff provides traders and investors a series of tools for reducing risks and increasing their chances of success. Still, there is no foolproof technique when it comes to investing. One should always be wary of the risks.

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