Wyckoff Theory.
Have you ever wondered how institutional investors manage their positions? What do they continue to do now and what will they do in the future? Tracking and tracking the whales is critical to making a profit in the markets - such investors are the overriding force behind every trend, and you'll be crushed if you get in their way.
Richard Wyckoff dedicated his story to learning about the trades of these investors. Its trading procedure is based on the investigation of market cycles, the interpretation of volume and the equality between supply and demand, the only indications that these institutional investors leave on the chart.
He has been one of the pioneers of technical study in the early 20th century. Wyckoff was described as one of the TA Titans along with Gann and Elliot. He was an avid student of the markets and an active trader. Early in his career, he identified the business of the legendary occupational operators of his time: J.P Morgan and Jesse Livermore. He closely inspected how they developed and maintained their tactics. All of the above helped Wyckoff develop techniques to assess the future direction of the market by analyzing cost action and volume on the charts.
As Wyckoff mentioned, small retailers are constantly losing a huge amount of millions of dollars to institutional entities. He dedicated himself to educating the public about how these giant investors operate and wrote several books on this matter.
Even though several of the techniques used by such investors during the 20th century are now illegal, Wyckoff's methodology for assessing the future direction of the market is still quite important.
Wyckoff reached the conclusion that the market action is a constant repetition of the same 4 stages: accumulation, margin, distribution and reduction. All these 4 stages happen directly thanks to the manipulation techniques of the “smart money” market.
The accumulation stage is generated in the graph as a narrow trading range in which institutional operators absorb the majority of the available supply of occupations.
Then, since the available supply is quite low, the demand increases, which produces a deep margin shift.
When cost and demand reach their highest point, institutional operators begin to lower their supply little by little, covering all the demand and building a tight distribution range.
Since each of the occupations remains in the hands of retail traders and there is no buying interest by institutional traders, the cost inevitably falls building a markdown stage on the chart.
To make the biggest profit in the markets, a trader should look at and understand how such institutional investors operate and follow suit.
The composite man
The Composite Man is just a fiction. It is the addition of occupations of various skilled traders that occur simultaneously.
The composite human carefully plans and does his operations. He is interested in retailers to buy an asset in which he has already accumulated a position by doing many transactions, both buying and trading, thereby building high volume and advertising the asset as is.
Wyckoff and his students believed that if one could understand the activities of the Composite human, he could discover many business and investment opportunities and profit from them.
So how do we apply this criterion to our business tactic? As you constantly study the cost and volume shift on the chart, take a step back and ask yourself the following questions:
What is the reason for the composite human being?
What are you doing right now? Accumulating, distributing or lowering or raising the price mark?
How do you earn money? Who loses thanks to the occupations of the Composite human being?
If I were the Composite human, what could my next step be?
Don't worry if you can't answer quickly - these questions are very complicated and require in-depth study. It is a job of the compound human being to cover their tracks: the less the population understands their motives, the more money they earn.
Fortunately, even though the activities of the Composite human being are stealthy, they remain traces throughout the graph and it is convenient for us to find and interpret them correctly. However antecedent to delve into technical research and graphics, we must understand the 3 main principles that are behind each cost shift; the so-called "Wyckoff laws"
Wyckoff's 3 Primordial Laws
Wyckoff's tactic is based on 3 primary laws, which help to detect the superior markets to trade, identify the bias of the future direction of costs, dictate when an asset is ready to exit a trading range and project ends of costs based on the conduct of the asset in its negotiation. distance. These principles are basic and have to be fully understood antecedent to follow.
THE LAW OF SUPPLY AND DEMAND
The first start is simple: once the demand is greater than the supply, the cost increases and once the supply is greater than the demand, the cost falls. Constantly that the Composite human being gets a significant part of the available supply, the supply / demand equality changes and the cost, naturally, begins to rise. If the Composite human releases his previously accumulated occupations, he shifts the balance back and the cost marks down.
A trading range (accumulation or distribution) symbolizes an equilibrium of supply and demand; assumes that there are 2 strong regions: a demand (support) region and a supply (resistance) region located side by side. The cost often oscillates between those 2 levels, while occupations change hands, whether it is from retail traders to composite man (accumulation) or from composite human being to retail traders (distribution).
To understand whether today's trading range represents accumulation or distribution, students of the Wyckoff procedure analyze the interaction between cost and volume and look for special events.
THE LAW OF EFFORT VERSUS RESULT
Volume is effort and cost change is the result. An effort is necessary to promote cost, whether it is increasing sales volume to minimize cost or increasing purchase volume to increase cost. If volume expands in the same direction as cost, it is a reliable trend continuation signal.
However, if there was a great effort to promote maximum (or lowest) cost and it did not result in a proportional cost change, then something is fishy. This behavior is called Cost and Volume Divergence, and it gives early guidelines for probable trend reversals.
This cost and volume study not only works in range markets, it also helps to identify directional biases throughout a trading range. If, throughout a range, the purchase volume peaks do not move the cost much higher, it assumes that there is still a lot of supply and it is unlikely that the cost will rise until all the supply is absorbed. The same beginning applies to the opposite scenario: if over a range a high volume of sales does not result in a deep downward shift, it assumes that there is a lot of demand, the Composite human being is potentially increasing his position in the degree of today.
THE LAW OF CAUSE AND IMPACT
This law is related to the beginning of supply and demand. Before any impact there should be a cause. And this impact will be proportional to the size of your cause. Accumulation and distribution are periods of creation of the cause. So the next markup or downgrade is the direct impact of this motif.
The cost cannot rise without a preliminary absorption of the supply and it cannot discharge without covering the majority of the demand. The longest accumulation (or distribution) involves the Composite human having acquired (or distributed) a majority of accessible occupations. Therefore, the next shift is going to be much deeper, as it requires a lot of liquidity to completely exit your position.
Trading Range Analysis
The primary goal of Wyckoff's analysis is to enter the market at the right time, anticipating moves in the right direction, minimizing risk exposure and increasing potential gains.
All of this is done by analyzing the trading ranges and identifying whether the current range is an accumulation or a distribution.
Wyckoff's method provides guidelines for determining events that occur in the trading range, helping to identify future directional bias. These events are shown in the famous schematics, created by Wyckoff and his students.
1- The trading range is divided into stages, and each stage comes with a group of events that define it. (Accumulation).
Stage A represents the outcome of the previous downtrend (of at least one intermediate). There are 4 events associated with it:
- PS (preliminary support) is a degree of support in which the increase in demand signals a viable end of the downgrade. Generally, it has pre-eminent volume over average and a wider candlestick spread.
- SC (sales climax) is a point at which the marketing pressure reaches its climax, and where the composite human being shows his first interest in marketing activities, immediately buying the panic of the retailers.
- AR (automatic rally) is a rally that is generated due to the cessation of marketing pressure. This rally should have a wider margin than previous ones to ensure that the previous sell-off was a climax. If that happens, the conjunction of SC and AR creates an estimate of the trading range parameters. There should be support close to SC and resistance close to AR.
- ST (secondary test): cost returns to SC levels to review the strength of demand in this area. To confirm a trading range that must remain in this area, any separation from the SC area must be an immediate high-volume return in the trading range.
Stage B builds "a cause" for the new trend. This stage represents a slow accumulation of activities in anticipation of the uptrend. The composite human creates a high enough demand in the lower part of the range and pushes the cost down in the preeminent part of the range. This process can take a long time, depending on the Composite Man's ability to control cost. This stage can integrate some novel tests of the lows (ST) and numerous novel tests of the highs (AR). Keep in mind that these novel tests have the potential to go out of the trading range to interfere with bankrupt retailers, yet the composition remains intact as long as the cost immediately returns to the trading range.
To further confirm that you are currently in Stage B, look at the volume. At the beginning of Stage B, the swings tend to have a maximum volume, which falls more and more as the consolidation continues.
Stage C is where the Composite human verifies if an asset is ready to go by demonstrating the remaining supply. There are 2 primary events:
Spring (jolt) - A drop in cost that takes you below the lows of the trading range (below the ST or even the trading climax, depending on how deep it was). In most cases, it is the last attempt of the Composite people to obtain low-cost occupations prior to the margin shift. The build-up of marketing pressure forces retailers to think that today's trading range will culminate in the displacement of markdowns and will exit or reverse their positions. The Composite Man waits for separation to produce sufficient liquidity and then immediately covers all available supply, causing the cost to return to the trading range.
- Testing: a tiny pullback to check if there is enough support at the bottom of the trading range after a reorganization. The composite human stops his buying pressure and checks if the market has enough demand not to allow the cost to fall below the trading range. If it is this way, the market is ready for margin shift. If not, the Composite human continues to accumulate the available supply.
Stage D - Make sure we are right with our previous study. If we correctly interpret the spring and previous tests as bullish signals, then demand should prevail over supply and cost should gradually rise to the TR highs. Stage D has 3 events:
- LPS (last fulcrum) is the attitude after a test rally. Generally, it retests previous levels that were considered resistance. These attitudes are usually quite slow and do not have volume.
- SOS (Sign of Strength) is a rally with a volume notably preeminent to the common and with a more extensive cost differential than the candles. Mainly take the cost above AR.
- BU (Back up): short-term attitude to SOS, slight profit taking by Centimeters (demand test) and new test of the maximums of the trading range. It is the last possibility to get on the bull train.
Example en BTC:
2- Distribution Range.
Working in a similar way to the accumulation trading range, the distribution range is characterized by several phases:
Phase A of the distribution range marks the end of the previous marking movement. It mimics phase A of the accumulation range, but with preliminary supply (PSY) instead of preliminary support and buying climax (BC) instead of selling climax. AR and ST work in exactly the same way as they do during a build-up phase, but in this case AR is driven by a lack of demand after the rally and ST is a retest of the previous highs, not the lows.
Phase B is the consolidation phase. Usually there are several new tests of the highs and lows of the trading range. These movements are usually there because of the constant struggle between supply and demand: the Composite Man tries to get rid of all his stocks without scaring the public of his asset, he wants to get rid of his entire position with minimal slippage, so he needs to Hold demand at high levels, causing the price to rise and recover from the liquidity provided by emerging operators.
There are several events that occur during Phase B:
SOW (Sign of Weakness) is the first major settlement after the auto rally. It usually breaks the lower part of the trading range, which shows a change of character in the trend. Indicates that the offer became dominant. The move to the downside should be in above-average volume and a wider candlestick margin.
UT (Upthrust) is the opposite of Spring - it is a quick move above the trading range (usually at low volume). It is there to test demand levels and gain additional liquidity from bankrupt traders. Often these are levels at which the composite man initiates his short positions.
Phase C is the phase where the CM makes the last attempt to shake up the retailers before the markdown phase. It is your last chance to sell the remaining shares and / or open short positions at the best prices. The main event during this phase is the UTAD (Upthrust After Distribution), which is the same as a UT, but is generally much more volatile. Note that this event is not required, just like Spring is during a rollup; the presence of this event depends on many factors, including fundamental events and the availability of excess demand.
Phase D is where the price finally breaks the bottom of the trading range. At this point, it is obvious to everyone that the supply is dominant and that the previous uptrend is totally exhausted. There are recent unsuccessful attempts to increase the price, which generally have low volume and low spread. The events in this phase are: LPSY (Last Supply Point) and SoW (Sign of Weakness).
Okay, let's imagine you've seen Phase A in action. There was a strong sell-off on the volume increase and an immediate Auto Rally. When is it safe and profitable to look for shorts? What price action events confirm that the trend is about to turn?
An aggressive trader could spot the change in character and the first signs of weakness from the demand side and enter a short position at the first UT or UTAD in Phase B. It is a solid move from a risk / reward perspective, If a trader detects clear signals that the trend is exhausted, he can potentially enter the best possible prices. But the Composite Man is patient and will likely push the price up to UT levels at least several times. By shorting UT / UTAD, the trader takes a low-risk trade from a price perspective, but potentially locks his funds in the trade for a long time.
The safest approach is to wait for the SOW in Phase D and enter LPSY. Sure, in this case, the trader runs the risk of the price returning to the highs of the trading range, but even if this happens, he can quickly cut his losses and enter the next signs of weakness.
Let's go through all the steps that should be part of the thought process of the trader who wants to apply Wyckoff's principles in his own trading strategy.
Example in BTC:
Have you ever wondered how institutional investors manage their positions? What do they continue to do now and what will they do in the future? Tracking and tracking the whales is critical to making a profit in the markets - such investors are the overriding force behind every trend, and you'll be crushed if you get in their way.
Richard Wyckoff dedicated his story to learning about the trades of these investors. Its trading procedure is based on the investigation of market cycles, the interpretation of volume and the equality between supply and demand, the only indications that these institutional investors leave on the chart.
He has been one of the pioneers of technical study in the early 20th century. Wyckoff was described as one of the TA Titans along with Gann and Elliot. He was an avid student of the markets and an active trader. Early in his career, he identified the business of the legendary occupational operators of his time: J.P Morgan and Jesse Livermore. He closely inspected how they developed and maintained their tactics. All of the above helped Wyckoff develop techniques to assess the future direction of the market by analyzing cost action and volume on the charts.
As Wyckoff mentioned, small retailers are constantly losing a huge amount of millions of dollars to institutional entities. He dedicated himself to educating the public about how these giant investors operate and wrote several books on this matter.
Even though several of the techniques used by such investors during the 20th century are now illegal, Wyckoff's methodology for assessing the future direction of the market is still quite important.
Wyckoff reached the conclusion that the market action is a constant repetition of the same 4 stages: accumulation, margin, distribution and reduction. All these 4 stages happen directly thanks to the manipulation techniques of the “smart money” market.
The accumulation stage is generated in the graph as a narrow trading range in which institutional operators absorb the majority of the available supply of occupations.
Then, since the available supply is quite low, the demand increases, which produces a deep margin shift.
When cost and demand reach their highest point, institutional operators begin to lower their supply little by little, covering all the demand and building a tight distribution range.
Since each of the occupations remains in the hands of retail traders and there is no buying interest by institutional traders, the cost inevitably falls building a markdown stage on the chart.
To make the biggest profit in the markets, a trader should look at and understand how such institutional investors operate and follow suit.
The composite man
The Composite Man is just a fiction. It is the addition of occupations of various skilled traders that occur simultaneously.
The composite human carefully plans and does his operations. He is interested in retailers to buy an asset in which he has already accumulated a position by doing many transactions, both buying and trading, thereby building high volume and advertising the asset as is.
Wyckoff and his students believed that if one could understand the activities of the Composite human, he could discover many business and investment opportunities and profit from them.
So how do we apply this criterion to our business tactic? As you constantly study the cost and volume shift on the chart, take a step back and ask yourself the following questions:
What is the reason for the composite human being?
What are you doing right now? Accumulating, distributing or lowering or raising the price mark?
How do you earn money? Who loses thanks to the occupations of the Composite human being?
If I were the Composite human, what could my next step be?
Don't worry if you can't answer quickly - these questions are very complicated and require in-depth study. It is a job of the compound human being to cover their tracks: the less the population understands their motives, the more money they earn.
Fortunately, even though the activities of the Composite human being are stealthy, they remain traces throughout the graph and it is convenient for us to find and interpret them correctly. However antecedent to delve into technical research and graphics, we must understand the 3 main principles that are behind each cost shift; the so-called "Wyckoff laws"
Wyckoff's 3 Primordial Laws
Wyckoff's tactic is based on 3 primary laws, which help to detect the superior markets to trade, identify the bias of the future direction of costs, dictate when an asset is ready to exit a trading range and project ends of costs based on the conduct of the asset in its negotiation. distance. These principles are basic and have to be fully understood antecedent to follow.
THE LAW OF SUPPLY AND DEMAND
The first start is simple: once the demand is greater than the supply, the cost increases and once the supply is greater than the demand, the cost falls. Constantly that the Composite human being gets a significant part of the available supply, the supply / demand equality changes and the cost, naturally, begins to rise. If the Composite human releases his previously accumulated occupations, he shifts the balance back and the cost marks down.
A trading range (accumulation or distribution) symbolizes an equilibrium of supply and demand; assumes that there are 2 strong regions: a demand (support) region and a supply (resistance) region located side by side. The cost often oscillates between those 2 levels, while occupations change hands, whether it is from retail traders to composite man (accumulation) or from composite human being to retail traders (distribution).
To understand whether today's trading range represents accumulation or distribution, students of the Wyckoff procedure analyze the interaction between cost and volume and look for special events.
THE LAW OF EFFORT VERSUS RESULT
Volume is effort and cost change is the result. An effort is necessary to promote cost, whether it is increasing sales volume to minimize cost or increasing purchase volume to increase cost. If volume expands in the same direction as cost, it is a reliable trend continuation signal.
However, if there was a great effort to promote maximum (or lowest) cost and it did not result in a proportional cost change, then something is fishy. This behavior is called Cost and Volume Divergence, and it gives early guidelines for probable trend reversals.
This cost and volume study not only works in range markets, it also helps to identify directional biases throughout a trading range. If, throughout a range, the purchase volume peaks do not move the cost much higher, it assumes that there is still a lot of supply and it is unlikely that the cost will rise until all the supply is absorbed. The same beginning applies to the opposite scenario: if over a range a high volume of sales does not result in a deep downward shift, it assumes that there is a lot of demand, the Composite human being is potentially increasing his position in the degree of today.
THE LAW OF CAUSE AND IMPACT
This law is related to the beginning of supply and demand. Before any impact there should be a cause. And this impact will be proportional to the size of your cause. Accumulation and distribution are periods of creation of the cause. So the next markup or downgrade is the direct impact of this motif.
The cost cannot rise without a preliminary absorption of the supply and it cannot discharge without covering the majority of the demand. The longest accumulation (or distribution) involves the Composite human having acquired (or distributed) a majority of accessible occupations. Therefore, the next shift is going to be much deeper, as it requires a lot of liquidity to completely exit your position.
Trading Range Analysis
The primary goal of Wyckoff's analysis is to enter the market at the right time, anticipating moves in the right direction, minimizing risk exposure and increasing potential gains.
All of this is done by analyzing the trading ranges and identifying whether the current range is an accumulation or a distribution.
Wyckoff's method provides guidelines for determining events that occur in the trading range, helping to identify future directional bias. These events are shown in the famous schematics, created by Wyckoff and his students.
1- The trading range is divided into stages, and each stage comes with a group of events that define it. (Accumulation).
Stage A represents the outcome of the previous downtrend (of at least one intermediate). There are 4 events associated with it:
- PS (preliminary support) is a degree of support in which the increase in demand signals a viable end of the downgrade. Generally, it has pre-eminent volume over average and a wider candlestick spread.
- SC (sales climax) is a point at which the marketing pressure reaches its climax, and where the composite human being shows his first interest in marketing activities, immediately buying the panic of the retailers.
- AR (automatic rally) is a rally that is generated due to the cessation of marketing pressure. This rally should have a wider margin than previous ones to ensure that the previous sell-off was a climax. If that happens, the conjunction of SC and AR creates an estimate of the trading range parameters. There should be support close to SC and resistance close to AR.
- ST (secondary test): cost returns to SC levels to review the strength of demand in this area. To confirm a trading range that must remain in this area, any separation from the SC area must be an immediate high-volume return in the trading range.
Stage B builds "a cause" for the new trend. This stage represents a slow accumulation of activities in anticipation of the uptrend. The composite human creates a high enough demand in the lower part of the range and pushes the cost down in the preeminent part of the range. This process can take a long time, depending on the Composite Man's ability to control cost. This stage can integrate some novel tests of the lows (ST) and numerous novel tests of the highs (AR). Keep in mind that these novel tests have the potential to go out of the trading range to interfere with bankrupt retailers, yet the composition remains intact as long as the cost immediately returns to the trading range.
To further confirm that you are currently in Stage B, look at the volume. At the beginning of Stage B, the swings tend to have a maximum volume, which falls more and more as the consolidation continues.
Stage C is where the Composite human verifies if an asset is ready to go by demonstrating the remaining supply. There are 2 primary events:
Spring (jolt) - A drop in cost that takes you below the lows of the trading range (below the ST or even the trading climax, depending on how deep it was). In most cases, it is the last attempt of the Composite people to obtain low-cost occupations prior to the margin shift. The build-up of marketing pressure forces retailers to think that today's trading range will culminate in the displacement of markdowns and will exit or reverse their positions. The Composite Man waits for separation to produce sufficient liquidity and then immediately covers all available supply, causing the cost to return to the trading range.
- Testing: a tiny pullback to check if there is enough support at the bottom of the trading range after a reorganization. The composite human stops his buying pressure and checks if the market has enough demand not to allow the cost to fall below the trading range. If it is this way, the market is ready for margin shift. If not, the Composite human continues to accumulate the available supply.
Stage D - Make sure we are right with our previous study. If we correctly interpret the spring and previous tests as bullish signals, then demand should prevail over supply and cost should gradually rise to the TR highs. Stage D has 3 events:
- LPS (last fulcrum) is the attitude after a test rally. Generally, it retests previous levels that were considered resistance. These attitudes are usually quite slow and do not have volume.
- SOS (Sign of Strength) is a rally with a volume notably preeminent to the common and with a more extensive cost differential than the candles. Mainly take the cost above AR.
- BU (Back up): short-term attitude to SOS, slight profit taking by Centimeters (demand test) and new test of the maximums of the trading range. It is the last possibility to get on the bull train.
Example en BTC:
2- Distribution Range.
Working in a similar way to the accumulation trading range, the distribution range is characterized by several phases:
Phase A of the distribution range marks the end of the previous marking movement. It mimics phase A of the accumulation range, but with preliminary supply (PSY) instead of preliminary support and buying climax (BC) instead of selling climax. AR and ST work in exactly the same way as they do during a build-up phase, but in this case AR is driven by a lack of demand after the rally and ST is a retest of the previous highs, not the lows.
Phase B is the consolidation phase. Usually there are several new tests of the highs and lows of the trading range. These movements are usually there because of the constant struggle between supply and demand: the Composite Man tries to get rid of all his stocks without scaring the public of his asset, he wants to get rid of his entire position with minimal slippage, so he needs to Hold demand at high levels, causing the price to rise and recover from the liquidity provided by emerging operators.
There are several events that occur during Phase B:
SOW (Sign of Weakness) is the first major settlement after the auto rally. It usually breaks the lower part of the trading range, which shows a change of character in the trend. Indicates that the offer became dominant. The move to the downside should be in above-average volume and a wider candlestick margin.
UT (Upthrust) is the opposite of Spring - it is a quick move above the trading range (usually at low volume). It is there to test demand levels and gain additional liquidity from bankrupt traders. Often these are levels at which the composite man initiates his short positions.
Phase C is the phase where the CM makes the last attempt to shake up the retailers before the markdown phase. It is your last chance to sell the remaining shares and / or open short positions at the best prices. The main event during this phase is the UTAD (Upthrust After Distribution), which is the same as a UT, but is generally much more volatile. Note that this event is not required, just like Spring is during a rollup; the presence of this event depends on many factors, including fundamental events and the availability of excess demand.
Phase D is where the price finally breaks the bottom of the trading range. At this point, it is obvious to everyone that the supply is dominant and that the previous uptrend is totally exhausted. There are recent unsuccessful attempts to increase the price, which generally have low volume and low spread. The events in this phase are: LPSY (Last Supply Point) and SoW (Sign of Weakness).
Okay, let's imagine you've seen Phase A in action. There was a strong sell-off on the volume increase and an immediate Auto Rally. When is it safe and profitable to look for shorts? What price action events confirm that the trend is about to turn?
An aggressive trader could spot the change in character and the first signs of weakness from the demand side and enter a short position at the first UT or UTAD in Phase B. It is a solid move from a risk / reward perspective, If a trader detects clear signals that the trend is exhausted, he can potentially enter the best possible prices. But the Composite Man is patient and will likely push the price up to UT levels at least several times. By shorting UT / UTAD, the trader takes a low-risk trade from a price perspective, but potentially locks his funds in the trade for a long time.
The safest approach is to wait for the SOW in Phase D and enter LPSY. Sure, in this case, the trader runs the risk of the price returning to the highs of the trading range, but even if this happens, he can quickly cut his losses and enter the next signs of weakness.
Let's go through all the steps that should be part of the thought process of the trader who wants to apply Wyckoff's principles in his own trading strategy.
Example in BTC: