Richard DeMille Wyckoff was a famous stock trader and investor, born in the late 19th century (1873–1934). Wykoff was a pioneer in the technical approach to stock market research. Wyckoff’s analyzed these market operators and their operations and concluded where risk and reward were optimal for trading. He shows the position of stop-losses at all times, the importance of managing the risk of any trade, and he explained techniques used to campaign within the large trend ( bullish and bearish ).Wyckoff also founded Wall Street Magazine.
A five-step approach to the market.
Wyckoff also developed specific Buying and Selling Tests, as well as a unique charting method based on Point and Figure (P&F) charts. While the tests help traders spot better entries, the P&F method is used to define trading targets. However, this article won’t dive into these two topics.
Accumulation
The Composite Man accumulates assets before most investors. This phase is usually marked by a sideways movement. The accumulation is done gradually to avoid the price from changing significantly.
Uptrend
When the Composite Man is holding enough shares, and the selling force is depleted, he starts pushing the market up. Naturally, the emerging trend attracts more investors, causing demand to increase.
Notably, there may be multiple phases of accumulation during an uptrend. We may call them re-accumulation phases, where the bigger trend stops and consolidates for a while, before continuing its upward movement.
As the market moves up, other investors are encouraged to buy. Eventually, even the general public become excited enough to get involved. At this point, demand is excessively higher than supply.
Distribution
Next, the Composite Man starts distributing his holdings. He sells his profitable positions to those entering the market at a late stage. Typically, the distribution phase is marked by a sideways movement that absorbs demand until it gets exhausted.
Downtrend
Soon after the distribution phase, the market starts reverting to the downside. In other words, after the Composite Man is done selling a good amount of his shares, he starts pushing the market down. Eventually, the supply becomes much greater than demand, and the downtrend is established.
Similar to the uptrend, the downtrend may also have re-distribution phases. These are basically short-term consolidation between big price drops. They may also include Dead Cat Bounces or the so-called bull traps, where some buyers get trapped, hoping for a trend reversal that doesn’t happen. When the bearish trend is finally over, a new accumulation phase begins.
A five-step approach to the market.
Wyckoff also developed specific Buying and Selling Tests, as well as a unique charting method based on Point and Figure (P&F) charts. While the tests help traders spot better entries, the P&F method is used to define trading targets. However, this article won’t dive into these two topics.
Accumulation
The Composite Man accumulates assets before most investors. This phase is usually marked by a sideways movement. The accumulation is done gradually to avoid the price from changing significantly.
Uptrend
When the Composite Man is holding enough shares, and the selling force is depleted, he starts pushing the market up. Naturally, the emerging trend attracts more investors, causing demand to increase.
Notably, there may be multiple phases of accumulation during an uptrend. We may call them re-accumulation phases, where the bigger trend stops and consolidates for a while, before continuing its upward movement.
As the market moves up, other investors are encouraged to buy. Eventually, even the general public become excited enough to get involved. At this point, demand is excessively higher than supply.
Distribution
Next, the Composite Man starts distributing his holdings. He sells his profitable positions to those entering the market at a late stage. Typically, the distribution phase is marked by a sideways movement that absorbs demand until it gets exhausted.
Downtrend
Soon after the distribution phase, the market starts reverting to the downside. In other words, after the Composite Man is done selling a good amount of his shares, he starts pushing the market down. Eventually, the supply becomes much greater than demand, and the downtrend is established.
Similar to the uptrend, the downtrend may also have re-distribution phases. These are basically short-term consolidation between big price drops. They may also include Dead Cat Bounces or the so-called bull traps, where some buyers get trapped, hoping for a trend reversal that doesn’t happen. When the bearish trend is finally over, a new accumulation phase begins.