History of Richard Wyckoff
Richard Wyckoff invented the Wyckoff Accumulation trading technique. In the early 1900s, Richard Wyckoff was a highly successful American stock market investor. He was regarded as one of the pioneers of stock market technical analysis. According to Wikipedia, Throughout the early 1900s, Richard Wyckoff worked as a trader and educator in the stock, commodity, and bond markets. Wyckoff was interested in determining the underlying trends or reasoning behind market action. Wyckoff supplemented and recorded his trading and teaching methods through talks, interviews, and research with successful traders of his time.
According to Wyckoff's analysis, the most prominent successful stocks and market campaigners of the time shared several qualities. He claimed he had evaluated and identified the best risk-reward ratio for trading. He underlined the significance of consistently placing stop-losses and managing the risk of each individual deal. Wyckoff also believes that certain strategies offer advantages when bullish or bearish markets.
Wyckoff's chart-based methodology is built on three basic laws that influence various elements of analysis. These include detecting the market's and individual stocks' current and probable future directional bias, selecting the best stocks to trade long or short, identifying a stock's readiness to exit a trading range, and predicting price targets in a trend based on a stock's trading range behavior. These laws guide the interpretation of every chart and the selection of each stock to trade. The laws are as follows:
The Law of Demand and Supply
According to Wyckoff, the price direction is determined by the law of demand and supply. This notion is crucial to Wyckoff's trading and investment strategy. When demand exceeds supply, prices increase, and when supply exceeds demand, prices decrease. A trader or analyst can evaluate the supply-demand balance by comparing price and volume bars, as well as rallies and reactions, across time.
The Law of Cause and Effect
The law of cause and effect assists traders and investors in setting price targets by estimating the probable extent of a trend emerging from a trading range. The horizontal point count in a Point-and-Figure chart (Point and figure charts are a method of visualizing price movements and trends in an asset regardless of the amount of time that has passed.) is Wyckoff's "cause," and the distance price moves corresponding to the point count is the "effect."
The functioning of this rule can be regarded as the force of accumulation or distribution inside a trading range, as well as how this force shows itself in the following trend or movement up or down.
The Law of Effort versus Result
The law of effort versus result warns of a potential shift in patterns in the near future. Divergences between volume and price can indicate a shift in the direction of a pricing trend. If Bitcoin price for example is on an upward trend and it's consolidating, the volume will be higher throughout the consolidation period, but the price will not reach a new high. As a result, this indicates that the volume and price are not expressing the same attitude.
Wyckoff Price Cycle
According to Wyckoff, the market may be understood and predicted by a detailed examination of supply and demand, which can be determined by examining price action, volume, and time. As a broker, he was able to watch the activities of highly successful persons and groups who dominated specific topics; as a result, he was able to discern the future intentions of those huge interests using what he called vertical (bar) and figure (Point and Figure) charts.
The image below depicts an idealized schematic of how he viewed the major interests' planning for and execution of bull and bear markets. Long orders should be entered at the conclusion of the preparation for a price markup or bull market, while short positions should be initiated near the end of the preparation for a price markdown.
Wyckoff accumulation consists of two stages: markup and markdown.
Investors should plan to buy during the markup phase and sell during the markdown phase.
What is Wyckoff Accumulation?
Wyckoff Accumulation is defined as a sideways or range-bound market activity that occurs after a long bearish movement. This is the stage at which knowledgeable and experienced traders accumulate or set trading positions without significantly changing prices to the upside. Smart traders and big-game players strive to keep this phase going until all of their trading positions are filled.
The Wyckoff price cycle begins with accumulation. During this period, institutional traders build orders and gradually gain strength, causing the price to rise. When the accumulation phase is finished, the selling-off phase begins. During this phase, the price will rise in accordance with a rise in demand. However, once the markup is over, the majority of retail traders will join this buy party. But there is little chance of profit after the markup period.
Wyckoff Accumulation Phases
The Preliminary Support (PS)
Preliminary support is the point at which significant buying begins to give pronounced support following a prolonged downtrend. The volume rises and the price spread widens, indicating that the downtrend is nearing its end.
The Selling Climax (SC)
The Selling Climax (SC) is the point at or near the bottom, this is a period of panic selling. In an SC, pricing will frequently close well off the low, reflecting the buying by these huge interests.
The Automatic Rally (AR)
For sellers, the Automatic Rally (AR) is a catastrophe. Following the severe selling pressure of the Selling Climax (SC), the price reverses and recovers all of the movement seen in the direction of the sellers. Short sellers are covering their positions at this stage. The high of this movement establishes the high of the range, which is a key barrier for most buyers.
The Secondary Test (ST)
At the Secondary Test point, the price will fall again after the Automatic Rally (AR), but this time it will be controlled. Sellers' volumes should be larger in this movement, and there may be many secondary price movements.
In the Spring phase, the price will perform a hard test of recent lows that will mislead traders. When a market average goes below its trading range, it makes a new panic low and then springs back into its old range, this is referred to as a Wyckoff Spring. After the spring, average traders consider the market trend bearish and start selling trades.
To summarize, the Wyckoff approach is extremely effective for traders seeking to capture the center of a market trend. It is, however, not always effective. People typically buy from support and sell from resistance. Making higher probability transactions is easier when a trader understands the accumulation phase and a price markup. The Wyckoff accumulation theory not only allows investors to hedge against any volatility, but it also assists investors in better understanding market cycles, price movements, and future trends.