Wyckoff trading using the example of ADA/BTC Accumulation schemePay attention to the phases and letter designations on the graph that I showed on the ADA / BTC pair. (Cardano). A diagram of the accumulation phases is shown. Which are relevant for trading now. Several trading methods are combined on the chart:
1) Trading by the Wyckoff method.
2) Trade in horizontal channels.
3) Trade from important areas (price reversal points).
4) Trading in secondary local trends.
Now the price is at the important zone of the mirror level which, from the development of the situation, can act as support or resistance. Channel pitch 30%. You can work in two directions.
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About Wyckoff's trading method.
The forerunner of volume analysis (VSA) is Richard Wyckoff. Roughly speaking, the whole point of the method can be expressed - trade for a major market player. The creator of this technique himself was a man who had a system-forming influence on stock trading. It was not a poor theorist who got rich after publishing books! He was a very successful trader and earned impressive capital in his day. The very method that he was allowed to achieve and the entire 40 years of experience in trading, he published in his book in the public domain is already closer to his death Wall Street Ventures and Adventures Through Forty Years. At the end of his life's journey, Wyckoff became more altruistic, and decided to share the knowledge that led him to wealth. He died in 1934.
The Wyckoff trading method was developed in the early 1930s. It consists of a number of principles and strategies originally developed for traders and investors. Wyckoff devoted much of his life experience to studying market behavior, and his work still has an impact on much of modern technical analysis (TA). Currently, the Wyckoff method is applied to all types of financial markets, although initially it was focused only on stocks.
During the creation of his work, Wyckoff was inspired by the trading methods of other successful traders (especially Jesse Livermore). Today, he enjoys the same respect as other key figures such as Charles Dow and Ralph Nelson Elliott . But for example, unlike Elliot’s theory, which is good in theory, but not always applicable in practice, the Wyckoff method is many times more effective for making money not in theory, but in practice.
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According to Richard Wyckoff's trading method, there are 3 laws:
1) The law of supply and demand .
2) The law of causation.
3) The law of communication efforts and results.
The first law states that the value of assets begins to rise when demand exceeds supply, and accordingly falls in the reverse order. This is one of the most basic principles in the financial markets, which does not exclude Wyckoff in his work.
We can represent the first law in the form of three simple equations:
1) Demand> supply = price increases.
2) Demand <offer = price falls.
3) Demand = supply = no significant price change (low volatility ).
The second law states that the differences between supply and demand are not a coincidence. Instead, they reflect preparatory actions resulting from certain events. In Wyckoff's terminology, the accumulation period (cause) ultimately leads to an uptrend (consequence). In turn, the distribution period (cause) provokes the development of a downtrend (consequence).
Wyckoff’s third law states that price changes are the result of common efforts that are displayed on the trading volume . In the case when the growth in the value of the asset corresponds to a high volume of trading, there is a high probability that the trend will continue to move. But if volumes are too small at a high price, growth is likely to stop and the trend may change direction.
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Wyckoff Price Cycles.
According to Wyckoff, the market can be understood and predicted using a detailed analysis of supply and demand . This can be done based on price action, volume and timeframe. By observing the behavior of large groups of investors, Wyckoff was able to learn to notice certain points during which preparations were made before a large price move. These moments were called accumulation (before the upward movement of prices) and distribution (before the fall of prices).
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“Composite person” (major player) and phases.
Wyckoff created the idea of a “composite man” (from the English composite man, composite operator), which embodies the imaginary personality of the market. He invited all investors and traders to study the stock market from the point of view if it were controlled by one subject, as this could facilitate their further following the trends.
At its core, the composite person represents the largest players (market makers), wealthy people and institutional investors. The behavior of a composite person is the opposite of most investors and traders that Wyckoff often observed, given their financial losses. This is the opposite of crowd action.
The cycle described in the Wyckoff method consists of four main phases:
1) Accumulation (accumulation).
2) Impulse or uptrend.
3) Distribution.
4) Markdown (correction, downtrend).
1 phase. Accumulation.
A composite person accumulates assets before most investors and traders begin to do so. This phase is usually marked by lateral movement. Accumulation occurs in a gradual manner to avoid significant price changes.
2 phase. Impulse or uptrend.
When a composite person takes possession of a sufficient amount of assets, while the sales force is depleted, he begins to push the market upward, forming an emerging trend that gradually attracts more and more new investors, which subsequently leads to an increase in demand.
3 phase. Distribution.
Then the “composite person” distributes the purchased assets. He begins to sell his profitable positions to those who enter the market at a late stage (“hamsters”).
4 phase. Markdown (correction, downtrend).
Shortly after the distribution phase, the market begins to fall. In other words, after the composite person has completed the sale of a significant amount of his position, he begins to push the market down. To repeat the cycle again. The hamster is not a mammoth - it will not die out. In the end, supply becomes much larger than demand, and a downtrend will follow.
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Approach to the Wyckoff market in five steps.
Wyckoff also developed a five-step approach to the market based on numerous principles and methods. Simply put, such an approach can be considered as the procedure for applying his work in practice.
Step one: identify the current trend.
The primary task is to determine the current trend and a superficial assumption where and how far it can go, in connection with which the following questions arise: "what is the current trend?", "What is the relationship between supply and demand?".
Step two: determine the strength of the asset.
How strong is the asset in relation to the market? Does its value move with the market or the opposite of it?
Step three: find an asset with a reason for further growth.
Are there enough reasons to open a position? Is the reason good enough for the potential benefit (consequence) to justify the possible risks in the future?
Fourth step: determine the likelihood of cost increases.
Is the asset ready for the intended move? What is its position relative to the current trend? Does the price and volume of trades correspond to possible growth? This step often includes Wyckoff tests for the purchase and sale of the selected asset.
Step Five: Your Login Time.
The last step contains all the timing information. For the most part, this is due to the analysis of a trading instrument to compare their behavior with the main market. In cryptocurrency, for example, with bitcoin .
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Wyckoff Trading Schemes.
Accumulation and distribution schemes are the most popular part of Wyckoff’s work, at least among cryptocurrency communities. This model breaks down these two schemes into smaller sections of five phases (from A to E), as well as several events that are briefly described below.
Pay attention to the phases and letter designations on the graph that I showed on the ADA / BTC pair. A diagram of the accumulation phases is shown. Which are relevant for trading now
ACCUMULATION DIAGRAM
PS - preliminary support (initial support) the first resistance - appears after a significant decrease in the price, the volume increases, and the price accelerates the decrease over time.
SC - the culmination of sales - there is a sharp drop in prices for large volumes.
AR - automatic rally (automatic upward movement) appears because there are very few sellers in the market, and buyers quickly raise the price up.
ST- secondary test (repeated test) - occurs to check the forces of supply and demand . There may be several ST and SC . ST can even slightly break the price level set by SC .
Spring - does not always occur, in the late stages of accumulation. The logic of false breakdown.
Test - Occurs after Spring is formed and should be on a small volume . Usually above the low at a lower level.
SOS - a sign of strength (signs of strength) the price begins to rise and stands out from the price range TR (trading range) with an increased volume .
LPS - the last support point, the last resistance level , occurs after a breakdown (SOS), this is a return of prices in the vicinity of TR with low volume and low price dynamics.
BU (back up) - the return of prices to the accumulation channel, which follows the realization of the profit of short-term investors and is a demand test. It does not always happen, for obvious reasons.
Phase A.
The strength of sales decreases and the downtrend begins to slow down. This stage is usually marked by an increase in trading volume . Preliminary support (from the English preliminary support, abbr. PS) indicates that new customers are starting to appear, but this is still not enough to stop the downward movement.
The culmination of sales (from the English selling climax, abbr. SC ) is formed through intense activity aimed at selling assets, as a result of which investors begin to capitulate. This often manifests itself as the highest point of volatility , when panic sales form high candles and wicks. A strong drop quickly develops into a jump or automatic rally (AR), due to the fact that buyers begin to absorb excess supply. Thus, the trading range ( TR ) of the accumulation scheme is determined as the distance between the minimum culmination of sales and the maximum of automatic rally.
A secondary test ( ST ) occurs when a drop in market prices crosses the sales climax ( SC ) to verify the validity of a downtrend. In this case, trading volume and market volatility are usually lower than usual. While the second test often forms a higher minimum relative to the culmination of sales, this does not always happen according to plan.
Phase B.
Based on the Wyckoff law of causation, phase B can be considered as a cause that leads to a certain effect.
Phase B is the consolidation phase in which a composite person accumulates the largest amount of assets. At this stage, the market tends to test various levels of resistance and support in the area of its trading range.
Numerous secondary tests ( STs ) may occur during phase B. In some cases, they show higher highs (bull traps) and lows (bear traps) with respect to the culmination of sales and the automatic rally, like phase A.
Phase C.
This phase is a typical period of asset accumulation. It is often the last bear trap before the market begins to show higher lows. During phase C, the composite person provides a small proposal, and in fact, those who were supposed to sell their assets have already done so.
During this phase, support levels begin to break through to stop traders and mislead investors. We can describe this as the last attempt to buy an asset at a lower price before the start of an uptrend. Thus, the bear trap encourages small investors to abandon the holding of their assets.
However, in some cases, support levels can be maintained, and the "spring" simply does not begin. In other words, there may be another accumulation scheme, which includes slightly different elements, but not “spring”. However, the overall structure of the circuit remains valid.
Phase D.
Phase D represents the transition between cause and effect. It is located between the accumulation zone (phase C) and the breakout of the trading range (phase E).
Typically, a significant increase in trading volume and volatility occurs during phase D. Usually it assumes the last point of support (from the English last point support, abbr. LPS ), demonstrating a lower minimum before the market begins to move up. LPS often precedes breakthrough resistance levels, which in turn creates higher highs. This indicates the manifestation of signs of strength (from the English. Signs of strength, abbr. SOS), as the previous resistance levels become new levels of support.
Despite a somewhat confusing terminology, there may be several last points of support during this phase. They often increase trading volume when testing new zones. In some cases, the price may create a small consolidation zone before effectively breaking through a larger trading range and moving on to phase E.
Phase E.
Phase E is the last step in the accumulation pattern. It is marked by a clear penetration of the trading range due to increased demand in the market, which indicates the beginning of an uptrend.
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Volume in separate phases (VSA).
A key element in the analysis of the Wyckoff method is the preservation of volume at the individual stages of accumulation / distribution.
Phase A.
In this phase, dynamic movements of prices with an increased volume occur. We have new highs / lows and climax points, followed by automatic price rallies in the opposite direction, and then retest on a smaller volume . This phase forms the border of the TR (trading range) channel, in which the price will consolidate until the rebound in phase D and E
Stage B.
Here, large investors get rid of their last position from the previous trend and prepare for its reversal.
Phase C.
This is a very important phase, because in phase C it comes to the end of the current trend. Weak players leave the market for Spring (accumulation) or UTAD (distribution). If these formations do not exist, then we are dealing with LPS , where the inability to continue the current trend is visible, the price practically does not move.
Phase D.
With signs of weakness in the current trend from phase C, the time comes to show the strength of the adversary. The price breaks the level in the expected direction, with high dynamics and increased volume .
Phase E.
Confirmation of our assumptions and completion of the accumulation / distribution process. Price accelerates in the expected direction. If we were unable to join the movement during phase D, then further problems may already arise with this. And this deal will be less profitable.
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Conclusion on the Wyckoff trading method.
Almost a hundred years have passed since the publication of the work, but the Wyckoff method is still in demand to this day. By nature, the market does not always exactly follow similar trading patterns. In practice, accumulation and distribution patterns can occur in different ways. For example, in some cases, phase B can last much longer than expected. For this reason, spring, UTAD and other tests may simply be absent.
However, Wyckoff's work offers a wide range of reliable trading techniques that are based on numerous theories and principles. His work is certainly valuable to thousands of investors, traders and analysts around the world. The accumulation and distribution schemes described in this article may be suitable for understanding the general order of cycles in financial markets.
But recently, due to the widespread introduction of algorithmic trading and the use of it by large players, it has become increasingly difficult to notice a large player on highly liquid instruments, but it is possible. According to three schemes of dialing / resetting by the position algorithm.
This analysis method is more relevant for medium-liquid instruments, where fewer algorithms and highly professional traders are clearly hard to see. One person can hide his real work, and do fake trade for dozens of people. It is clear that with good preparation, it is possible to calculate and understand what will happen next, but naturally this is not an analysis of the schedule. Analysis of the schedule in the work of a truly successful trader in fact takes no more than 20-30% of the work.
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It is impossible to describe everything in one article. The Wyckoff method at first glance seems complicated, but it is not. The main thing is to understand the essence of the work and practice trading tools. To start, start trading with a symbolic amount.
Always remember, a theory without practice is zero.
Once again, the Wyckoff method works well on medium-liquid instruments such as cryptocurrencies, but not lower than the top 100.
