• One Percent Trading Group

The Wyckoff Theory

Updated: Aug 30

We will be going to look into the famous Wyckoff Theory from the eyes of Bob Evans who was a great teacher of the Wyckoff Theory.

First Determine the present position and probable future trend of the market.


What is the market doing at the time you’re looking at the charts?

This is a good question to ask yourself


This assessment should help you decide whether to be in the market at all, The use of bar charts, Point & Figure charts or even Candle Stick charts.


Pick a stock that’s in line with the current trend


If the trend is up, pairs that are stronger than the market will have a good indication that the market is buying, just looking at structure if price is making Higher Highs or Lower Lows.


Pick stocks for trading that have the potential to exceed or equal the minimum objectives


A method called Point and Figure (P&F) for both long and short trades. In Wyckoff's fundamental law of “Cause and Effect” the horizontal P&F count within a trading range represents the cause, while the subsequent price movement represents the effect. Therefore, if you are planning to take long positions, choose stocks that are under accumulation or re-accumulation


Pick stocks that are ready to move


Look for what is going on in that stock is the market buying or is the market already selling? or is the market in a range ready to buy or sell.

A systematic approach of the selling steps, these are to be explained down below.


Wyckoff’s Composite Man


This was the idea that was made to create an imaginary identity for the market, it was made to help traders understand a pair or stock's price movement and the overall market. Wyckoff suggested that all traders should study the fluctuations of the market along with price movements.

Wyckoff always wanted retail investors to trade just like the Composite Man, however, what he found was that the behaviour of retail traders was always the opposite of the Composite Man, he iterated that the strategy of the Composite Man is somewhat predictable, and retail traders can learn from that strategy.

The strategy of a Composite Man can be analysed by using the four price cycles, which make up our next topic.


The Wyckoff Price Cycles



According to Richard Wyckoff, the market can be understood and anticipated through a detailed outlook of Supply and Demand.

As a broker himself, he was able to observe the doings of highly successful individuals, via the use of what he called vertical (Bar) and figure (Point and Figure) charts he was able to decipher the future intentions of those interests.

The time to enter long orders is towards the end of the preparation for a price mark-up or bull market (accumulation of large lines of stock), while the time to initiate short positions is at the end of the preparation for price markdown.

In simpler words, the time for selling was at over brought distribution areas and vice versa for sells, over sold accumulation areas.


The Foundations of the Wyckoff Method


The Wyckoff method of trading or Wyckoff theory relies on two main rules or concepts:


  • Price Action

  • Market Cycles


These are the two important pillars of the Wyckoff method:


Rule 1

The price action never follows the same course as it did in the past. This means the market never will behave in the same way or manner


Rule 2

As every move of the price action and market is unique, its analytical importance relies on its comparison to past behaviour.


Analysing Trading Ranges


Improving market timing when establishing a position is one of the objectives when analysing trading ranges.

These are places where there is a favourable reward/risk ratio which exists within the trading range.

Trading ranges (TR) are places where the previous trend (up or down) has been halted and there is relative equilibrium between supply and demand.


Wyckoff Schematics


For one to say they’ve mastered Wyckoff they must be able to anticipate and correctly judge the direction and magnitude of the move out of a trading range (TR), These concepts are illustrated in the following two schematics; two depicting common variants of accumulation TR, followed by examples of distribution TR.


Accumulation Schematic


PS - Preliminary Support


The spread widens, Volume increases, this shows that the selling pressure might be depleting


SC - Selling Climax


At this point selling pressure is at its highest with high volume and wide spreads


AR - Automatic Rally


Automatic Rallies come after a SC which marks exactly where demand comes in to stop price falling further

ST - Secondary Test


A secondary test will be testing the range either high or low of the range. testing supply and demand orders Spring/Shakeout


A spring or shake out, shakes out any weak hands that brought early, known as a stop loss hit


LPS - Last Point of Support


The lowest point of a reaction after a spring/shakeout action, showing the last point before the breaks the range


SoS - Sign of Strength


Price advances with increased volume, this usually takes place from the spring forming a LPS


BU - Back up


The common structural element preceding a more substantial price mark up. Usually includes a variety of forms, including a simple pull-back, or a new TR creating a fractal reaccumulation


Accumulation Phases


Phase A

  • The stopping of the down trend, during this phase supply has been dominant

  • The spread widens, followed by a volume deficit so the intense selling pressure is relieved

  • If the ST goes lower than SC, a prolonged consolidation can be expected

  • The rules of the SC & ST along with the high of the AR set the boundaries of the TR

  • After the selling pressure, it's preferable to see the PS, SC AR, and the ST forming.

  • During the accumulation TR, the points PS, SC, and ST are not evident.


Phase B

  • Also known as "building a cause"

  • In phase B, institutions are accumulating the low-priced inventory

  • Usually, multiple ST according to phase B accompanied by an rally to the upper end of the TR.

  • Price swings are usually accompanied by high volume, as the professionals absorb the orders

  • At this stage the instrument is ready for phase C


Phase C

  • The spring is a method that was introduced to trap traders to take short positions for the price to quickly reverse back to the TR

  • This means the instrument is ready to make a move up

  • The appearance of a SC validates the move; this is a good time to initiate a partial long position


Phase D

  • In this phase price usually moves to the top of the TR

  • At this time, it's good to add to any profitable positions usually at LPS or the SoS with a BU action in hand


Phase E

  • The pair leaves TR & demand is in full control along with the mark-up


Distribution Schematic


PSY - Preliminary Supply

  • Spread widens

  • Volume increases indicating the change in price direction


BC - Buying Climax

  • Buying force is at its peak

  • A BC coincides with a great earnings report or any other positive news.


AR - Automatic Reaction

  • With intense buying diminished after the BC, AR takes place

  • The low of the sell-off helps define the low boundary of the distribution trading range


ST - Secondary Test

  • Price revisits the area of the BC to test the demand/ supply

  • Volume and spread decrease as price approaches the resistance area of the BC


mSoW - Minor Sign Of Weakness

  • A downward move can be observed to the lower boundary or slightly past the AR

  • The initial SoW shows a change in market direction, supply will now be dominant

  • This shows a break in the lower TR showing weakness in the range


UT - Upthrust

  • An upthrust is similar to a spring where it breaks out the upper range

  • Can be seen as a stop loss hit for any sellers selling early

  • Is also known as it testing hold volume areas mostly the BC


UTAD - Upthrust After Distribution

  • This is the distributional counterpart to the spring and terminal shakeout

  • This happens at the later stages of the TR

  • The UTAD is not a required element

  • The move will be sharp and happens after an upthrust


LPSY - Last Point Of Supply

  • After testing the SoW the market may slow down, and start showing difficulty advancing

  • This is caused by a weak demand

  • This is the last point in which you will see higher prices before breaking the TR


MSoW - Major Sign Of Weakness

  • A downward move can be observed to the lower boundary breaking out the TR

  • The initial SoW shows a change in market direction, supply will now be dominant and overcoming demand

Distribution Phases


Phase A

  • This phase marks the stoppage of the prior, this event usually follows on AR and a ST of the BC


Phase B

  • The function of this Phase is to build a cause in preparation for a downtrend. In this phase, institutions will be closing their long trades

  • in this case, large interests are net sellers of shares as the TR evolves, to exhaust as much of the remaining demand as possible

Phase C

  • This phase may avail its self via push up to the UT or UTAD that quickly reverses and close back in the TR

  • This is a move that's meant to induce break-out traders then later pinch them out of their over-leveraged positions, thus surrendering their stake to the big guys, often demand is weak in a distribution TR.

  • Usually, the price doesn't reach the level of the BC or initial ST

  • Phase C's test of demand may be represented by a UT of a lower high with the TR


Phase D

  • The evidence that supply is dominant increases being signalled by price travelling through or to the TR support

  • There are often multiple weak rallies within this phase

  • These LPSY represent excellent opportunities to initiate or add onto profitable positions


Phase E

  • This phase depicts an unfolding downtrend.

  • Price leaves the TR, supply will now be in full swing.

  • Once TR support is broken on a major SoW, the breakdown is often tested with a rally that fails at or near the support this shows a high probability of price selling off

Recommended charts to Analyse for Wyckoff


Wyckoff Buying Tests for Accumulation

  • Downside price objective accomplished – P&F chart

  • Preliminary support, selling climax, secondary test - Bar and P&F charts

  • Activity bullish (volume increases on rallies and diminishes during reactions) – Bar chart

  • Downward stride broke (that is, supply line or downtrend line penetrated) - Bar or P&F chart

  • Higher lows - Bar or P&F chart

  • Higher highs - Bar or P&F chart

  • Stock stronger than the market (that is, stock more responsive on rallies and more resistant to reactions than the market index) - Bar chart

  • Base forming (horizontal price line) – Bar or P&F chart

  • The estimated upside profit potential is at least three times the loss if the initial stop-loss were hit – P&F or Bar charts


Wyckoff Selling Tests for Distribution


  • Upside objective accomplished - P&F chart

  • Activity bearish (volume decreases on rallies and increases on reactions) - Bar and P&F charts

  • Preliminary supply, buying climax - Bar and P&F charts

  • Stock weaker than the market (that is, more responsive than the market on reactions and sluggish on rallies) - Bar chart

  • Upward stride broke (that is, support line or uptrend line penetrated) - Bar or P&F chart

  • Lower highs - Bar or P&F chart

  • Lower lows - Bar or P&F chart

  • Crown forming (lateral movement) - P&F chart

  • The estimated downside profit potential is at least three times the risk for if the initial stop-order were hit - P&F and bar charts


Conclusion


The work of Wyckoff's method was centred around the realization that the stock and the forex market were driven by large operators who manipulate the price in their favour.

This then leads to traders favouring the Wyckoff method.

His method has withstood the test of time, this method was systemized for identifying high probability trades, which has given traders an edge over the market.


To get the full in-depth teaching of Wyckoff, One Percent Trading Group is the perfect place to start.

Offering you step by step guide that'll hold your hand throughout the learning curve

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