What is the Wyckoff Theory?
In this modern era, the operation of trading is common. One uses trading as their passive income while the others depend on it to continue living their life. There are a bunch of terms, techniques, and theories in trading. One of them is the classic Wyckoff Rules.
Richard Demille Wyckoff, or merely Wyckoff, is an American investor who introduced the key elements of the trend development, namely the Wyckoff Rules. The set of rules contains two periods, accumulation and distribution, which cycle in four phases; accumulation, mark-up, distribution, and mark-down.
Wyckoff accumulation and distribution distinct in several ways. The first one, accumulation, informs the traders that there is no such thing as the same behavior of the market and individual securities the second time. They have different attitudes, in which if they happen to meet at one point, it only occurs once. Their variations in size, detail, and extension are very broad and at some point, infinite.
The second condition, distribution, conveys the importance of re-evaluation. In order to analyze today’s price, we need to compare it with what happened yesterday, last week, or even last month. It is the only way we can know whether the price is relatively good or not. In other words, the context is everything.
Wyckoff Price Cycle
In trading, there are springs and failures. The springs remark the price that moves below the support line while the failures indicate that there is a decrease in the market. The range from spring to failure is what is called accumulation. It is when the traders tend to buy more and more stocks at the lowest possible price.
This phase, on the other hand, symbolizes the uptrend in the slope. It is not as simple as when there is a small uprising, over a short period of time, then we call it a mark-up. The Mark-up phase, in fact, happens when the overall trend, from the opening to the closing, is upward. It can be months and even years depends on what period is in use. During this cycle, there is also a condition named throwback (breakdown). Throwbacks arise when the candle drops to the same place as it was once there. It seems like you are being nostalgic for the old times.
When no high is being produced, in another word, it is a failure, then it signals the beginning of distribution. Distribution here signifies the market participants’ behavior in selling their stocks. They always try to sell (distribute) an asset at the highest cost, totally different during the accumulation time when they are inclined to buy as much as possible.
On the other side of mark-up, this cycle occurs when the slope is showing a new downtrend. This state then generates its own redistribution section. It eventually ends when the signal of a new accumulation cycle surfaces.
While mark-up has a breakdown as its partner, mark-down has correction as the corrector of breakdowns. Corrections also act as a stabilizer so that it does not go downward continuously.
Accumulation: Events and Phases
A phase may contain several events at once or re-occurrence of the previous event. There are many events in accumulation. The instances are preliminary support (PS), selling climax (SC), automatic rally (AR), and secondary test (ST). Just like its name, PS shows support after a prolonged down-move in the previous stage. Then, when it is near the bottom, the selling pressure or panicky selling by the traders reaches the highest level (SC). After that, when a lot of people buy stocks, it fuels the prices and the AR happens. Next, in ST, the price revisits the area of the selling climax in order to check the supply or demand in these degrees.
Talking about phases, there are mainly five stages of accumulation, in which the initial position is usually the longest. The first phase represents the end of the previous downtrend. It is when the supply has always been dominant up to this point. Moving on to the next level, the second phase portrays the ‘building of a cause’ for a new mark-up (uptrend). This process may take a longer time, sometimes more than a year. The third state, on the contrary, allows the stock price to undergo a decisive test of the remaining supply. During this method, a successful one, which is represented by a spring, indicates that there will be a high prospect. Then, if our analysis is correct, the later phase that follows is the dominance of demand over supply. Lastly, the stocks withdraw from the trading range, the demand is controllable, and the mark-up is very clear.
Distribution: Events and Phases
The events of distribution are a lot as well. Some are preliminary supply (PSY), buying climax (BC), automatic reaction (AR), and secondary test (ST). PSY happens when large interests start to discharge after an up-move has occurred, signaling that there might be a new trend. When the public is urging to buy stocks, we know that it is the climax of buying (BC). After that intense buying lowers, an AR takes place. Similar to accumulation, an ST at this point is used to test the supply or demand.
For the distribution’s phases, there are five conditions as well. Distribution is basically the opposite of accumulation, so you can just think of the other side of accumulation’s explanation. It started with the stopping of the preceding uptrend, then the preparation for a fresh downtrend follows, a test for the leftover demand occurs, the supply dominates the TR, and then ends with the development of the downtrend.
In conclusion of Wyckoff’s accumulation and distribution, the traders only need to follow the rules and methodologies provided; the periods and or the whole cycles. They can copy Wyckoff’s discipline regarding the real game of trading or just apply others’ systems. Although his works of art are not always utilized, the use of Wyckoff’s analysis is completely worth the effort in attaining it.