The Wyckoff technique

The Wyckoff technique is considered a modern school of financial technical analysis that is widely used. The Wyckoff technique is a combination of fundamental analysis and technical analysis. It includes trading rules and techniques designed to help investors evaluate the market as a whole, find potentially profitable stocks, and determine trading goals.

The Wyckoff technique

1. Laws of the Wyckoff technique.

Wyckoff proposed three main laws of analysis:

Law of supply and demand:

The law of supply and demand is one of the most basic principles of financial markets. It is used to determine the trend of the price. When demand is greater than supply, the price increases, whereas when supply is greater than demand, the price decreases. Simply put, when the number of buyers is more than the sellers, that is, the demand for a commodity is more than the supply, the price of the good will increase. Conversely, when there are more sellers than buyers, meaning the supply is more abundant than the market’s demand, the price of goods will fall.

– Based on this rule, investors can compare prices and corresponding trading volumes to study the balance of supply and demand, thereby making predictions about future market movements. future.

Although this is a fairly simple rule, easy to understand to accurately assess the balance of supply and demand on the chart and understand its impact on the market is difficult and requires a lot of time to research and develop, and practice.

The law of cause and effect:

The law of cause-and-effect helps to identify bullish or bearish price targets by assessing the potential level of a particular trend. At this point, the supply-demand relationship is no longer random but the result of many previous stages of preparation.

– To describe this rule, Wyckoff uses point and figure charts. Which, the cause is measured by the number of sideways points in the chart and the consequence is the distance the price moves corresponding to that number of points. Therefore, the longer the price moves sideways, the stronger the trend will be when the price breaks out of that period.

As such, it helps investors to estimate how long a trend might last after breaking out of a consolidation or trading range.

The Law of Effort – Results:

Law of effort – results are determined by the difference between price and volume. It helps to warn investors about the change in price trends in the future. That is, if the price moves in harmony with the volume, it is more likely that the trend will continue. If the price movement is significantly different from the volume traded, the trend is likely to stop or change direction.

2. The price cycle of the Wyckoff technique.

The Wyckoff technique suggests that the market moves in four cycles: Accumulation – Bullish – Distribution – Decline. Among them, the accumulation cycle and distribution cycle are considered the most important.

2.1. Accumulation cycle:

This is the cycle where the major forces in the market begin to accumulate wealth. These forces will pour money into the market slowly to avoid price fluctuations too much. The market in this cycle tends to move sideways.

The accumulation cycle is divided into 5 sub-phases:

– State 1:

This phase marks the slowing down of the previous downtrend. Here, supply is still overwhelming demand. However, the supply is weakening as evidenced by the appearance of PS and SC.

  • Base Support (PS).  There is a significant amount of buying after a long-term decline. Signaling that the downtrend may be coming to an end. However, the buying volume was not enough to stop the price from continuing to go down.
  • Peak selling (SC).  At this time, selling pressure was pushed to the peak. Usually, the price will close above the SC, showing that the big forces are starting to buy in. The main support line is SC.
  • Automatic Recovery (AR).  The selling pressure decreased and the new buying force pushed the price up. The main resistance line is AR.
  • Secondary test (ST).  The market checks to see if the downtrend has really ended. Prices return to SC to test the supply/demand balance at these prices.
– Phase 2:

At this stage, the major forces in the market began to buy gradually at low prices to anticipate a new uptrend. Accumulation can take a long time.

This stage may form one, two, or more STs after an SC. ST points formed with significantly reduced volume and price.

– Stage 3:

This stage performs a decisive test, determining whether the stock is ready to go up in price. When a successful test of the low volume shows that the stock is ready to go up. This is a good time for investors to enter buy orders.

  • Jumping (Spring).  This is usually a trap created by big forces to deceive investors, making them believe that the price will fall and sell. This makes it possible for the big players to buy at a very low price before the price rises again. However, the leap may not happen as the SC support has strong resistance.
  • Test (Test).  The major forces retest supply throughout the cycle or at key bullish positions. If the supply increases significantly when tested, the market is not ready for an uptrend. If the test is successful, the price will make a higher low and the volume will decrease.
– Stage 4:

This phase marks the moment when the price breaks the resistance level, starting a new uptrend. During this period, there are usually bullish bounces, BUs, or LPSs before the formation of SOS. These are good points to enter potential buy orders.

  • Nearest Support Point (LPS).  When the market starts to gain volume and price volatility, LPS appears causing the market to fall deeper, like gaining momentum to prepare for a breakout to higher levels. In the accumulation phase diagram, there can be more than one LPS point.
  • Sign of Strength (SOS).  As the trading volume and price volatility increase, the price will break the resistance level. Usually, the SOS will appear after a Spring, which is a way of reconfirming the previous price behavior.
– Stage 5:

This is the period when the price has completely surpassed the resistance level, the demand is higher than the supply. However, new levels of resistance at higher levels can occur at any point during this period, but usually, for a shorter time, these new resistances are seen as stepping stones to higher prices. than.

The Wyckoff technique

2.2. Bullish cycle:

When the accumulation cycle is broken, the market will begin a bullish phase. After accumulating a large enough amount of stocks, plus the selling force weakened, the buyers quickly pushed the price up, and a new trend was formed. Rising prices will spur investors who are outside the market to jump in and buy stocks, causing demand to exceed supply, and the market will continue to push prices higher.

However, in this bullish period, it is not necessary that the price always goes up, but the market will have periods of re-accumulation or downward corrections. At that time, the price will move sideways or correct down slightly for a short period of time, before continuing to increase again.

2.3. Delivery cycle:

After the price reached an expected level, highly profitable investors began to sell gradually to take profits.

This cycle is cleverly implemented by major forces by selling slowly so that the price does not fall quickly but still stimulates the buying demand of individual investors. At this stage, the market tends to move sideways.

The distribution cycle is also divided into 5 sub-periods, as opposed to the accumulation cycle:

– State 1:

Phase 1 marks the end of the previous uptrend. Here, demand is still overwhelming supply. However, the demand is waning, less progress is made on each rally before significant supply appears, as evidenced by the arrival of PSY and BC.

  • Base Support (PSY).  There was a significant amount of selling after a long-term rally. The uptrend may be coming to an end. However, the selling volume was not enough to keep the price from going up.
  • Fast peak (BC).  At this point, buying pressure is pushed to the peak. Usually, the price will close below BC, indicating that the big forces are starting to sell. This time is usually a lot of good news because the forces holding assets need great demand from the public to sell their shares without driving down the share price. The main resistance line is BC.
  • Automatic Recovery (AR).  The reduced buying pressure plus the new selling force pushed the price down. With strong buying dropping significantly after BC and large supply continuing, AR takes place. The main support line is AR.
  • Secondary test (ST).  The market checks to see if the uptrend has really ended. Prices go back to BC to test the supply/demand balance at these prices. For the top to be confirmed, supply must be greater than demand. That is, as the price approaches BC, the volume will decrease.
– Phase 2:

At this stage, the major forces in the market began to sell gradually at high prices to take profits, preparing for a new downtrend. Distribution can take a long time.

This stage may form one, two, or more STs after a BC. STs form with significantly reduced volume and price. ST can be in the form of a UT push, the price fluctuates above BC but closes below BC.

  • Push price (UT).   The big forces create virtual demand to push the price with the actual volume is not high.
– Stage 3:

This stage performs a decisive test, determining whether the stock is ready to fall in price. This shows up when creating the UTAD. UTAD is similar to UT but usually produces the highest peak in the cycle.

When a successful test of the low volume shows that the stock is ready to go down. This is a good time for investors to enter a sell order.

  • Post-Delivery Price Push (UTAD).  This is often a trap created by big forces to deceive investors, making them believe that the price will continue to rise and buy. This makes it possible for the big players to sell at a very high price before the price drops. However, UTAD may not happen as BC resistance has strong resistance.
  • Test (Test).  The major forces retest demand throughout the cycle or at key positions of the bearish phase. If demand increases significantly when tested, the market is not ready for a downtrend. If the test is successful, the price will make lower high and the volume will decrease.
– Stage 4:

Phase 4 comes after the tests in phase 3 are complete, the price moves to resistance and reverses. It shows that during the last spikes in demand, supply gradually prevailed. When the price falls below the support line, a new downtrend begins.

During this period, there are often many weak rallies of LPSY before the formation of SOW. These LPSYs represent excellent opportunities to initiate or add to profitable short positions.

LPSY—final supply point. After testing the support on the SOW, a weak rally in a narrow range shows that the market is having considerable difficulty moving up. This failure to recover could be due to weak demand, large supply, or both. LPSY represents demand exhaustion and the last wave of distribution by major operators before serious price cuts begin.

  • Final Supply Point (LPSY).  When the market started to gain high volume and price volatility, LPSY appeared causing the market to recover slightly. This shows that the market is having a hard time rallying before prices fall further. In a distribution phase diagram, there can be more than one LPSY point.
  • Signs of Weakness (SOW).  As the trading volume and price volatility increase, the price will break the support level. Usually, the SOW will appear after a UTAD, which is a way of reconfirming the previous price behavior.
– Stage 5:

This is the period when the price has surpassed the most obvious support level, the supply is higher than the demand. However, new lower levels of support can occur at any point during this period, but often for a shorter time, these new support levels are seen as stepping stones to a deeper drop in price. than.

The Wyckoff technique

2.4. Discount cycle:

After the big players have sold a large amount, they will start to push the market down faster. This causes other investors to start to panic and sell stocks, causing supply to increase faster than demand, leading to a fall in prices.

The bearish cycle will be faster and stronger than the accumulation and uptrend cycles. Because investors tend to want to sell quickly to get out of their positions.

Similar to the bull phase, the market does not always go down but there will be short periods of time when the market will redistribute or correct up before resuming the downtrend. At the end of the bearish phase, the market will resume the cycle with a new accumulation phase.

3. Enter the market with the Wyckoff technique.

The Wyckoff technique lays out a five-step market entry process:

Step 1: Identify the market trend.

The first step of any technique should be to determine the direction of the market. Analyze the market structure and supply-demand relationship to identify current market trends and predict future trends. The market is in an uptrend, downtrend, or sideways.

Step 2: Choose stocks that match the trend.

After determining the market trend, it is necessary to determine the group of healthy stocks in the market. This group of stocks can be an industry group, a group of leading companies, etc. This is a group that has the ability to lead the market, which means that it fluctuates before market fluctuations.

After identifying a group of healthy stocks, it is necessary to select a group of stocks that are favorable to the market with better momentum than the market. Mean:

When the market is up, the stock has stronger momentum than the market. When the market corrects, falls below the market, or goes sideways or up.

When the market falls, the stock has a stronger downward momentum than the market.

Step 3: Pick a stock whose “cause” meets the price target.

Use the Wyckoff technique to determine price targets based on the length of the accumulation/distribution period (when the market moves sideways or corrects). According to the law of cause and effect, the sideways price movement in the trading range represents the “cause” and the degree of subsequent price movement is the “result” for both short-term and long-term trading. Therefore, it is advisable to choose stocks that are in the accumulation or re-accumulation phase long enough to be able to meet your price target.

– Buy stocks that are in the accumulation or re-accumulation phase in an uptrend and have accumulated long enough.

– Sell shares that are in the distribution or redistribution stage in a downtrend and have a long enough distribution period.

Step 4: Determine the probability of a breakout of the price.

Once a stock is selected, it is necessary to consider whether it is ready to break out of the trading range to move up after accumulation or down after distribution.

To gauge the possibility of a price move, Wyckoff suggested 9 buy and sell signals. 9 signals determine which cycle is about to end, a new cycle is about to start. Wyckoff’s 9 buy and sell signals include:

– Buy test of accumulation cycle:
  • Completed discount target.
  • Formation of PS, SC, and ST.
  • There is bullish price action: volume increases when prices rise and decreases when prices fall.
  • The downtrend line is broken.
  • Price makes a higher bottom.
  • Price makes a higher high.
  • The stock is stronger than the market (prices rise faster than the market when prices rise and fall more slowly when prices fall).
  • The base (horizontal price line) is formed, meaning the accumulation period is long enough to create a future breakout.
  • Estimate potential profit 3 times higher than stop loss if an initial stop loss is hit.
– Sales test of the distribution cycle:
  • Accomplished target price increase.
  • Form PSY, BC, and AR.
  • There is bearish price action: volume increases when prices fall and decrease when prices rise.
  • The uptrend line is broken.
  • Price makes a lower low.
  • Price makes a lower high.
  • Stocks are weaker than the market (prices fall faster than the market when prices fall and rise more slowly when prices rise).
  • Base formation (horizontal price line), meaning the distribution time is long enough for a future breakout.
  • Estimate potential profit 3 times higher than stop loss if an initial stop loss is hit.
Step 5: Determine the time to enter the market.

The Wyckoff technique suggests that investors should only enter the market when the factors of the stock are in line with the market trend. Thus, the success rate of the trade is higher thanks to the overall strength of the market.

Based on the rules and price cycles of Wyckoff, investors can determine the entry point, stop loss and take a profit more reasonably.

Above are the basic contents of the Wyckoff technique. Wyckoff technique simple, easy-to-understand content. But to apply it to effective investment, it is necessary to practice and study deeply. Besides, when using the Wyckoff technique, it is necessary to coordinate with the candlestick chart technique, the bar chart, etc. And always keep the principle of maintaining the stop loss until you close the position.

Hope you get the basics and effectively use the Wyckoff technique in your trading.

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