Wyckoff method forex
Reaccumulation strategy Reaccumulation is the pause in an uptrend that builds the cause for a new rally. It can take weeks, months, and even years to complete. The trendless trading range will discourage many traders and they will sell shares to move on to other more active assets. At the same time, big players use the release and availability of shares to add to their positions.
Often traders misinterpret a reaccumulation as distribution. With careful analysis, you can learn to make the essential distinction between these two conditions. Recall that absorption results in reaccumulation or accumulation, and price action becomes ever less volatile as the structure comes to a conclusion and the uptrend begins. This is because most of the available shares have been removed from the market. In the schematic above notice how each of the lows in the area of support are higher than the prior low.
It is not uncommon for the lowest price of the structure to be on the AR or the following Test. Reaccumulations can also have a Spring at the conclusion. The best time to trade is SOS. In other words, a breakout above resistance, after Creek and LPS are clearly seen on the chart.
The stop loss should be placed below support. Wyckoff Accumulation Phases Phase A: This phase is a sign previous downtrend has ended and means booking profits and closing of short positions. Up to this point, supply has been dominant. The approaching diminution of supply is evidenced in preliminary support PS and a selling climax SC.
Usually, these events can be easy to see on the bar charts, where widening spread and heavy volume depict the transfer of huge numbers of shares from the public to large professional interests. An automatic rally AR , consisting of both institutional demand for shares as well as short-covering, typically ensues after strong selling pressures. But ST usually shows less selling than previously and a narrowing of spread and decreased volume, generally stopping at or above the same price level as the SC.
Sure, sometimes we can see sharp reversals without consolidation. But now we are trying to figure out a clear indication of downtrend reversal. The main sign of this phase is an accumulation of positions by institutions and you can always see open interest in COT reports. The process of accumulation can take from a few weeks to almost a year. But usually, it takes 3 — 6 weeks. Early on in Phase B, the price swings tend to be wide, accompanied by high volume.
As the professionals absorb the supply, however, the volume of downswings within the TR tends to diminish. Phase B is the longest phase of accumulation. When it appears that supply is likely to have been exhausted, the market is ready for Phase C. Phase C: This phase takes less time. But you are smart traders and use this high-probability trading opportunity to go long?
LinkedIn Kirsten Rohrs Schmitt is an accomplished professional editor, writer, proofreader, and fact-checker. She has expertise in finance, investing, real estate, and world history. Throughout her career, she has written and edited content for numerous consumer magazines and websites, crafted resumes and social media content for business owners, and created collateral for academia and nonprofits. Learn about our editorial policies Legendary technician Richard Wyckoff wrote about financial markets in the early decades of the 20th century at the same time as did Charles Dow, Jesse Livermore, and other iconic market analysis figures.
His pioneering approach to technical analysis known as the Wyckoff Method has survived into the modern era. It continues to guide traders and investors in the best ways to pick winning stocks, the most advantageous times to buy them, and the most effective risk management techniques to use. Four distinct phases comprise the cycle: accumulation, markup , distribution, and markdown. Wykoff also defined rules to use in conjunction with these phases.
These rules can further help to identify the location and significance of price within the broad spectrum of uptrends, downtrends, and sideways markets. Key Takeaways The Wyckoff Method is a technical analysis approach that can help investors decide what stocks to buy and when to buy them. The four phases of the market cycle are accumulation, markup, distribution, and markdown.
The Wyckoff Method can help investors make less emotional, better-informed decisions about when to buy and sell stocks. Rule 1: The market and individual securities never behave in the same way twice. Rather, trends unfold through a broad array of similar price patterns that show infinite variations in size, detail, and extension. Each incarnation changes just enough from prior patterns to surprise and confuse market participants. Many modern traders might call this a shapeshifting phenomenon that always stays one step ahead of profit-seeking.
Rule 2: The significance of price movements reveals itself only when compared to past price behavior. In other words, context is everything in the financial markets. Additional rules: Wyckoff established simple but powerful observational rules for trend recognition. He determined that there were just three types of trends: up, down, and flat. In addition, there were three-time frames: short-term, intermediate-term, and long-term.
He observed that trends varied significantly in different time frames. This set the stage for future technicians to create powerful trading strategies based on their interplay. It defines how and why stocks and other securities move. The Wyckoff market cycle phases are accumulation, markup, distribution, and markdown. Generally speaking, the accumulation phase forms as institutional investors increase their buying and drive demand. As more interest develops, the trading range displays higher lows as prices position themselves to move higher.
With buyers gaining power, prices push through the upper level of the trading range. At this Markup phase, a chart will show a consistent upward trend. In the distribution phase, sellers are trying to gain the upper hand. The horizontal trading range in this phase will display lower price tops and a lack of higher bottoms. The markdown phase is a time of greater selling. Once this fourth and final phase of the Wyckoff market cycle finishes, the entire cycle will repeat itself.
The pattern often yields a failure point or spring that marks a selling climax, ahead of a strong trend that eventually exits the opposite side of the range. The last decline matches algo-driven stop hunting often observed near downtrend lows, where price undercuts key support and triggers a sell-off.
This is followed by a recovery wave that lifts the price back above support. Markup The markup phase then follows, measured by the slope of the new uptrend. Pullbacks to new support offer buying opportunities that Wyckoff calls throwbacks, similar to buy-the-dip patterns popular in modern markets.
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Fortunately, Wyckoff offers time-tested guidelines for identifying and delineating the phases and events within a TR, which, in turn, provide the basis for estimating price targets in the subsequent trend. These concepts are illustrated in the following four schematics; two depicting common variants of accumulation TRs, followed by two examples of distribution TRs. Accumulation Wyckoff Events PS—preliminary support, where substantial buying begins to provide pronounced support after a prolonged down-move.
Volume increases and price spread widens, signaling that the down-move may be approaching its end. SC—selling climax, the point at which widening spread and selling pressure usually climaxes, as heavy or panicky selling by the public is being absorbed by larger professional interests at or near a bottom. Often price will close well off the low in a SC, reflecting the buying by these large interests.
AR—automatic rally, which occurs because intense selling pressure has greatly diminished. A wave of buying easily pushes prices up; this is further fueled by short covering. The high of this rally will help define the upper boundary of an accumulation TR. If a bottom is to be confirmed, volume and price spread should be significantly diminished as the market approaches support in the area of the SC.
It is common to have multiple STs after a SC. Test—Large operators always test the market for supply throughout a TR e. If considerable supply emerges on a test, the market is often not ready to be marked up. A spring is often followed by one or more tests; a successful test indicating that further price increases will follow typically makes a higher low on lesser volume.
SOS—sign of strength, a price advance on increasing spread and relatively higher volume. Backing up to an LPS means a pullback to support that was formerly resistance, on diminished spread and volume. On some charts, there may be more than one LPS, despite the ostensibly singular precision of this term. This term is short hand for a colorful metaphor coined by Robert Evans, one of the leading teachers of the Wyckoff method from the s to the s.
A back-up is a common structural element preceding a more substantial price mark-up, and can take on a variety of forms, including a simple pullback or a new TR at a higher level. A terminal shakeout at the end of an accumulation TR is like a spring on steroids. Shakeouts may also occur once a price advance has started, with rapid downward movement intended to induce retail traders and investors in long positions to sell their shares to large operators. However, springs and terminal shakeouts are not required elements: Accumulation Schematic 1 depicts a spring, while Accumulation Schematic 2 shows a TR without a spring.
Up to this point, supply has been dominant. The approaching diminution of supply is evidenced in preliminary support PS and a selling climax SC. These events are often very obvious on bar charts, where widening spread and heavy volume depict the transfer of huge numbers of shares from the public to large professional interests. Once these intense selling pressures have been relieved, an automatic rally AR , consisting of both institutional demand for shares as well as short-covering, typically ensues.
A successful secondary test ST in the area of the SC will show less selling than previously, a narrowing of spread and decreased volume, generally stopping at or above the same price level as the SC. If the ST goes lower than that of the SC, one can anticipate either new lows or prolonged consolidation. Horizontal lines may be drawn to help focus attention on market behavior, as seen in the two Accumulation Schematics above. Sometimes the downtrend may end less dramatically, without climactic price and volume action.
In general, however, it is preferable to see the PS, SC, AR and ST, as these provide not only a more distinct charting landscape, but also a clear indication that large operators have definitively initiated accumulation. Rather, in such cases, Phase A resembles that more typically seen in distribution see below.
Phases B-E in re-accumulation TRs generally have a shorter duration and smaller amplitude than those in the primary accumulation base. In Phase B, institutions and large professional interests are accumulating relatively low-priced inventory in anticipation of the next markup. The process of institutional accumulation may take a long time sometimes a year or more and involves purchasing shares at lower prices and checking advances in price with short sales.
Overall, the large interests are net buyers of shares as the TR evolves, with the goal of acquiring as much of the remaining floating supply as possible. Institutional buying and selling imparts the characteristic up-and-down price action of the trading range. Early in Phase B, the price swings tend to be wide and accompanied by high volume. As the professionals absorb the supply, however, the volume on downswings within the TR tends to diminish. When it appears that supply is likely to have been exhausted, the stock is ready for Phase C.
As noted above, a spring is a price move below the support level of the TR established in Phases A and B that quickly reverses and moves back into the TR. It is an example of a bear trap because the drop below support appears to signal resumption of the downtrend.
In reality, though, this marks the beginning of a new uptrend, trapping the late sellers or bears. A low-volume spring or a low-volume test of a shakeout indicates that the stock is likely to be ready to move up, so this is a good time to initiate at least a partial long position. The appearance of a sign of strength SOS shortly after a spring or shakeout validates the analysis.
As noted in Accumulation Schematic 2, however, the testing of supply can occur higher up in the TR without a spring or shakeout; when this occurs, the identification of Phase C can be challenging. Phase D: If we are correct in our analysis, what should follow is the consistent dominance of demand over supply. This is evidenced by a pattern of advances SOSs on widening price spreads and increasing volume, as well as reactions LPSs on smaller spreads and diminished volumes.
During Phase D, the price will move at least to the top of the TR. LPSs in this phase are generally excellent places to initiate or add to profitable long positions. Setbacks, such as shakeouts and more typical reactions, are usually short-lived. Distribution Wyckoff Events PSY—preliminary supply, where large interests begin to unload shares in quantity after a pronounced up-move.
Volume expands and price spread widens, signaling that a change in trend may be approaching. BC—buying climax, during which there are often marked increases in volume and price spread. The force of buying reaches a climax, with heavy or urgent buying by the public being filled by professional interests at prices near a top.
A BC often coincides with a great earnings report or other good news, since the large operators require huge demand from the public to sell their shares without depressing the stock price. AR—automatic reaction. With intense buying substantially diminished after the BC and heavy supply continuing, an AR takes place.
The low of this selloff helps define the lower boundary of the distribution TR. For a top to be confirmed, supply must outweigh demand; volume and spread should thus decrease as price approaches the resistance area of the BC. An ST may take the form of an upthrust UT , in which price moves above the resistance represented by the BC and possibly other STs before quickly reversing to close below resistance.
After a UT, price often tests the lower boundary of the TR. SOW—sign of weakness, observable as a down-move to or slightly past the lower boundary of the TR, usually occurring on increased spread and volume. The AR and the initial SOW s indicate a change of character in the price action of the stock: supply is now dominant. LPSY—last point of supply. After testing support on a SOW, a feeble rally on narrow spread shows that the market is having considerable difficulty advancing.
This inability to rally may be due to weak demand, substantial supply or both. UTAD—upthrust after distribution. It occurs in the latter stages of the TR and provides a definitive test of new demand after a breakout above TR resistance.
Up to this point, demand has been dominant and the first significant evidence of supply entering the market is provided by preliminary supply PSY and the buying climax BC. These events are usually followed by an automatic reaction AR and a secondary test ST of the BC, often upon diminished volume. However, the uptrend may also terminate without climactic action, instead demonstrating exhaustion of demand with decreasing spread and volume; less upward progress is made on each rally before significant supply emerges.
Phase B: The function of Phase B is to build a cause in preparation for a new downtrend. During this time, institutions and large professional interests are disposing of their long inventory and initiating short positions in anticipation of the next markdown.
The points about Phase B in distribution are similar to those made for Phase B in accumulation, except that the large interests are net sellers of shares as the TR evolves, with the goal of exhausting as much of the remaining demand as possible. For instance, SOWs are usually accompanied by significantly increased spread and volume to the downside. It is a price move above TR resistance that quickly reverses and closes in the TR. This is a test of the remaining demand. A UT or UTAD allows large interests to mislead the public about the future trend direction and, subsequently, sell additional shares at elevated prices to such break-out traders and investors before the markdown begins.
In addition, a UTAD may induce smaller traders in short positions to cover and surrender their shares to the larger interests who have engineered this move. During Phase D, price travels to or through TR support. The evidence that supply is clearly dominant increases either with a clear break of support or with a decline below the midpoint of the TR after a UT or UTAD. There are often multiple weak rallies within Phase D; these LPSYs represent excellent opportunities to initiate or add to profitable short positions.
A simplistic interpretation of this rule is to identify divergences between volume and price action. As an example, consider where there is a high turnover of volume but little resultant price action. Wyckoff trading strategy A Wyckoff strategy can be broken down into a few simple steps. The chart below shows the schematic for an accumulation bottom. A distribution top is simply the mirror image. This is the markdown phase where the big money starts offloading shares to the crowd.
Phase A marks the steepest price descent which is the markdown period. PS is the first point of support in the descent. At this point, a minor reversal and accumulation may start, however further falls are likely. PS is generally considered a fakeout in the Wyckoff model. SC, the selling climax represents the point of capitulation of the crowd.
This is where sentiment is deeply negative, as the crowd anticipates the bottom dropping out of the market. AR is the automatic rally. At this point, smarter money steps in to buy the dip pushing the market back up in a corrective wave. Meaning the price will still be considerably below the previous highs.
ST marks the end of phase A. Phase B starts with a retest of the previous low, where the market will push down again trying to find a bottom. ST may be at or below the selling climax SC , but generally will be above it. Phase B continues with at least one more rally where the price tests the previous high reached at AR. This area now forms strong resistance and will tend to keep the price confined to a trading range during the accumulation period.
Phase B will often culminate with a retest of the lowest support line. At this point, the price may reach the lowest point in the cycle. Most of the retail crowd has long since capitulated by this time. This is where the big money is accumulating heavily. LP represents the last point of support. By this time, the price recovery is well underway. The price will test the upper resistance lines of the trading range and rebound upwards.
BU is the backup rally where the price starts to accelerate sharply to the upside as the general investor starts to enter the market again. This represents the markup phase. Example: Gold Weekly To see a real world example of Wyckoff analysis, we can look to the weekly gold price in US dollars between and The point of support, PS is reached in and this triggers a very small rally off the lows. A few weeks later the market reaches SC, the selling climax.
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