Wyckoff Method – all you need to know to improve your trading results and trading strategy
Today I want to discuss with you Wyckoff Method. For those, who don’t know, Richard Demille Wyckoff (1873–1934) is considered to be one of five ‘fathers’ of thechnical analysis. I am not going to stop on his biography – if you want, you can find it in internet. I want to focus on his method. Market is changing all the time. As from my experience best of all Wyckoff method works for metals and some other commodities. At least in modern market and in conditions we have last few years and despite his main focus was the stock market.
Wyckoff’s approach is based on idea, that trader can understand market through detailed analysis of supply and demand. That can be ascertained from studying price action, volume and time. You can see below scheme of his concept to get it better.
As you see, the best time for going long is accumulation area, while ideal time for shorts is at the end of the preparation for price markdown.
If you want to use this method, you have to remember 3 laws:
1. The law of supply and demand determines the price direction. This principle is central to Wyckoff’s method of trading and investing. When demand is greater than supply, prices rise, and when supply is greater than demand, prices fall. How to identify it? Well – check the volumes in real market (I mean futures or stocks, not CFDs). This way you can study the balance between supply and demand by comparing price and volume bars over time.
2. The law of cause and effect helps the trader and investor set price objectives by gauging the potential extent of a trend emerging from a trading range. Wyckoff’s “cause” can be measured by the horizontal point count in a point-and-figure chart, while the “effect” is the distance price moves corresponding to the point count. Other waords, it can be seen as the force of accumulation or distribution within a trading range—and how this force works itself out in a subsequent trend or movement up or down.
3. The law of effort vs result provides an early warning of a possible coming trend reversal. Divergences between volume and price often alert about it. For example, when there are several high-volume (large effort) but narrow-range price bars after a substantial rally, with the price failing to make a new high (little or no result), this suggests that big interests are unloading shares in anticipation of a change in trend.
I want to you to have a look at 2 schemes below to understand how accumulation and distribution work and how you can identify it on the chat.
Accumulation: Wyckoff Events
PS—preliminary support, SC—selling climax, AR—automatic rally, ST—secondary test, SOS—sign of strength, LPS—last point of support, BU—”back-up”.
Distribution: Wyckoff Events
PSY—preliminary supply, BC—buying climax, AR—automatic reaction, ST—secondary test, SOW—sign of weakness, LPSY—last point of supply, UTAD—upthrust after distribution.
With my mentees we use Wyckoff method as a part of our complex analysis for short term, middle term trades and investing. I believe it will help to improve your trading results and boost your profits.