The Wyckoff trading model is an effective investment market analysis method and is applied to this day. Based on the rules of market movements, applying the Wyckoff method will help investors make wise decisions to enter buy or sell orders.
What is the Wyckoff trading method?
The Wyckoff method (Wyckoff model) is an analysis method based on the rules of market movements that helps traders evaluate the overall market, find potential profit areas and determine trading goals. pandemic.
The theoretical and practical approaches of the Wyckoff method to the markets include:
Identify potential buy/sell zones to enter buy or sell orders.
Analyze oscillation, accumulation and distribution channels.
How to use Point and Figure charts to determine price targets.
From the foundation of Wyckoff's law, there have been two famous methods developed and commonly used in the market: the Spring and Upthrust model and the VSA method (Volume and Price Analysis).
However, this article only focuses on introducing the rules, principles and trading techniques of the Wyckoff model, specifically:
The 3 basic laws of Wyckoff's method
Wyckoff Price Cycle
Wyckoff diagram
What is “Composite Man”?
5 detailed market access steps
The Wyckoff model helps traders evaluate the overall trading market (Source: Internet)
What are the 3 important laws of the Wyckoff model?
The 3 laws of the Wyckoff model (The Laws of Wyckoff) include: Laws of supply - demand, Cause - Effect, Effort - Result.
3.1 Law of Supply and Demand
This is the first and central rule of Wyckoff's methodology. This rule states that prices will increase when demand is greater than supply, conversely when supply is greater than demand, prices will decrease:
Supply > Demand => Price decreases;
Supply < Demand => Price increases;
Supply = Demand => Price (almost) unchanged.
To identify the strength of supply and demand, you can research by comparing prices and trading volumes. However, in reality this takes quite a bit of time to learn.
3.2 Law of Cause and Effect
This rule is used to determine price targets based on accumulation time, through Point & Figure charts. Simply put, the longer the price moves sideways (consolidates), the greater the trend strength will be when it breaks out of the accumulation zone. Accumulation is considered the reason for the strength of the trend.
This rule helps predict expected price levels by determining the potential level of a trend being formed from accumulation or distribution.
The law of cause and effect in the Wyckoff method (Source: Internet)
3.3 The Law of Effort and Results
This Wyckoff's Law provides early warning signals of a possible trend change in the near future. Divergence between price and volume often indicates fluctuations in price trends.
Changes in price are considered the result of effort, expressed through changes in trading volume. If price and volume move in harmony with each other, it is likely that the trend will continue. But if they have a difference in the amplitude of fluctuations, it is likely that the trend may stop.
The Law of Effort and Results in the Wyckoff method (Source: Internet)
What is the concept of “Composite man” in Wyckoff?
Composite man is the synthesis of the major forces behind the market (institutional traders, investment funds...).
In fact, the behavior of individual traders often goes against the overall market, in other words, the opposite of the "Composite man", leading to losses. Therefore, Wyckoff believes that traders should act according to the composite man, because the strategy of this force can be completely learned. It's called standing on the shoulders of giants.
From the Composite man concept, we have a Wyckoff Price Cycle model of the market cycle consisting of four stages: accumulation, growth, distribution and recession.
Wyckoff price cycle in the Wyckoff method (Source: Internet)
Cycles in the Wyckoff method
The Wyckoff method consists of 4 stages: Accumulation, growth, distribution and decline stage. Specifically:
Accumulation phase
To recognize this stage, just look at the "Composite man" starting to buy accumulated assets. However, the cash flow of this group enters the market very skillfully, is difficult to recognize and does not cause prices to increase suddenly. Therefore, it is really difficult for individual traders to recognize this.
Growth phase
The end of the accumulation phase is also the beginning of the growth phase. At this time, Composite Man has accumulated enough, the selling force has decreased sharply, this group will proceed to push the price up. Naturally following investment psychology, retail traders will be attracted by the force of price increases and quickly join the vibrant market, pushing prices even more strongly. Right now, demand will be greater than supply.
Distribution phase
Composite men have seen the market rise enough, they will start selling their holdings to late market participants. Looking at the chart, you will see that this period will go sideways, showing that supply meets demand, the two sides are in balance until the supply is exhausted.
Depression stage
When supply is scarce, supply is smaller than demand. The price reduction process was extremely strong, sliding for a long time, causing confusion among small investors who joined later. At this time, they are rushing to sell assets to avoid further losses.
Wyckoff diagram in the cycle of accumulation and distribution
In the four cycles of the Wyckoff model, accumulation and distribution are the two stages that determine the market situation. Wyckoff also built models showing the events that took place during these two periods so people could understand what really happened.
Each accumulation and distribution cycle in the Wyckoff method is divided into 5 small stages from A to E, and in which many events take place as well as price behavior in each stage.
Wyckoff diagram in the cycle of accumulation and distribution
In the four cycles of the Wyckoff model, accumulation and distribution are the two stages that determine the market situation. Wyckoff also built models showing the events that took place during these two periods so people could understand what really happened.
Each accumulation and distribution cycle in the Wyckoff method is divided into 5 small stages from A to E, and in which many events take place as well as price behavior in each stage.
Diagram of the cumulative cycle Wyckoff model
Accumulation cycle diagram (Source: Internet)
Events that take place during accumulation:
PS (preliminary support): significant buying begins to appear after a long-term price decline, signaling that the downtrend may be coming to an end.
SC (Selling Climax): this is the time when selling pressure is pushed to its peak. Normally, at this point, the price will close above the old bottom, reflecting the starting buying action of major forces.
AR (Automatic Rally): this can be understood as a recovery that occurs naturally. Selling pressure has decreased significantly and new buying pressure has pushed prices up.
ST (Secondary Test): is the time when the market retests the price range of the SC event to check supply and demand. When the price approaches the bottom area of SC to test the support zone, the trading volume and price difference will decrease significantly. There can be one, two or more STs after an SC.
Test: Major forces often retest supply during the TR (Trading Range) or at key locations of the bullish phase. If supply increases significantly, it will push prices down deeply and prove that the market is not ready for an uptrend. A successful test is when the price makes a higher low and trading volume decreases.
SOS (Sign of Strength): is when trading volume and price volatility are increasing.
LPS (Last Point of Support): is the last bottom created after SOS. In the cumulative phase diagram, there can be more than one LPS point even though its definition is “final”.
BU (Back-up): is a term coined by Robert Evans, a leading teacher of the Wyckoff method from the 1930s-1960s. According to him, BU can manifest in many different forms such as a pullback or a new TR at a higher level before forming SOS.
The phases in the accumulation cycle follow the Wyckoff model
Phase A: is the moment that signals the end of the previous downtrend. Although supply still dominates, it has gradually decreased, as shown by the PS and SC events
Phase B: Is the time when composite man begins to accumulate, and is considered the origin of cause in the law of Cause and Effect. This phase usually lasts quite a long time.
Phase C: This phase usually carries out a final test that pushes prices down, creating Spring. This can be considered a trap for sellers because the price broke out of previous support levels. However, soon the price will gradually create higher lows, and traders who are not alert will lose money here.
Phase D: Is the moment when results begin to be realized in the Law of Cause and Effect, marking the beginning of a new uptrend. There are still pullbacks here, which are the last good opportunities to buy. See details: What is Pullback?
Phase E: This is the final phase of accumulation. Here the price has escaped the trading range due to increased market demand. From here, the market entered a strong uptrend.
Distribution cycle diagram
Distribution takes place with the opposite events and phases of Accumulation, but the essence is quite similar.
Distribution cycle diagram (Source: Internet)
Phases in the distribution cycle according to Wyckoff theory
Events in the delivery cycle
PSY (preliminary supply – preliminary supply): assets that start to be sold after the bull cycle. Volume often increases markedly with a large amplitude of price.
BC (buying climax): volume and price range continue to increase, buying force peaks and price seems to be able to reach its highest level here.
AR (automatic reaction): After BC, buying power decreased significantly, supply gradually increased and sales began.
ST (secondary test): price returns to BC area to check supply and demand, retesting resistance levels. For the test to be successful, supply must be greater than demand, trading volume must decrease and price fluctuations should also be less.
SOW (sign of weakness): supply dominates, shown by increased volume and price range while prices gradually decrease.
LPSY (last point of supply): a weak recovery with a narrow range shows that the market no longer has the power to push prices up. Final sales also take place here.
Phase A: is the moment that signals the end of the previous uptrend.
Phase B: Is the time when composite man begins to sell, also considered the origin of cause in the law of Cause and Effect.
Phase C: This phase usually carries out a final test that pushes the price up, and also creates a price trap for inexperienced traders.
Phase D: Marks the start of a new downtrend. This phase is almost a mirror of phase D in the accumulation cycle.
Phase E: The final phase of the Distribution phase marks the beginning of a downtrend, with a clear break below the trading range as supply strongly outweighs demand.
The Wyckoff method approaches the trading market in 5 steps
The Wyckoff method shows 5 steps to choose investment products and participate in trading in the stock market as follows:
Step 1: Determine current position and future trends.
Analyze whether the market is accumulating or trending, what stage the trend is in, what the supply and demand relationship is like... These analyzes will help traders decide whether to participate in the market or not. If you participate, will you be in a buy or sell position...
Step 2: Choose investment products that match the trend
During an uptrend, choose investment products that are stronger than the market, with a growth rate higher than the growth rate of the entire market. On the contrary, in a downtrend, choose investment products with a decreasing momentum greater than the general decreasing momentum.
Step 3: Choose investment products with "causes" that meet your goals
We have talked about cause in the cause and effect law of the Wyckoff method, which is shaped in phase B in both the cycle of accumulation and distribution. Choose investment products that are at these stages to meet your trader's goals.
Step 4: Determine the possibility of price breakout
After choosing an investment product that is in the accumulation stages, consider whether it is ready to break the trading range to bring you profits or not.
Step 5: Determine the appropriate time to enter the market
Wyckoff believes that you should only participate in the market when the elements of the investment product are consistent with the general factors of the market.
What are the advantages and disadvantages of applying the Wyckoff model?
The most common advantages and disadvantages when traders use the Wyckoff model:
Pros: Wyckoff is a trusted trading method adopted by traders across the globe. The model helps traders grasp market psychology and increase the positions of leaders and large investors. In addition, if the trader combines well with the trading volume index (Volume) and momentum index (Momentum), the trading path will be even more favorable.
Disadvantage: For new traders, the Wyckoff model easily confuses the accumulation and distribution phases. Besides, this method is also considered by Pro traders to be difficult and not easy to use for technical analysis.
Frequently Asked Questions (FAQ) about the Wyckoff method
Does the Wyckoff method really work?
Completely effective, if you do thorough research and analysis. This is a methodology researched for many years by Richard Wyckoff and has been successfully applied by many traders. Helps investors explain the nature and price behavior during trading. Additionally, the Wyckoff price cycle phase is one of the most valuable supply and demand patterns for stocks.
Which time frame is best to apply the Wyckoff model?
In theory, Wyckoff's law is much more effective if applied on long-term time frames. Therefore, many analysts recommend using daily or weekly time frames. However, using the Wyckoff model in smaller time frames can also help traders identify accumulation periods and estimate possible future trends. Short time frames include: 4 hours, 2 hours and 1 hour.
What is the Wyckoff spring model?
The Wyckoff spring pattern is a model used in stock trading to predict the price trend of stocks in the near future. However, as with any other technical analysis tool, it cannot be guaranteed that its predictions will be 100% accurate.
What is the Wyckoff VSA model?
The VSA method was born based on the theoretical basis of the Wyckoff method developed by Tom Williams. The Wyckoff VSA model uses volume and price volatility indicators to analyze price patterns on the chart. This VSA model allows investors to identify market trends, potential buy and sell points and make trading decisions based on them.
See details: https://vnrebates.org/
