Wyckoff Method
Short Description
A trading method...
Description
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Te mechanics o the markets are so complicated that one must break it down into some oundational guidelines that encompass the whole, then build upon that oundation slowly and methodically until it makes sense and becomes a high probability, low risk undertaking.
by Jerry Garner jr
Te Law o Supply and Demand 1. States that when demand is greater than supply, prices will rise, and when supply is greater them demand, prices will all. Here the analyst studies the relationship between supply versus demand using price & volume over time as ound on the bar chart. 2. Te L aw o Cause & Effect Effect Postulates that in order to have an effect will be in proportion to the cause. Tis law is seen working as the orce o accumulation or distribution within a trading range. 3. Te Law o Effort Versus Result divergences and disharmonies between volume and price ofen presage a change in the direction o the price trend & helpul or indentiying accumulation verses distribution & gauging effort.
Law o Supply and and Demand •
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Demand reers to how much (quantity) o a product or service is desired by buyers. Te quantity demanded is the amount o a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. relationship. Te analyst studies the relationship between supply vs. demand using price and volume over time. Supply represents how much the market can offer. Te quantity supplied reers to the amount o a certain good producers are willing to supply when receiving a certain price. Te correlation between price and how much o a good or service is supplied to the market is known as the supply relationship. relationship. Price, thereore, is a reflection o supply and demand. Te Law o Demand states, the lower something’s price is, the more demand there is or it and the relationship between demand and price is an inverse relationship. relationship. As one goes up, the ot her comes down. Te Law o Supply states, the higher something’ss price is, the more it will be supplied and the relationship between supply and price is a direct relationship. As one something’ goes up, the other goes up. Supply and demand is the basic oundation o economics However Supply and demand demand is the effect, not the cause. Something happens, and supply increases or demand decreases (or both) causing price to go down, or something happens and supply goes down or demand goes up (or both) causing price to go up. Te “something” is the cause, and the change in supply/ demand is the effect. So, yes, price went up because o an increase in demand however, it is the cause or the change in supply and demand that caused the price change. trading is the perception and speculation o what the change in supply and demand will be. Markets move off o the imbalance o supply and demand, a imbalance o supply and the market has to all, a imbalance o demand and the market has to rise. Accumulation rom the Supply/Demand perspective is demand coming in to gradually overcome and absorb the supply and to support the market at this price le vel. Distribution rom the Supply/Demand perspective is where the Supply overcomes Demand and stops the upward move and eventually begins t he downward move. Distribution reers to the elimination o a long investment or speculative position and ofen involves establishing a speculative
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Richard D. Wyckoff devised three laws that gove rn market dynamics. Tese laws tell you how and why the markets work. Te law o Supply and Demand is the most undamental and overriding aspect o market dynamics. Te other two laws act on and measure Supply and Demand.
by Jerry Garner jr
Te Law o Supply and Demand 1. States that when demand is greater than supply, prices will rise, and when supply is greater them demand, prices will all. Here the analyst studies the relationship between supply versus demand using price & volume over time as ound on the bar chart. 2. Te L aw o Cause & Effect Effect Postulates that in order to have an effect will be in proportion to the cause. Tis law is seen working as the orce o accumulation or distribution within a trading range. 3. Te Law o Effort Versus Result divergences and disharmonies between volume and price ofen presage a change in the direction o the price trend & helpul or indentiying accumulation verses distribution & gauging effort.
Law o Cause & Effect •
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A second basic principle underlying all analytical efforts is the law o cause and effect. Te idea here is that in order or there to be an effect t hat shows up as a change in the price o a stock, there must first be a cause. In its most basic state, t his law seems very much the s ame as the law o supply and demand. In the cases o the individual trades mentioned, the cause is the buyer’s desire to hold the shares, or the seller’s desire to have dollars. In one case the cause is expressed in terms o demand and in the other in terms o supply supply.. A cause can be stated in terms o the reason behind an individual trade. In the making o important profits in the stock market, however, however, the significance o each individual trade is greatly reduced. Here the idea o a cause must be taken more broadly,, Te effect realized by a cause will be in direct proportion to that cause. Consequently, to get an important move, or broadly effect there must be an important cause. Tese are not built rom one trade, but rather take time, sometimes a long time, to develop. Generally these causes are built during an important shif in who is holding the stock. Te flow o shares that is o greatest significance is the one that occurs as shares leave the strong hands o the proessional traders and go to the weaker hands o the general public. Every market advance begins only afer the proessional traders have all, or just about all, the shares they desire. Once the move begins, it will b e carried orward primarily by the increasing and emotional buying o the public. Te emotion at work here, by the way, is greed. Te knowledgeable trader will go with the upward trend o the advance as long as prices continue to move up e asily. Te idea is to measure this cause and project the extent o its effect. Te excesses that develop in supply and demand are not random but are the result o key events in market action or the result o periods o preparation. Tis law’s operation can be seen working as the orce o accumulation or distribution within a trading range that works itsel out in the subsequent move out o that trading range. Tis law can be seen working over a group o bars.
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Te price o every equity moves up or down because there is an excess o demand over supply or supply over demand, the Law o Effort vs. Results - divergencies and disharmonies between volume and price ofen presage a change in the direction o the price trend.
by Jerry Garner jr
Te Law o Supply and Demand 1. States that when demand is greater than supply, prices will rise, and when supply is greater them demand, prices will all. Here the analyst studies the relationship between supply versus demand using price & volume over time as ound on the bar chart 2. Te L aw o Cause & Effect Effect Postulates that in order to have an effect will be in proportion to the cause. Tis law is seen working as the orce o accumulation or distribution within a trading range. 3. Te Law o Effort Versus Result divergences and disharmonies between volume and price ofen presage a change in the direction o the price trend & helpul or indentiying accumulation verses distribution & gauging effort.
Law o Effort vs Result •
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states that the change in price o a t rading vehicle is the result o an effort expressed by the level o volume & that harmony between effort & result promotes urther price movement while lack o harmony promotes a change in direction. Te law o effort (volume) verses result (price) is action, this law can be seen working on one bar. o get a better idea o how the concept o effort versus result works and how it can help protect against disaster, consider yet another hypothetical situation. It begins with a stock that explo des upward by six points. Te volume is ten thousand shares. Te next day, there is an additional advance o our points and trading expands to twenty thousand shares. At this point, many people are making a lot o money. Tis is also t he type o situation that brings out an incredible amount o greed. On the third day, the stock takes on an additional two points while the volume soars to orty-thousand shares. Ten day number our comes and this time the “wonder stock” only advances hal a point. Te volume, however, however, tops the hundred thousand share level. Is it clear what is happening in this case? Obviously Obviously,, the price is moving up and the volume is expanding. Tat should be a good sign and in many cases it is a good indication or the uture. In this case, though, it creates a problem. As t he stock advances, the amount o each successive advance decreases. Te volume on the ot her hand increases steadily throughout the our days. Tis results in a clear case o an effort without a corresponding result. It produces a warning o potential trouble. Anyone not already in this stock is well advised not to get in, at least not at this dangerous time. Tose already holding positions should protect themselves as best they can, or just get out. Until it can be determined why the result is lagging behind the effort or until the s ituation corrects itsel, there is the potential or disaster. Te chart at the b ottom o exhibit five shows how this concept o effort without result might look in actual practice.
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Whckoff Schematics 1. Wyckoff empowers the traderanalyst with a balanced, whole brained approach to technical analysis decision making. Te schematics provide picture diagrams as a right-brained tool to complementt the lef-brained anacomplemen lytical checklists urnished by the Wyckoff three laws and nine tests. 2. One objective o the Wyckoff method o technical analysis is to improve market timing when establishing a speculative position in anticipation o a coming move where a avorable reward/risk ratio exists to justiy taking that position. 3. o be successul, you must be able to anticipate and correctly judge the direction and magnitude o the move out o the R.
Wyckoff Schematics O Market Phases
rading ranges are places where the previous move has been halted rading and there is relative equilibrium between supply and de mand. It is here within the R that campaigns o accumulation or distribution develop in preparation or the coming bull or bear trend. It is this orce o accumulation or distribution that can be said to build a cause that unolds in the subsequent move.
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Whckoff Schematics 1. Wyckoff empowers the traderanalyst with a balanced, whole brained approach to technical analysis decision making. Te schematics provide picture diagrams as a right-brained tool to complementt the lef-brained anacomplemen lytical checklists urnished by the Wyckoff three laws and nine tests. 2. One objective o the Wyckoff method o technical analysis is to improve market timing when establishing a speculative position in anticipation o a coming move where a avorable reward/risk ratio exists to justiy taking that position. 3. o be successul, you must be able to anticipate and correctly judge the direction and magnitude o the move out o the R.
rading Ranges present avorable short-te rm trading opportunities rading with potentially very avorable reward/risk parameters. Nevertheless, great reward comes with participation in the trend that emerges rom the rading Range. Wyckoff offers unique guidelines by which the trader-analyst can examine the phases within a R .
Wyckoff Schematic O Accumulation visual representation of the Wyckoff market action typically found within a TR of accumulation
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Phases o Accumulation 1. Lines A and B define support o the trading range, while lines C and D define resistance. 2. Phase A: o stop a downward trend either permanently or temporarily. 3. Phase B: o build a cause within the trading range or the next effect and trend. 4. Phase C: Smart money “tests” the market along the lower and/ or the upper boundaries o the trading range. Here one observes “springs” and/or “jumps” and “backups”. 5. Phase D: Defines the “line o least resistance”” with the passage o the resistance nine buying tests. 6. Phase E: Te mark up or the upward trending phase unolds.
Wyckoff model or accumulation is not a schematic or all the possible variations within the anatomy o a rading rading Range, it does provide the important Wyckoff Wyckoff principles that are evident in an area o accumulation. It also shows the key phases used to guide our analysis rom the beg inning o the rading rading Range with a selling climax, through building a cause until the taking o a position.
Wyckoff Schematic O Accumulation visual representation of the Wyckoff market action typically found within a TR of accumulation
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Accumulation Schematic Defined Accumulation 1. PS (1) – preliminary support, where substantial buying begins to provide pronounced support afer a prolonged down-move. Volume and the price spread widen and provide a signal that the down move may be approaching its end. 2. SC (2) – selling climax, the point at which widening spread and selling pressure usually climaxes and heavy or panicky selling by the public is being absorbed by larger proessional interests at prices near the bottom. At the low,, the climax helps to define the low lower level o the R. 3. AR (3) – automatic rally, where selling pressure has been exhausted. A wave o buying can now easily push up prices, which is urther uelled by short covering.
Wyckoff Schematic O Accumulation visual representation of the Wyckoff market action typically found within a TR of accumulation
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Accumulation Schematic Defined Accumulation 1. S (4, 5, 8) – secondary test, price revisits the area o the s elling climax to test the supply/demand at these price levels. I a bottom is to be confirmed, significant supply should not resurace, and volume and 2. Te Creek (6) – is a wavy line o resistance drawn loosely across rally peaks within the trading range. Tere are minor lines o resistance and a more significant “creek” o supply that will have to be crossed beore the market’s journey can continue continue onward onward and upward.
Wyckoff Schematic O Accumulation visual representation of the Wyckoff market action typically found within a TR of accumulation
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Springs or Shakeouts (7) Defined 1. Usually occur late within the trading range and allow the dominant players to make a definitive test o available supply beore a markup campaign will unold. 2. I the amount o supply that suraces on a break o support is very light (low volume), volume), it will be an indication that the way is clear or a sustained advance. 3. Heavy supply here usually means a renewed decline. 4. Moderate volume here may mean more testing o support and a time to proceed with caution. 5. Te spring or shakeout also serves the purpose o providing dominant interests with additional supply rom weak holders at low prices.
Wyckoff Schematic O Accumulation visual representation of the Wyckoff market action typically found within a TR of accumulation
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Accumulation Accumulatio n Schematic Defined 1. Jump (9) – continuing continuing the creek analogy, the point at which price jumps through the resistance line; a bullish sign i the jump is achieved with increasing speed and volume. 2. SOS (10, 12) – sign o strength, an advance on increasing spread and volume, usually usually over some level o resistance 3. BU/LPS (13) – last point o support, the ending point o a reaction or pullback at which support was met. Backing up to an LPS means a pullback to support that was ormerly resistance, on diminished spread and volume afer an SOS. Tis is a good place to initiate long positions or to add to profitable ones.
Wyckoff Schematic O Accumulation visual representation of the Wyckoff market action typically found within a TR of accumulation
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Accumulation Schematic Defined Accumulation 1. PS (1) – Preliminary Supply is where substantial selling begins to provide pronounced resistance afer an up move. Volume and spread widen and provide a signal that the up move may be approaching its end. 2. BC (2) – Buying Climax is the point at which w idening spread and the orce o buying climaxes, and heavy or urgent buying by the public is being filled by larger proessional interests at prices near a top. 3. AR (3) – Automatic Reaction Reaction with buying pretty much exhausted and heavy supply continuing an AR ollows the BC. Te low o this selloff will help define the bottom o the rading Range (R).
Wyckoff Schematic O Distribution visual representation of the Wyckoff market action typically found within a TR of accumulation
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Accumulation Schematic Defined Accumulation 1. S – Secondary est(s) est(s) revisit the area o the Buying Climax to test the demand/supply balance at these price levels. I a top is to be confirmed, supply will outweigh demand and volume and spread should be diminished as the market approaches the resistance area o the BC. 2. SOW – Sign o Weakness at point 10 will usually occur on increased spread and volume as compared to the rally to point 9. Supply is showing dominance. Our first “all on the ice” holds and we get up try to orge ahead. 3. Te ice is an analogy to a wavy line o support drawn loosely under reaction lows o the rading rad ing Range. A break through the ice will likely be ollowed by attempts attemp ts to get back above it.
Wyckoff Schematic O Distribution visual representation of the Wyckoff market action typically found within a TR of accumulation
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Accumulation Schematic Defined Accumulation 1. UAD – UPthrust Afer Distribution Distributio n Similar to the Spring and erminal Shakeout in the trading range o Accumulation Accumulation,, a UAD may occur in a R or distribution. It is more definitive test o new demand afer a breakout above the resistance line o the R and usually occurs in the latter stages o the R. 2. I this breakout occurs on light volume with no no ollow through through or on heavy volume with a breakdown back into the center o the trading range, then this is more evidence that the R was Distribution Distributio n not Accumulatio Accumulation. n. 3. Tis UAD usually results in weak holders o short positions giving them up to more dominant interests, and also in more distribution to new, less inormed buyers beore a decline.
An upthrust is the opposite o a spring. It is a price move above the resistance level o a trading range that quickly reverses itsel and moves back into the t rading range. An upthrust is a “bull trap trap”” – it appears to signal a start o an uptrend but in reality marks the e nd o the up move.
Wyckoff Schematic O Distribution visual representation of the Wyckoff market action typically found within a TR of accumulation
Te Whyckoff rading Method 1930: A Case Study o the US Stock Market Market
Accumulation Schematic Defined Accumulation 1. LPSY – Last Point o Supply afer we test the ice (support) on a SOW, a eeble rally attempt on narrow spread shows us the difficulty the market is having in making a urther rise. Volume may be light or heavy heavy,, showing weak demand or substantial supply. It is at these LPSY’s that the last waves o distribution are being unloaded beore markdown is to begin. 2. Afer a break through the ice, a rally attempt is thwarted at the ice’s surace (now resistance). Te rally meets a last wave o supply beore markdown ensues. LPSY’s are good places to initiate a short position or to add to already profitable ones. 3. In Phase E, the stock or commodity leaves the R and supply is in control.
Within the dynamics o a rading Range, Range, the orce o acc umulation or distribution gives us the cause and the potential opportunity or substantial trading profits.
Wyckoff Schematic O Distribution visual representation of the Wyckoff market action typically found within a TR of accumulation
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