Trading Wyckoff Accumulation 

Wyckoff accumulation is part one of the entire Wyckoff trading system and while you’re catching bottoms with accumulation, don’t forget to sell tops with: 

1. Wyckoff Distribution

2. RSI Trading like the pros

3. Catch perfect re-entry ops with fibonacci

Arguably one of the most famous (yet misunderstood) trading strategies of all time, from one of the best traders of all time is Wyckoff trading theory. 

We promise if you take the time to learn the principals we outline below, you’ll never miss a macro trading bottom again and will be buying long before other traders so you can ride the way of profits until the top. 

Before we can trade, we first need to understand its origins and familiarize ourselves with its rules and how these pioneering methods still stand the test of of time today.

The system we know today was created by trading juggernaut, Richard Wyckoff, a well-known stock trader from the 20th century, who along with Dow, Elliot, Gann and Merril is now considered one of the most relevant traders of former generatons. 

Through observing and interviewing the best traders of his time, Wyckoff was able to create a “best practices” guide (if you will) of the techniques of ultra successful traders such as JP Morgan and Jesse Livermore and create what we now know as the “Wyckoff Method”. 

Wyckoff went on to become a renowned market educator and the founder and create of the “Magazine of Wall Street”, an incredibly popular trader magazine that at it’s peak had upwards of 200,000 subscribers and countless readers. 

Wckoff’s Easy Five-Step Approach to the Market

Step 1: Determine the Overall Market trend.

What is the current relationship between buyers and sellers? Is there more demand than supply or visa-Versa? This helps us to identify overall market trend or the trend on the timeframe we are trading on. 

Step 2: Determine the asset’s strength.

Is the asset moving in relation to the market or is the opposite occurring?  

Step 3: Look for assets with enough reason to enter.

Is the market or asset giving you enough confluence to enter a position at this stage and is there a good enough R:R ration to give you confidence in this position. 

Step 4: Determine the likeliness of the move. 

Are we ready for a move up or down and how likely is this move to occur? Do our volume and indicators say the same thing,  or is there a clear difference that would spoil our position?

Step 5: Time your entry.

The last step is all about timing. Is the time right now, or do we need to show a little more patience and confluence for a better set up?

The Three Laws of Wyckoff.

Wyckoff Law #1 – Supply and Demand

The first law states that prices rise when demand is greater than supply, and drop when the opposite is true. This is pretty basic stuff and not an exclusive thought of Wyckoff, but still, something beginner traders overlook.  

• Buyers (Demand) > Sellers (Supply) = Price goes up

• Buyers (Demand) < Sellers (Supply) = Price goes down

• Equilibrium between the two = No major price change

Wyckoff Law #2 – Cause and Effect

With every action, there is an equal and opposite reaction, this was the premise of law two in that for every cause there is an effect. 

In Wyckoff terms

Accumulation = markup (Downtrend)

Distribution – markdown (Downtrend

From this law he was able to create accurate estimations on the potential effects of a cause, meaning he created a method to define trading range based on periods of accumulation and distribution. This then allowed him to predict the extension of a market trend after breaking out of a trading range.

Wyckoff Law #3 – Effort Vs Result

The third Wyckoff law states that the changes in an asset’s price are a result of an effort, which is represented by the trading volume. If the price action is in harmony with the volume, there is a good chance the trend will continue. But, if the volume and price diverge significantly, the market trend is likely to stop or change direction.

The Two Rules of Wyckoff

His first rule to traders is that the markets never behave in the same way twice and this relates well to the saying you’ve no doubt heard that “The markets don’t repeat, but they often rhyme”. Meaning that while the markets don’t play out in the exact same way, there are distinct similarities to market cycles that can be observed and taken advantage of for those who understand them.

His second rule to traders is similar to the first in that the best way to evaluate the current market climate is to look to the past. You’ve no doubt heard of the term “looking left” to spot similarities in price action, fractals, line of S&R etc. Well similarly Wyckoff’s rule was to look at days, week, months or even years in the past to evaluate current price action. 

Wyckoff Market Price Cycle

The above Wyckoff Price Cycle is as relevant today as it was 100 years ago and is bound by the premise each portion of a market cycle is made of waves of accumulation (buying) and distribution (selling) and that one when cycle ends, another begins.

Wyckoff’s “Composite Man Thoery”

Before we getting into each of the phases of Wyckoff’s theory, it’s eas equally to understand what he called the “The Composite Man”. “Tha hell is The composite man” we hear you saying, well stick with us here because it’s important. 

“…all the fluctuations in the market and in all the various stocks should be studied as if they were the result of one man’s operations. Let us call him the Composite Man, who, in theory, sits behind the scenes and manipulates the stocks to your disadvantage if you do not understand the game as he plays it; and to your great profit if you do understand it.” (The Richard D. Wyckoff Course in Stock Market Science and Technique, section 9, p. 1-2)

So what does that mean exactly..?

It means that Wyckoff is saying put yourself in the shoes of This composite man, to study and trade the market as if a single person was controlling it, making it easier to go along with the market trend.  

In today’s markets, these composite men would be the smart money, the whales and MM”s that can single-handedly control the state of the market with but a few clicks of a button and completely control the price of (in our case) bitcoin or other cryptos. 

Understanding market maker mentality is the key to Wyckoff’s entire theory because we small fish in a MUCH, MUCH bigger pond and these composite operators posses skills and resources far beyond the average retail operator. They are that accumulate positions before retailers and sucker them into their webs before dumping on our asses (in a lot of cases, but not always all). 

It’s our duty to study these market makers with the sole purpose of thinking and trading like them and get ahead of the pack, because truthfully, it’s the only way we can go from a good trader, to a great one; and as the old saying goes..

“If you can’t beat em’, join em..” 

Wyckoff Logic Part 1- Accumulation

The very first stage of Wyckoff is accumulation, this is where the big boys are quietly loading up on the sidelines at a better price before retail traders, which is usually marked by a period of sideways movement, with little price action.

You will notice in the above image there are 5 phases:

• Phase A, B, C, D & E

Phase A: Stopping the Downtrend

Begins with the first attempted stoppage of a current downtrend, but supply is still larger than demand and this failed buying attempt creates what’s called “Preliminary Supply (PS). This indicates that buyers are entering the market, but not enough to stop the downtrend…yet. Here volume increases and price spread widens, signaling that the downtrend may be coming to an end.

Shortly after, we see a “Selling Climax” (SC). This is where traders begin to capitulate and we see a wave of panic selling by retailers, which is swift bought up by the smart money at the near bottom of the move. From here we will sometimes see large wicks as the price closes far from the low of the candle. (Think Pin Bar)

Once the selling pressure has diminished, an “Automatic Rally” (AR) occurs, seen as a quick bounce as the excess supply (created by panic sellers) is being bought up by the smart money who are now setting their positions at these better prices.

A “Second Test” (ST) occurs within a similar price range as our SC, which will show less selling pressure than previously along with decreased volume. While a higher low is often observed as the image shows above, it’s not always the case. It’s also not uncommon to have multiple ST’s after and SC. 

Phase B: “Cause and Effect”

In Wyckoff terms, Phase B could be considered the building blocks of a new uptrend, this is called “Cause and Effect”. In this phase, the big boys are accumulating well-priced BTC before the next big move to the upside.

This is the major consolidation phase where the price will often range between a high and low point, often testing previous support and resistance levels. It’s during this phase that we also may see a number of ST’s (ST in Phase B) and in some cases, a new higher high and lows could also be printed, trapping the bulls and bears.

These price swings tend to be wide and accompanied by higher trading volume, however as BTC is being accumulated, the volume on moves down within the trading range tend to get smaller and when supply seems to have been exhausted, we move onto Phase C.

Phase C: “Spring”

This phase is the final test and bear trap before the markets start making higher lows and price starts moving to the upside. It’s the time where the smart money is to decide whether the price is ready to be moved up. This is the “Last Point of Support” (LPS).

It’s can be marked by a move below the support level of the trading range (established in Phase A & B) that quickly reverses and moves back into the trading range. This catches retail traders out because it leads them to believe that we’ll continue the overall downtrend, trapping late sellers.

In the Wyckoff method. a successful test of supply represented by a spring (Or a shakeout) provides a high probability trading opportunity.

A low volume spring, or a low volume test of a shakeout indicates that price is potentially ready for a move up, creating a good time to set (at least) a partial long position. Sometimes however, these shakeouts simply do not occur, regardless of which the overall pattern still remains valid.

Phase D: “Transition”

Phase D is the second last phase and represents the transition between “The Cause” and “The Effect”, Phase C has set us up for the potential bullish moves and it’s during this time that we see a significant increase in trading volume and volatility due to greater demand, then supply.

It’s at this stage we may (or may not) see the final LPS, making a higher low before the entire market and price, moves higher and “Back Up” (BU). This then sees a break of the trading range and is followed by the “Sign of Strength” (SOS) we needed to confirm any bullish bias.

Our SOS resistance, now becomes our support – things are starting to get VERY interesting at this point!

The final phase of our Wyckoff Accumulation and the bullish momentum is obvious to all traders involved. From here, new trading ranges and a new accumulation consisting of both profit-taking and additional buying by smart money could be established by smart money.

This can occur at any point in Phase E and these new trading ranges are sometimes called “stepping stones” on the way up to an even higher pricing range. 

Image: BTC Wyckoff Accumulation Example January 2020