Trading Wyckoff Distribution

Put very simply, distribution is the opposite of accumulation and is the process of selling BTC (or an asset) at the best average price over a certain time period. Whereas in accumulation smart money was looking to buy at the best price, this time they are looking to sell onto retailers to secure their profits. 

This usually occurs after an uptrend, where our composite operator starts to process of selling off their accumulated BTC (in our case), which all begins with a “Buying Climax (BC), the opposite of our “Selling Climax” (SC).

Phase A:

PSY: Preliminary Supply – Tell us that the uptrend is slowing down and the forces that drove the price up in the first place are not as strong as they were previously. 

BC: – Buying Climax – This is formed after an intense bout of buying, usually buy retail traders or “Dumb Money” (no offense), which is usually followed by..

AR: Automatic Reaction –  This is temporary relief in selling pressure and a strong bounce as the excess BTC is bought by the market makers.  It’s at this stage that the distribution of the asset occurs onto FOMO buyers. 

Phase B: 

Similar to the above accumulation chart, Phase B in our distribution phase is considered an area of consolidation that precedes the impending downtrend.

ST: Secondary Test – This occurs when the market revisits the space between BC and AR, forming a lower high, testing demand and supply at these price levels.

SOW: Sign of Weakness – Seen 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.

UT: Upthrust – After and SOW, sometimes the market will move up and above the resistance level within the TR (Trading Range) created by the previous BC (Buying Climax), resulting in a secondary test (ST), also called an upthrust (UT)

Phase C:

In some cases, the market will offer one last bull trap and terminal shakeout after the Phase B consolidation period. This UTAD or “Upthrust After Distribution” is essentially the opposite of the spring period outlined above in accumulation. 

This will occur in the later stages of the trading range and provides a definitive test of the new demand after a breakout about the trading range resistance level. 

Phase E:

LPSY: Last Point of Supply – After testing support on a SOW, a failed rally on narrow spread shows that a market rally is showing all the signs of being exhausted. This could be due to weak demand, excess supply or both. 

This is often time (when confirmed) followed by an upcoming market (Downtrend) as supply is now fully in control, offering a great opportunity to short the market, riding the move down to a TR and lows outside of the preceding range. 

Traders can trail their stops at this point as the price falls and after this significant move, a climactic action may signal the beginning of re-distribution TR or accumulation.