The Wyckoff Method: A Tutorial
A five-step market approach
Wyckoff's "composite man"
Wyckoff Price Cycle
Wyckoff's three laws
Trading Range Analysis
Accumulation: Wyckoff Events
Accumulation: Wyckoff Phases
Distribution: Wyckoff Events
Distribution: Wyckoff Phases
Supply and demand analysis
Comparative strength analysis
Nine buy/sell tests(Video) How to Trade Like The Banks - Wyckoff Method Explained in 8 minutes
Wyckoff Purchase Tests for Accumulation
Wyckoff sales tests for distribution
About the Author
Richard Demille Wyckoff(1873–1934) was a pioneer of the technical approach to studying the stock market in the early 20th century. He is considered one of the five "titans" of technical analysis, along with Dow, Gann, Elliott and Merrill. At the age of 15, he got a job as a stockbroker at a New York brokerage firm. Then, still in his 20s, he became director of his own company. He also founded and, for nearly two decades, wrote and editedwall street magazine, which, at one point, had over 200,000 subscribers. Wyckoff was an avid student of the markets, as well as an active trader and tape reader. He observed the trading activities and campaigns of the legendary stockbrokers of his day, including JP Morgan and Jesse Livermore. Drawing on his observations and his interviews with leading traders, Wyckoff codified the best practices of Livermore and others in the laws, principles, and techniques of trading methodology, money management, and mental discipline.
From his position, Mr. Wyckoff has seen how many retail investors have been repeatedly defrauded. Therefore, he dedicated himself to educating the public about "the real rules of the game" of big interests, or "smart money." In the 1930s, he founded a school that would later become the Securities Market Institute. The school's core offering was a course that integrated the concepts Wyckoff had learned about how to identify the buildup and distribution of large-trader inventory with how to take positions in harmony with these large players. His time-tested ideas are as valid today as they were when they were first articulated.
This article provides an overview of Wyckoff's theoretical and practical approaches to the markets, including guidelines for identifying trading candidates and entering long and short positions, analysis of accumulation and distribution trading ranges, and an explanation of how to use dot charts. and figures to identify. price targets 🇧🇷 While this article focuses exclusively on stocks, Wyckoff's methods can be applied to any open trading market in which large institutional traders operate, including commodities, bonds, and currencies.
A five-step market approach
The Wyckoff Method involves a five-step approach to stock selection and trade entry, which can be summarized as follows:
1. Determine the current position and the possible future trend of the market.Is the market consolidating or is it trending? Does your analysis of market structure, supply, and demand indicate the likely direction in the near future? This assessment should help you decide if you should be in the market, and if so, whether to go long or short. Use bar graphs and point and figure graphs of major market indices for Step 1.
2. Select stocks in line with the trend.In an uptrend, select stocks that are stronger than the market. For example, look for stocks that show higher percentage increases than the market during rallies and smaller declines during reactions. In a downtrend, do the opposite: pick stocks that are weaker than the market. If you are not sure about a specific problem, leave it and move on to the next one. Use individual stock bar charts to compare against the most relevant market index for Step 2.
3. Select actions with a "cause" equal to or greater than your minimum objective.A critical component of Wyckoff's trade selection and management was his unique method of identifying price targets using point and figure (P&F) projections for long and short trades. In Wyckoff's fundamental law of "Cause and Effect", the horizontal P&F count within a trading range represents the cause, while the subsequent price movement represents the effect. Therefore, if you plan to take long positions, choose stocks that are accumulating or reaccumulating and that have accumulated enough cause to satisfy your target. Step 3 is based on the use of dot plots and individual stock figures.
4. Determine the readiness of the actions to move.Apply the nine tests to buy or sell (described below). For example, in a trading range after a prolonged rally, does the evidence from the nine short tests suggest that significant supply is entering the market and that a short position can be justified? Or in an apparent accumulation trading range, does the nine test buys indicate that the bid has been successfully absorbed, as evidenced by a low volume spring and an even lower volume test of that spring? Use bar graphs and point graphs and individual stock figures for Step 4.
5. Time your commitment to a swing in the stock index.Three quarters or more of individual issues move in unison with the general market, so you increase the chances of a successful trade by having the power of the general market behind you. Wyckoff's specific principles help you anticipate potential changes in the market, including a change in the character of price action (such as the largest bearish bar on highest volume after a prolonged uptrend), as well as rallies of Wyckoff's three laws (see below). Put your stop loss in place and then trail, as appropriate, until you close the position. Use bar and point graphs and figures for Step 5.
Wyckoff's "composite man"
Wyckoff proposed a heuristic device to help understand price movements in individual stocks and the market as a whole, which he called the "Compound Man."
“…all the fluctuations in the market and in all the various actions must be studied as if they were the result of the operations of a single man. Let's call him Compound Man, who, in theory, stays behind the scenes and manipulates actions to his detriment if you don't understand the game while he's playing it; and for your great benefit, if you understand it.(The Richard D. Wyckoff Course in Science and Technique of the Stock Market, section 9, p. 1-2)
Wyckoff advised retailers to try to play the market game the way Composite Man played it. In fact, he went so far as to state that it doesn't matter whether market movements “are real or artificial; that is, the result of actual buying and selling by the public and bona fide investors or artificial buying and selling by larger operators.” 🇧🇷Richard D. Wyckoff's method of trading and investing in stocks, section 9M, p. two)
Based on his years of observing the market activities of major operators, Wyckoff taught that:
Compound Man carefully plans, executes and concludes his campaigns.
Compound Man lures the public into buying a stock in which he has already amassed a sizable line of shares by making many transactions involving a large number of shares, in effect, advertising his shares by creating the appearance of a "broad market."
Individual stock charts should be studied with a view to judging the behavior of the stock and the motives of the big traders who dominate it.
With study and practice, one can acquire the ability to interpret the motives behind the action that a graph represents. Wyckoff and his associates believed that if one could understand the behavior of the Composite Man market, one could identify many business and investment opportunities early enough to take advantage of them.
Wyckoff Price Cycle
According to Wyckoff, the market can be understood and anticipated through a detailed analysis of supply and demand, which can be verified from the study of price action, volume, and time. As a broker, he was in a position to observe the activities of highly successful individuals and groups who were proficient in specific subjects; consequently, he was able to decipher, through the use of what he called vertical graphs (bars) and figures (dots and figures), the future intentions of these great interests. An idealized schematic of how he conceptualized the preparation of large interests and the execution of bull and bear markets is represented in the following figure. The time to enter long orders is at the end of the preparation for a price markup or bull market (accumulation of large stock lines), while the time to initiate short positions is at the end of the preparation for a price markup.
Wyckoff's three laws
Wyckoff's graph-based methodology is based on three fundamental "laws" that affect many aspects of analysis. This includes determining the current and potential future directional bias of the market and individual stocks, selecting the best stocks to trade long or short, identifying a stock's readiness to break out of a trading range, and projecting price targets in a trading range. trend from behavior. of a stock in a trading range. These laws inform the analysis of each chart and the selection of each stock to trade.
1. The law of supply and demand determines the direction of the price.This principle is fundamental to the Wyckoff method of trading and investing. When the demand is greater than the supply, prices go up, and when the supply is greater than the demand, prices go down. The trader/analyst can study the balance between supply and demand by comparing price and volume bars over time. This law is deceptively simple, but learning to accurately measure supply and demand on bar charts, as well as understanding the implications of supply and demand patterns, takes a lot of practice.
2. The law of cause and effecthelps the trader and investor set price targets by gauging the potential range of a trend emerging from a trading range. Wyckoff's "cause" can be measured by counting the horizontal points on a point and figure chart, while the "effect" is the distance price movements corresponding to the point count. The operation of this law can be viewed as the force of accumulation or distribution within a trading range, as well as how that force works in a subsequent trend or moves up or down. Point and figure chart counts are used to measure a cause and project the extent of its effect. (See the "Dot and Shape Counting Guide" below for an illustration of this law.)
3. The Law of Effortversus result provides an early warning of a possible trend change in the near future. Divergences between volume and price usually signal a change in the direction of the price trend. For example, when there are several high volume (high effort) but narrow range price bars after a substantial rally, and the price fails to make a new high (little or no result), this suggests that large interests are unloading. actions in anticipation of a change in trend.
Trading Range Analysis
One goal of the Wyckoff method is to improve market timing by establishing a position in anticipation of an upcoming move where there is a favorable reward/risk ratio. Trading Ranges (TR) are places where the previous trend (up or down) has stopped and there is a relative balance between supply and demand. Institutions and other major professional interests prepare for their next bullish (or bearish) campaign as they accumulate (or distribute) shares within the TR. In accumulation and distribution TRs, Compound Man is actively buying and selling; the difference is that in accumulation, shares purchased outnumber shares sold, while in distribution the opposite is true. The degree of accumulation or distribution determines the cause that develops in the subsequent movement out of the TR.
A successful Wyckoff analyst must be able to correctly anticipate and judge the direction and magnitude of a TR output. Fortunately, Wyckoff offers proven guidelines for identifying and delineating the phases and events within a TR, which in turn provide the basis for estimating subsequent trend price targets. These concepts are illustrated in the following four schemes; two representing common variants of accumulation TR, followed by two examples of distribution TR.
Accumulation: Wyckoff Events
PS: preliminary support, where substantial buying begins to provide pronounced support after a prolonged move lower. Volume is increasing and the price spread is widening, indicating that the move lower may be coming to an end.
SC - sales climax, the point at which spread expansion and selling pressure typically reach their climax and public panic or sell-offs are being absorbed by larger professional interests at or near the bottom. Often the price will close very low on a SC, reflecting the buying of these large interests.
AR—meeting of records, which is because the intense selling pressure has largely subsided. A shopping spree easily pushes prices up; this is further boosted by short coverage. The high of this high will help define the upper limit of a TR accumulation.
ST: secondary test, where the price revisits the SC area to test the supply/demand balance at these levels. If a bottom is to be confirmed, the volume-price spread should narrow significantly as the market approaches support in the SC area. It is common to have multiple STs after a SC.
Observation: springs or jerksThey typically occur at the end of a TR and allow dominant stock players to make a definitive test of available supply before a markup campaign unfolds. A "spring" takes the price below the TR minimum and then reverses to close within the TR; This action allows big interests to mislead the public about the future direction of the trend and buy additional shares at bargain prices. A terminal concussion at the end of a TR build is like a spring on steroids. Shakes can also occur once a price advance has begun, with a rapid move lower intended to induce retail traders and long investors to sell their shares to large traders. However, springs and terminal dampers are not required: Stackup Diagram 1 represents a spring, while Stackup Diagram 2 shows an unsprung TR.
Proof—Large traders always test the supply market throughout a TR (eg ST and Springs) and at key points during a price advance. If a sizable supply emerges on a test, the market is generally not ready to be marked. A spring is usually followed by one or more tests; a successful test (indicating that more price increases will follow) usually generates a higher low on lower volume.
SOS: strength signal, a price advance over the ever-increasing spread, and relatively higher volume. Often an SOS occurs after a spring, which validates the analyst's interpretation of that prior action.
LPS: Last Stand, the lowest point of a reaction or recoil after an SOS. Backing up to LPS means a retracement to support that was previously resistance, with both spread and volume down. In some charts, there may be more than one LPS, despite the ostensibly singular precision of that term.
BU—“backup”🇧🇷 This term is shorthand for a colorful metaphor coined by Robert Evans, one of the leading teachers of the Wyckoff method from the 1930s to the 1960s. Evans likened the SOS to "jumping across the stream" of price resistance, and the "retracement". up the creek” represented both short-term profit-taking and a further supply test around the resistance area. A reversal is a common structural element that precedes a more substantial price range and can take many forms, including a simple pullback or a new TR at a higher level.
Accumulation: Wyckoff Phases
Fase A:Phase A marks the stop of the previous downtrend. Up to this point, supply has been dominant. The approaching supply decline is evidenced by preliminary support (PS) and selling climax (SC). These events are often very obvious on bar charts, where ever-increasing expansion and high volume represent the transfer of large amounts of shares from the public to large professional interests. Once these intense selling pressures have eased, an automatic rally (AR) typically ensues, consisting of both institutional demand for shares and short covering. A successful secondary test (ST) in the SC area will show less selling than before and a spread tightening and volume decline, typically stopping at or above the same price level. If ST falls below SC, new lows or prolonged consolidation can be anticipated. The minima of SC and ST and the maxima of AR define the limits of TR. Horizontal lines can be drawn to help focus attention on market behavior, as seen in the two accumulation schemes above.
Sometimes the downtrend can end less dramatically without reaching the climax of price action and volume. In general though, it's preferable to watch PS, SC, AR, and ST as they provide not only a more defined chart picture, but a clear indication that the big traders have definitely started piling up.
In a reaccumulation TR (occurring during a long-term uptrend), the points representing PS, SC, and ST are not evident in Phase A. Instead, in these cases, Phase A resembles that shown seen more typically in the distribution (see below). ). Phases B-E are generally shorter in duration and smaller in amplitude than, but similar to, the primary accumulation base.
Fase B:In Wyckoff's analysis, Phase B has the function of "building the cause" for a new uptrend (see Wyckoff's Law #2: "Cause and Effect"). In Phase B, institutions and large professional interests are hoarding shares at relatively low prices in anticipation of the next markup. The institutional buildup process can take a long time (sometimes a year or more) and involves buying stocks at lower prices and monitoring price advances with short sales. There are usually multiple STs during Phase B, as well as push-up type actions at the high end of the TR. In general, large interests are net buyers of shares as the TR evolves, with the goal of acquiring as much of the remaining floating supply as possible. Institutional buying and selling conveys the characteristic high and low price action of the trading range.
At the start of Phase B, price swings tend to be wide and accompanied by high volume. However, as the professionals absorb the supply, the volume on shortfalls in the TR tends to decrease. When it appears that supplies have probably run out, stocks are ready for Phase C.
Fase C:It is in Phase C that the share price is put through a litmus test of remaining supply, allowing “smart money” traders to see if the stock is ready to be downgraded. As noted above, a spring is a price movement below the TR support level (established in Phases A and B) that quickly returns to the TR. It is an example of a bear trap because the drop below the support seems to indicate a resumption of the downtrend. In reality, however, this marks the beginning of a new uptrend, trapping the last few bears. In the Wyckoff method, a successful bid test represented by a spring (or concussion) provides a high probability trading opportunity. A low volume spring (or low volume test of a jolt) indicates that the stock is likely ready to move higher, so this is a good time to initiate at least a partial long position.
The appearance of an SOS shortly after a spring or concussion validates the analysis. However, as indicated in buildup schematic #2, the power test can occur higher up the TR without a spring or oscillation; when this occurs, identifying Phase C can be challenging.
Phase D:If we are correct in our analysis, what should happen is the continued dominance of demand over supply. This is evidenced by a pattern of advances (SOS) on widening price spreads and increasing volume, as well as reactions (LPS) on tighter spreads and decreasing volumes. During Phase D, the price will move at least to the top of the TR. LPS at this stage are generally great places to start or add profitable long positions.
Phase E:In Phase E, inventory leaves the TR, demand is under full control, and the profit margin is obvious to everyone. Setbacks, such as tremors and more typical reactions, are usually short-lived. New, higher-level TRs, which comprise both the taking of profit and the acquisition of additional shares ("reaccumulation") by large traders, can occur at any point in Phase E. These TRs are sometimes referred to as "rungs." " in the path. to even higher levels of price targets.
Distribution: Wyckoff Events
PSY: preliminary supply, where large interests begin to unload shares in quantity after a pronounced upward movement. Volume expands and the price spread widens, indicating that a trend reversal may be approaching.
BC - buying climax, during which there are often sharp increases in volume and price spread. The buying force reaches a climax, with strong or urgent purchases by the public that are occupied by professional interests at prices close to the maximum. A BC usually coincides with a big earnings report or other good news, as big traders require a lot of public demand to sell their shares without depressing the share price.
AR—automatic reaction🇧🇷 With the intense buying subsiding substantially after the BC and the continuation of the great supply, an AR occurs. The minimum of this settlement helps define the lower bound of the TR distribution.
ST: secondary test, where the price revisits the BC area to test the balance between supply and demand at these price levels. For a cap to be confirmed, supply must exceed demand; therefore, volume and margin should decrease as the price approaches the BC resistance area. An ST can take the form of a bullish momentum (UT), in which price moves above the resistance represented by the BC and possibly other STs before quickly reversing to close below resistance. After a UT, the price usually tests the lower limit of the TR.
SOW—sign of weakness, observable as a movement below (or slightly beyond) the lower limit of the TR, which usually occurs with increasing margin and volume. The AR and initial SOW(s) indicate a change in character in the stock price action: the offering is now dominant.
LPSY: last refueling point🇧🇷 After testing support in a SOW, a weak rally in the tight spread shows that the market is having considerable difficulty moving forward. This inability to recover could be due to weak demand, substantial supply, or both. LPSYs represent drying up in demand and the last waves of distribution from major carriers before downgrading begins in earnest.
UTAD — momentum after distribution.A UTAD is the distributive counterpart of the spring and terminal jolt in the TR accumulation. It occurs in the late stages of the TR and provides a definitive test of new demand after a break above the TR resistance. Analogous to springs and jerks, a UTAD is not a necessary structural element: the TR in Layout Scheme #1 contains a UTAD, while the TR in Layout Scheme #2 does not.
Distribution: Wyckoff Phases
Fase A:Phase A in a TR distribution marks the stop of the previous uptrend. Up to this point, demand has been dominant and the first significant evidence of a supply entering the market is provided by the preliminary offer (PSY) and the buying climax (BC). These events are often followed by an Automatic Reaction (AR) and a Secondary Test (ST) of the BC, often at a reduced volume. However, the uptrend could also end without climactic action, instead demonstrating depleting demand with declining span and volume; less bullish progress is made on each rally before a significant bid appears.
In a TR redistribution within a larger downtrend, Phase A may look more like the start of a TR accumulation (for example, with climatic downward price and volume action). However, phases B through E of a TR redistribution can be analyzed similarly to the TR distribution at the top of the market.
Fase B:The role of Phase B is to build cause in preparation for a new downtrend. During this period, institutions and big professional interests are dumping their long stocks and going short in anticipation of the next downgrade. The points about Phase B in the distribution are similar to those made for Phase B in the accumulation, except that the large interests are net sellers of shares as the TR evolves, with the goal of depleting as much of the supply as possible. remaining demand. This process leaves indications that the supply/demand balance has been tilted towards supply and not towards demand. For example, SOWs are often accompanied by significantly higher margin and volume on the downside.
Fase C:In distribution, Phase C can be revealed through a push up (UT) or UTAD. As noted above, a UT is the opposite of a spring. It is a price move above TR resistance that quickly reverses and closes at TR. This is proof of the remaining lawsuit. It is also a bull trap: it appears to signal the resumption of the uptrend, but is actually intended to "mislead" uninformed breakout traders. A UT or UTAD allows large interests to mislead the public about the direction of the future trend and subsequently sell additional shares at high prices to such traders and investors before the downgrade begins. In addition, a UTAD can induce smaller traders in short positions to cover and surrender their shares to the larger interests that spawned this move.
Aggressive traders may want to initiate short positions after a UT or UTAD. The risk/benefit ratio is usually quite favourable. However, “smart money” repeatedly stops traders initiating these shorts with one UT after another, so it is safer to wait until Phase D and an LPSY.
Often the demand is so weak in a TR distribution that the price does not reach the initial BC or ST level. In this case, the Phase C demand test can be represented by a UT from a lower maximum within the TR.
Phase D:Phase D comes after the Phase C tests show us the last gasps of the lawsuit. During Phase D, the price travels towards or through the TR support. Evidence that the bid is clearly dominant increases with a clear break of support or a drop below the TR midpoint after a UT or UTAD. There are often several weak rallies in Phase D; these LPSYs represent excellent opportunities to initiate or add profitable short positions. Anyone still in a long position during Phase D is asking for trouble.
Phase E:Phase E describes the development of the downtrend; the stock leaves the TR and the supply is under control. Once TR support breaks into a large SOW, that breakout is often tested with a rally that fails at or near support. This also represents a high probability opportunity to sell short. Subsequent rallies during the downgrade are generally poor. Traders who have taken short positions can track their stops as prices fall. After a significant downward move, weather action can signal the start of TR redistribution or accumulation.
Supply and demand analysis
Analysis of supply and demand in bar charts, by examining volume and price movements, represents one of the central pillars of the Wyckoff method. For example, a wide-range price bar, closing well above previous bars and accompanied by above-average volume, suggests the presence of demand. Also, a high volume price bar with a wide spread, which closes at a low well below the lows of previous bars, suggests the presence of supply. These simple examples belie the extent of the subtleties and nuances of such an analysis. For example, labeling and understanding the implications of Wyckoff events and phases on trading ranges, as well as determining when the price is ready to move higher or lower in price, relies heavily on correctly assessing supply and demand.
Wyckoff's first and third laws described above (supply vs. demand and effort vs. result) embody this central approach. The conventional wisdom of much technical analysis (and basic economics) accepts one of the obvious insights from the law of supply and demand: when the demand to buy shares exceeds the sell orders at any given time, the price it will advance to a level where demand will decrease and/or supply increases to create a new (transitory) equilibrium. The converse is also true: when sell (supply) orders exceed buy (ask) orders at any time, equilibrium will (temporarily) be restored by a price drop to a level where supply and demand are equal. in equilibrium.
Wyckoff's Third Law (Effort vs. Result) involves identifying price-volume convergences and divergences to anticipate potential turning points in price trends. For example, when volume (effort) and price (result) increase substantially, they are in harmony, suggesting that demand is likely to continue driving the price up. In some cases, however, the volume may increase, possibly even substantially, but the price is not sustained, producing only a marginal change at close. If we observe this price-volume behavior in reaction to support in an accumulation range, this indicates supply absorption due to high interest rates, and is considered bullish. Likewise, high volume on a rally with minimal price advance in a distribution trading range demonstrates the inability of a stock to rise due to the presence of significant supply, including from large institutions. Various reactions in the AAPL chart below illustrate the Law of Effort versus Result.
In this AAPL chart, we can see the Effort versus Result principle in three price reactions. In the first, we see prices fall for several wide-spectrum bars and volume rises. This suggests a harmony between the volume (Effort) and the fall in price (Result). In the second reaction, the price falls by a similar amount to Reaction #1, but with tighter spreads and lower volume, indicating limited supply, which in turn suggests the potential for at least a rally to short term. In Reaction #3, the size of the swing decreases but the volume increases. That is, the Effort increases while the Result decreases, showing the presence of large buyers absorbing the offer in anticipation of the continuation of the rally.
Comparative strength analysis
Wyckoff's stock selection process has always included a comparative strength analysis. To identify candidates for long positions, he looked for stocks or sectors that outperformed the market, both during trends and within trading ranges, while with short positions he looked for underperformers. All of his graphs, including bar, point, and figure graphs, were drawn by hand. Therefore, he conducted his comparative strength analysis between a stock and the market, or between a stock and others in its industry, by placing one chart below the other, as in the example below. Wyckoff compared successive waves or oscillations on each chart, examining the strength or weakness of each relative to previous waves on the same chart and the corresponding points on the comparison chart. A variation on this approach is to identify significant highs and lows and note them on both charts. You can then gauge the strength of the stock by comparing its price to previous highs or lows and doing the same on the comparison chart.
In these charts of the AAPL and the NASDAQ Composite Index ($COMPX), AAPL is making a lower high at point #3 (relative to point #1), while $COMPX is making a lower high at point #1. highest maximum at that point. This shows that AAPL is underperforming the market at point #3. The picture changes in February: AAPL is starting to outperform the market, making a higher high at point 5 and a higher low at point 6 versus the market, which is making a lower high at point 5 and a lower low at point 5. low in #6. In his stock selection, Wyckoff would choose stocks that show similar strength relative to the market, assuming these candidates also meet other criteria, as discussed in the Nine Tests to Buy/ sale below.
Modern Wyckoff practitioners can use the relative strength relationship between a stock and a market proxy to compare points of strength and weakness. In fact, using the Relative Strength Ratio can more easily eliminate possible inaccuracies due to the existence of different price ranges between a stock and its relevant market index.
Nine buy/sell tests
While Wyckoff's three laws provide a general foundation for Wyckoff's method, the nine buy and sell tests are a more limited set of specific principles to help guide entry into a trade. These tests help delineate when a trading range is coming to an end and a new uptrend (recharge) or downtrend (recharge) is about to begin. That is, the nine tests define the line of least resistance of the market. Below is a list of the nine buy tests and the nine sell tests, including references to which type of chart to use.
Wyckoff Purchase Tests for Accumulation
Negative Price Target Achieved - P&F Chart
Preliminary Support, Selling Climax, Minor Test - Bar Charts and P&F
Bullish Activity (Volume increases on rallies and decreases during reactions) – Bar Chart
Step Down Broken (i.e. Supply Line or Downtrend Line Penetrated): Bar Chart or P&F
Higher lows - bar chart or P&F
Highest Highs - Bar Chart or P&F
Stocks stronger than the market (ie stocks more receptive to rallies and more resistant to reactions than the market index) - Bar Chart(Video) A Wyckoff Review of 2022 | Bruce Fraser | Power Charting (12.09.22)
Base Formation (Horizontal Price Line) – Bar Chart or P&F
Estimated profit potential is at least three times the loss if the initial stop-loss were hit: P&F and bar charts
Wyckoff sales tests for distribution
Positive target achieved - P&F chart
Bearish Activity (Volume decreases on rallies and increases on reactions) - Bar Charts and P&F
Preliminary Supply, Buy Climax - Bar Charts and P&F
Stocks weaker than the market (ie, more sensitive than the market to reactions and slower to rise) - Bar Chart
Bullish Step Broken (i.e. Support Line or Uptrend Line Penetrated): Bar Chart or P&F
Lower highs - bar chart or P&F
Lower Lows: Bar Chart or P&F
Cup formation (lateral movement) - P&F chart
The estimated negative profit potential is at least three times the risk if the initial stop order is hit: P&F and bar charts
(Adapted from Pruden H (2007) The Three Skills of Top Trading. Hoboken, NJ: John Wiley & Sons, Inc.; pp. 136-37)
The following chart from AAPL illustrates buy tests 2 through 8.
The downtrend in this AAPL example concludes with Preliminary Support (PS), a Selling Climax (SC), an Auto Rally (AR) and a Minor Test (ST), all of which combine to satisfy Test #2. Volume contracts throughout the trading range and prices begin to make higher highs and lows; this shows a decrease and absorption of supply and the ease of upward movement despite the fall in demand. Once the supply is exhausted, the price may rise with less demand than expected. Such activity is optimistic and satisfies Test #3. Downtrend and downtrend channel broke and price consolidated in trading range – Test #4 met. In Feb-April 2009, AAPL makes higher highs and lows, all of which are stronger than the market. This satisfies tests #5, 6 and 7. The stock has spent six months consolidating and has created sufficient cause for a substantial advance going forward. The foundation is in place, satisfying Test #8.
Please note that tests #1 and #9 can only be met by using P&F charts. Guidelines for horizontal counting in a consolidation are discussed in the next section of this article.
Wyckoff's Figure and Point Counting Guide (P&F)
Wyckoff has developed an exceptionally effective method of identifying price targets for long and short trades using point and figure (P&F) charts. This method incorporates Wyckoff's fundamental law of cause and effect, where the horizontal P&F count within a trading range represents the Cause and the subsequent price movement outside the trading range represents the Effect.
Wyckoff's Counting Guide shows the trader how to calculate the cumulative cause during a trading range in order to project future target prices. The process consists of the following:
Use a bar chart and a P&F chart that span the same trading ranges and periods.
Choose an appropriate box size for the P&F chart: for example, for low-priced stocks, the box size can be 0.5 to 1 point, while for high-priced stocks (>$200), a box size more than 5 points would be more appropriate. The box size for the Dow Jones Industrial Average can be 100 points.
After identifying a signal of strength (SOS) on the right side of the TR on the bar chart, locate the last point where support was found in a reaction: the last point of support (LPS). Locate this point on your P&F chart as well and count from right to left at the LPS price level, making your most conservative count first and moving further to the left as the move progresses. These count increments must be based on the phases corresponding to specific Wyckoff events within the TR.
Moving to the left, rotate the bar graph and divide the accumulation area into phases, adding one entire phase at a time. Note that the P&F phases are NOT the same as Phases A – E used in the analysis of trading ranges described in the sections on Accumulation and Distribution above. Never add just part of a P&F phase to your account. Volume and price action usually shows where the phase started and ended. For example, the first phase might consist of counting P&F from LPS to spring, while the second phase covers counting from spring to a clearly defined ST.
In the case of a long-term count involving multiple P&F phases, the LPS typically appears at the original preliminary support level or SC. When LPS occurs at any of these levels, it tends to validate the count.
A spring can also serve as an LPS from a P&F count standpoint. Normally, a spring is followed by an SOS, and the minimum of the reaction that follows that SOS is also a valid LPS.
As the trend progresses, you will often see price consolidation or the formation of a new trading range at a higher (or, in a downtrend, lower) level. This will often produce a "springboard confirmation count" of the original P&F count. So, as the new TR forms, you can often get a time stamp by watching the action of the stock as the potential count begins to confirm the original count. In other words, as the price target projected from the TR springboard approaches the original TR, the uptrend or downtrend may be ready to resume.
Since price swings within these springboard trading ranges are typically narrower than within the primary accumulation or distribution TRs, it is preferable to use a smaller box size to measure P&F counts within the former. For example, long-term counts on three- and five-point charts are often confirmed by subsequent secondary counts using a one-point reaccumulation TR chart.
For long-term price targets, you should add the P&F count to the exact low of the trading range where the count is measured, as well as to the midpoint between the low and the price level of the count line. Therefore, it will use the most conservative counts as a guide to estimate more realistic minimum price targets.
Price targets derived from Wyckoff P&F counts represent points where you should "stop, look and listen." These targets should never be seen as exact points from which a trend will change; instead use them as projected points where a twist can occur. Additionally, you can use the bar chart to watch price action and volume as they approach these points.
In the case of three or five point plots, the same count line should be used for the one point plots.
Below is an example of a horizontal springboard P&F count for the Dow Jones Industrial Average (DJIA). The size of the box is 100 points with 3 box investments. So, to calculate price targets, calculate the number of columns at the count line level, multiply that sum by 100 (the box size) and 3 (the reversal metric) and add this product to the count line (obtaining the maximum price). target), the low of the trading range (lower price target), and the midpoint. Maximum P&F targets for the DJIA project consolidation and potential halt action around the target areas.
The pioneering work of Richard D. Wyckoff in the early 20th century centered on the understanding that stock price trends were primarily driven by institutions and other large traders manipulating stock prices in their favor. Many professional traders today use the Wyckoff method, but his general approach is still not widely followed among retail traders, although his educational efforts are aimed at teaching the public the "real rules of the game". However, his stock selection and investing methodology has withstood the test of time, in large part due to his comprehensive, systematized, and logical framework for identifying high-probability, highly-profitable trades. The discipline involved in this approach allows the trader to make informed and emotionless trading decisions. Using the Wyckoff method, one can invest in stocks by capitalizing on the intentions of big “smart money” interests, rather than getting caught up on the wrong side of the market. Becoming proficient in Wyckoff analysis requires considerable practice, but it is well worth the effort.
About the Author
This article was written by Roman Bogomazov and Michael Lipsett, and the schematics were created by Roman Bogomazov and edited by the late Dr. Henry O. ("Hank") Pruden. Roman is a trader and educator specializing in the Wyckoff Method of trading and investing, which he has taught for more than a dozen years as an adjunct professor at Golden Gate University and as a principal online instructor atwyckoffanalytics.com🇧🇷 For more information on the Wyckoff Method and Roman courses and regular market updates follow him onGorethe visitwyckoffanalytics.com.