WYCKOFF
METHOD
VOLUME 1
BACKGROUND
QUANTUM STONE
CAPITAL
TABLE OF CONTENTS
1
INTRODUCTION
2
WHO WAS RICHARD WYCKOFF?
3
SUMMARY
1
IN T R OD U C T ION
Welcome to the Wyckoff Method. Our goal of this
educational material is to take you on a journey of
exploration to discover what Wyckoff Method is, how it
is used and why we implement Wyckoff analysis in our
trading.
Price action viewed through eyes of Institutional traders
is powerful technique to analyze charts. It helps us to
find the best price levels to enter trades. We found that
adding Wyckoff schematics to our already profitable
chart analysis has even increased the probability of
recognizing those price levels that have potential of
delivering trades with very high risk reward ratios.
Retail forex industry is flooded with trading strategies
based on never-ending list of indicators and chart
analysis techniques that do not explain why price moves
from or to certain price level. For majority of retail
traders choosing the best method to time and predict
the market movement can be frustrating and confusing.
Same as Wyckoff, we also advocate a return to basics.
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Introduction
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1
Richard Wyckoff is considered to be one of the best
technical analysts in history. Observing the market in
the early 20th century, Richard Wyckoff pioneered a
method of technical analysis that is still widely used by
traders today. The Wyckoff Method is one of the best
blueprints when it comes to picking winning stocks, the
best times to buy them, and the most effective risk
management approach.
Observing price action, Wyckoff ultimately formulated
his theory which identifies key elements in the
development of trends. In his model, these periods are
marked by accumulation and distribution.
You may be asking, “Why should I implement Wyckoff in
my own trading?”. The main reason is, that it will allow
you to recognize upcoming price moves. Once you mark
the end of the accumulation phase, you can expect the
price to move higher and therefore long trades will have
higher probability of working out. And after marking the
distribution phase, price is expected to move lower.
Then you can start looking for short entries.
Introduction
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Some traders who mastered this method and are
trading it in combination with our core strategy, have
been able to position their trade entries with such high
precision that on some trades they managed to achieve
over 1:100 risk reward ratio. This could be possible for
you too.
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Introduction
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2
W H O W A S R IC H A R D
WYCKOFF?
Richard Demille Wyckoff (1873–
1934) was an early 20th-century
pioneer in the technical approach
to studying the stock market. He is
considered one of the five “titans”
of technical analysis, along with
Dow, Gann, Elliott and Merrill. At
age 15, he took a job as a stock
runner for a New York brokerage.
While still in his 20s, he became the head of his own
firm. He also founded and, for nearly two decades,
wrote and edited “The Magazine of Wall Street,” which
at one point, had more than 200,000 subscribers.
Wyckoff was an avid student of the markets, as well as
an active tape reader and trader. He observed the
market activities and campaigns of the legendary stock
operators of his time, including JP Morgan and Jesse
Livermore. From his observations and interviews with
those big-time traders, Wyckoff developed the Wyckoff
Method that codified these traders’ best practices into
laws, principles and techniques of trading methodology,
money management and mental discipline.
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Who Was
Richard Wyckoff?
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Capital
2
From his position, Mr. Wyckoff observed numerous
retail investors being repeatedly fleeced. Consequently,
he dedicated himself to instructing the public about “the
real rules of the game” as played by the large interests,
or “smart money.” In the 1930s, he founded a school
that later became the Stock Market Institute. The
school’s central offering was a course based on Wyckoff
schematics and integrated the concepts that Wyckoff
had learned about how to identify large operators’
accumulation and distribution of stock with how to trade
in harmony with these big players. His time-tested
insights are as valid today as they were when first
articulated.
In these materials we will provide explanation of the
Wyckoff Method and both its theoretical and practical
approaches to the markets, including guidelines for
identifying trade candidates and for entering long and
short positions, analysis of accumulation and
distribution trading ranges.
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Who Was
Richard Wyckoff?
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2
Wyckoff published the first technical analysis method in
1908, and in 1911, he began sending his clients weekly
forecasts, utilising charts with price and volume
movements and his own analysis. Wyckoff was
consistently disagreeing with analysts who were using
charts for buy/sell decisions, he believed, “Stock market
technique is not an exact science. Stock prices are
made in the minds of men.” (We will cover this more
later as he begins to touch on the role of the Composite
Operator.)
In his opinion, purely mathematical or mechanical chart
analysis could not compete with finely developed,
practiced judgement. He often ignored financial reports,
news items, earnings reports, rumors, brokers’ tips, and
was especially scornful of “half-baked trading theories
expounded in boardrooms and popular books on the
stock market.” We think that the more common
reference for the majority of people reading this, would
be if you replaced “rumors and brokers’ tips” with
“Instagram and Twitter.”
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Who Was
Richard Wyckoff?
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2
Wyckoff believed that an analyst should be a detective,
their role is to uncover the forces behind price and
volume fluctuations. He was a market psychologist,
weighing the human motivations that fuel these moves,
and a general who is planning a financial campaign to
intercept stocks when the charts showed they were at
their most profitable stage.
Wyckoff’s popularity as an analyst grew dramatically,
and his newsletters were in huge demand. After over 40
years in the market, he continued to teach a method
based squarely on the law of supply and demand.
“When the demand for a stock exceeds supply, prices
rise; when supply is greater than demand, prices
decline.” He compared the stock market ticker tape to a
movie, saying, “Every minute of the day it is
demonstrating whether supply or demand is greater.”
The Wyckoff Method charts price and volume and their
relationship over time. These are the only things you
need to utilise on your chart, price and volume. You
don’t need anything else.
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Who Was
Richard Wyckoff?
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2
The goal is to judge how the market, groups of stocks,
and individual issues are reacting to the supply and
demand struggle. You are looking for turning points —
the final high of a bull market or the last low in a bear
market. Our approach as Wyckoff analysts is to spot
peaks and troughs of the intermediate moves that
appear in between as well.
The Wyckoff Method is guided by the fact that every
change in the market is made up of waves of buying
and selling that will go on as long as they can attract a
following. When the following is exhausted, that wave
ends and a contrary wave begins. Small daily waves
gradually develop into larger waves, which eventually
build into a bear or bull market swings. If the wave is
significant, Wyckoff acts harmoniously with it.
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Who Was
Richard Wyckoff?
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SUMMARY
Many professional traders use the Wyckoff Method
today because its systematic and logical structure for
identifying high probability market movements. Richard
Wyckoff also established key principles such as trends,
stop loss or take profit. Even almost 100 years later
many traders and investors still use these timeless
concepts.
Although Wyckoff focused exclusively on stocks, The
Wyckoff Method can be applied to any freely traded
market in which large institutional traders operate,
including commodities, bonds, stock indices and
currencies.
There are few aspects of the Wyckoff Method that we
do not plan to utilize because either they are not
applicable to currency trading or would be hard to
implement.
These are:
- Point and Figure charts
- Comparative Strength Analysis
- Nine Buying/Selling Tests
Summary
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In order to provide wholesome explanation and keep
original content authentic, in some sections we'll keep
using stock trading related terminology, but on many
occasions word 'stocks' can be replaced with 'currency
pairs'. Therefore, if you happen to find something
harder to understand, please just push it aside for now
or you can ask us and we will gladly provide more
explanation.
The Wyckoff Method breaks down market selection and
entry into the market in 5 steps. We will cover these in
Volume 2.
Summary
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WYCKOFF
METHOD
VOLUME 2
5-STEP APPROACH
QUANTUM STONE
CAPITAL
TABLE OF CONTENTS
1
DETERMINE TREND BIAS
2
IN HARMONY WITH THE TREND
3
CAUSE THAT EXCEEDS OBJECTIVE
4
5
DETERMINE WHEN TO TRADE
TIMEFRAME
1
D E T E R M I N E TR E ND B IA S
Determine where the market currently sits and project
its future trend. Is the market consolidating or trending?
Does your analysis of market structure, supply and
demand indicate the direction that is likely in the near
future? This is a major thing to consider as without
these factors we are ideally trading a blind range.
This leading onto the reasoning on this being the first
step in the 5-step approach we take to the market. This
assessment should help you to decide whether to be in
the market at all and if so, whether to take long or short
positions.
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Determine
Trend Bias
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IN H A R M ONY W ITH
THE TREND
In an uptrend we would select stocks that are stronger
than the market. For instance, we would choose stocks
that demonstrate greater percentage increases than the
overall stock market during rallies and smaller
decreases during reactions. In a downtrend, the reverse
– stocks that are weaker than the overall stock market.
Look at markets that demonstrate clear trend. In an
uptrend, look at markets that are correctively making
higher highs and higher lows; upon entry we will take
the trade with the trend not against it. In a downtrend,
do the reverse – choose markets that are making lower
highs and lower lows continuously.
In Forex, we do not have equivalent of stock market
index for all currency pairs. Therefore, one option we
have is to use Dollar Index for when we decide to trade
USD/XXX or XXX/USD pairs.
If you are not sure about a specific issue, drop it and
move on to the next one. There is never a point in
trading a market that is not in sync with current
momentum or isn’t in harmony with the trend.
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In Harmony With
the Trend
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C A U S E T H A T E X C E E DS
OBJECTIVE
Select markets with a “cause” that equals or exceeds
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 both long and short
trades.
In Wyckoff's fundamental law of “Cause and Effect,” the
horizontal Point and Figure count within a trading range
represents the cause, while the subsequent price
movement represents the effect.
Therefore, if you are planning to take long positions,
choose markets that are under accumulation or
re-accumulation and have built a sufficient cause to
satisfy your objective. Step 3 relies on the use of Point
and Figure charts of individual markets.
We talk more about the Law of Cause and Effect in
Volume 3.
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Cause That
Exceeds Objective
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DETERMINE WHEN
TO TRADE
Determine the markets that are ready to make a move.
Apply the nine tests for buying or for selling. For
instance, in a trading range after a prolonged rally, does
the evidence from the nine selling tests suggest that
significant supply is entering the market and that a short
position may be warranted?
Or in an apparent accumulation trading range, do the
nine buying tests indicate that supply has been
successfully absorbed, as evidenced further by a lowvolume spring and an even lower-volume test of that
spring?
By understanding this, we can choose from our list of
markets what to trade, and what to stay away
from/avoid for the week ahead.
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Determine When
to Trade
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5
TIMEFRAME
Time your commitment with a turn in the stock market
index (Dollar Index). Regardless of the timeframe, your
Wyckoff bias should move in harmony with the general
market, so you improve the odds of a successful trade
by having the power of the overall market behind it.
Specific Wyckoff principles help you anticipate potential
market turns, including a change of character of price
action (such as the largest down-bar on the highest
volume after a long uptrend), as well as manifestations
of Wyckoff's three laws. Put your stop-loss in place and
then trail it, as appropriate, until you close out the
position.
In Volume 3 we will discuss 3 Wyckoff Laws.
Timeframe
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WYCKOFF
METHOD
VOLUME 3
3 WYCKOFF LAWS
QUANTUM STONE
CAPITAL
TABLE OF CONTENTS
1
INTRODUCTION
2
THE LAW OF SUPPLY AND DEMAND
3
THE LAW OF CAUSE AND EFFECT
4
THE LAW OF EFFORT VERSUS RESULT
1
IN T R OD U C T ION
Wyckoff's chart-based methodology rests on three
fundamental “laws” that affect many aspects of analysis.
These include determining the market's current and
potential future directional bias, selecting the best
markets to trade long or short, identifying the readiness
of a market to leave a trading range and projecting price
targets in a trend from a market’s behavior in a trading
range.
These laws inform the analysis of every chart and the
selection of every market to trade.
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Introduction
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2
T H E L A W OF S U P P L Y
AND DEMAND
This is the most rudimentary principle of any financial
markets. The law of supply and demand determines the
price direction. This principle is central to Wyckoff's
method of trading and investing.
When demand is greater than
supply, prices rise, and when
supply is greater than demand,
prices fall. And when demand
equals supply, the market is
considered to be in equilibrium
and you will have low market
volatility.
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 evaluate supply and demand on
bar charts, as well as understanding the implications of
supply and demand patterns, takes considerable
practice.
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The Law of Supply
and Demand
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T H E L A W OF C A U S E
AND EFFECT
The law of cause and effect helps the trader and
investor set price objectives by gauging the potential
extent of a trend emerging from a trading range. The
interaction between supply and demand are not
random. Therefore, we will see periods of consolidation
(“cause”), which will lead to periods of expansion
(“effect”). After a phase of accumulation/distribution we
tend to see a trending market.
In essence:
-
phase
phase
phase
phase
of
of
of
of
accumulation will be the cause for an uptrend
distribution will be the cause for a downtrend
re-accumulation will be the cause for an uptrend continuation
re-distribution will be the cause for a downtrend continuation
This law's operation can be seen as the force of
accumulation or distribution within a trading range, as
well as how this force works itself out in a subsequent
trend or movement up or down.
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The Law of
Cause and Effect
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T H E L A W OF E FFOR T
VERSUS RESULT
The law of effort versus result provides an early warning
of a possible change in trend in the near future. It costs
around 10,000 lots worth of trading to move market a
single pip. Therefore, every move in the market takes a
lot of “effort”. The amount of effort being exerted can be
seen in the volume.
Now, when volume and price action are in harmony, we
can anticipate a trend to continue. When they start to
diverge, we can anticipate the trend to either stop or
change. When market is consolidating, but the volume
is high, the effort is not reflected in the price action.
This shows divergence between volume and price
action, which should lead to expansion.
For example, when there are several high-volume (large
effort) but narrow-range price bars after a substantial
rally, with the price failing to make a new high (little or
no result), this suggests that large institutional traders
are ready to exit their long trades in anticipation of a
change in trend.
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The Law of Effort
versus Result
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4
Because forex is OTC (over the counter) market, we
can’t see total volume as we can in the markets that are
exchange-based (e.g. stocks or futures). The volume
data we can see on our trading platform represents
only volume generated by the particular broker we trade
with. Therefore, we need to be careful how much we
rely on volume data.
In Volume 4 we will cover Wyckoff’s ‘Composite Man’.
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The Law of Effort
versus Result
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WYCKOFF
METHOD
VOLUME 4
WYCKOFF'S
'COMPOSITE MAN'
QUANTUM STONE
CAPITAL
TABLE OF CONTENTS
1
WYCKOFF'S 'COMPOSITE MAN'
1
WYCKOFF'S
'C O M P OS I T E M A N'
Wyckoff proposed a heuristic device to help understand
price movements in individual stocks and the market as
a whole, which he dubbed the “Composite Man.”
“…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)
As we know one of Wyckoff’s ideologies was to reveal
the real reasons behind stock price movements. It was
during his inquisition into this that revealed a group of
better informed, more highly skilled investors and
traders, each with various amounts of money and
influence in the market. These titans of trading have the
ability to shape the market and completely control price.
The market is their show, we are simply the ones
playing along to their tune. These are the Composite
Operators.
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Wyckoff's
'Composite Man'
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This is where the theory of smart money is derived from.
“Smart Money” is the Composite Operator and retail
investors are considered to be “Street Money”,
analogous to a game of chess where the Composite
Operator is the grand master who is aware of your next
move. Your job is to stay in the game long enough to
call check mate.
It’s really important to understand the role of the
Composite Operator (CO) in Wyckoff methodology. The
reason being is that the CO is behind all of these
markups and markdowns (according to Wyckoff
anyway). Once we look at the role of the CO, the
movements of Accumulation and Distribution will make
more sense from a Wyckoffian perspective.
The CO is the story of the collective activities of a
number of professional operations occurring at the
same time. Wyckoffians tell the story of their actions
and motives as though they are one giant operator.
Wyckoff used to read tape in order to understand and
reveal the motives of these huge trading operations.
The stock market operations of these traders had
common characteristics cycle after cycle.
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Wyckoff's
'Composite Man'
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The immense scale of their operations allowed the CO
to arrive early in the Accumulation Phase for a stock
and stealthily buy shares. The CO does not want to be
discovered (before they deem it’s time to reveal their
intentions), the aim at the beginning of Accumulation is
to gather as many stocks as possible for the lowest
price. Huge amounts of capital are skilfully and quietly
deployed at bottoms.
Wyckoff concluded that such operations, conducted on
a large scale, would result in the chosen stocks rallying
dynamically after the accumulation phase. These
targeted stocks would move further, faster and longer
than other stocks. These were the stocks worth owning.
We also see the flip-side of this in distribution structures
where the CO is operating to sell stocks at the highest
possible price before commencing a markdown process.
During this process the CO is distributing stocks at the
top price points and trying to maintain price before
revealing their intentions and letting the markdown
occur.
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Wyckoff's
'Composite Man'
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It’s a war-zone out there, super-traders are battling with
other super-traders for the most desirable stocks (and
those that the COs have finished with.) Secrecy in the
conducting of a campaign is critical. The activities of
these large competing super-traders became the focus
of Wyckoff’s analysis. Through years of research he
began to see their operations in the charts. Their
actions could be completed with Sam Fisher stealth, but
their footprints were seen all over the charts. They
could not hide from Wyckoffian analysts who could see
this evidence in two key areas, price and volume.
Composite Operators demonstrate skills and abilities
in their campaigns that are not evident in most traders
— they also have the capital to shape the market.
Wyckoff was determined to become like them in thought
and action, and he did. If you can’t beat them, why not
join them? The birth of the Wyckoff Method stemmed
from this motivation, understand what the “big boys” are
doing and follow in their path. By repeatedly telling the
story of the CO on the charts, it is possible to begin to
think and act in unison.
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Wyckoff's
'Composite Man'
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When you break it all down, what Wyckoff was saying,
is the following:
The CO is accumulating or distributing stock, I want to
analyse their footprint so that I am taking the same
trades that they are. If the stock is being accumulated, I
want to be buying. If the stock is being distributed, I
want to be selling. By understanding this and analysing
footprints on the charts, I can begin shaping my trades
and positions to ensure I am in the same position as
them (all be it with far less capital.)
Wyckoff advised retail traders to try to play the market
game as the Composite Man played it. In fact, he even
claimed that it doesn't matter if market moves “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.” (The Richard D.
Wyckoff Method of Trading and Investing in Stocks,
section 9M, p. 2)
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Wyckoff's
'Composite Man'
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Based on his years of observations of the market
activities of large operators, Wyckoff taught that:
- The Composite Man carefully plans, executes and concludes
his campaigns.
- The Composite Man attracts the public to buy a stock in
which he has already accumulated a sizeable line of shares by
making many transactions involving a large number of shares,
in effect advertising his stock by creating the appearance of a
“broad market.”
- One must study individual stock charts with the purpose of
judging the behavior of the stock and the motives of those
large operators who dominate it.
- With study and practice, one can acquire the ability to
interpret the motives behind the action that a chart portrays.
Wyckoff and his associates believed that if one could
understand the market behavior of the Composite Man, one
could identify many trading and investment opportunities early
enough to profit from them.
Accumulation and Distribution schematics are two areas
that allow us to track the CO footprint in the charts and
distinguish their intentions.
In Volume 5, we are going to look at the Price Cycle as
described by Richard Wyckoff.
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Wyckoff's
'Composite Man'
Quantum Stone
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WYCKOFF
METHOD
VOLUME 5
WYCKOFF PRICE CYCLE
QUANTUM STONE
CAPITAL
TABLE OF CONTENTS
1
WYCKOFF PRICE CYCLE
2
ANALYSIS OF TRADING RANGES
3
WYCKOFF SCHEMATICS
1
WYCKOFF PRICE CYCLE
According to Wyckoff, the market can be understood
and anticipated through detailed analysis of supply and
demand, which can be ascertained from studying price
action, volume and time.
As a broker, he was in a position to observe the
activities of highly successful individuals and groups
who dominated specific issues; consequently, he was
able to decipher, via the use of what he called vertical
(bar) and figure (Point and Figure) charts, the future
intentions of those large interests.
An idealized schematic of how he conceptualized the
large interests' preparation for and execution of bull and
bear markets is depicted in the figure below. The time to
enter long orders is towards the end of the preparation
for a price markup or bull market (accumulation of large
lines of stock), while the time to initiate short positions
is at the end of the preparation for price markdown.
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Wyckoff
Price Cycle
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WYCKOFF PRICE CYCLE
Simplified representation of Wyckoff Price Cycle
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Wyckoff
Price Cycle
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A N A L Y S I S OF T R A DING
RANGES
One objective of the Wyckoff method is to improve
market timing when establishing a position in
anticipation of a coming move where a favorable
reward/risk ratio exists. Trading ranges (TRs) are
places where the previous trend (up or down) has been
halted and there is relative equilibrium between supply
and demand.
Institutions and other large professional interests
prepare for their next bull (or bear) campaign as they
accumulate (or distribute) shares within the TR. In both
accumulation and distribution TRs, the Composite Man
is actively buying and selling - the difference being that,
in accumulation, the shares purchased outnumber those
sold while, in distribution, the opposite is true. The
extent of accumulation or distribution determines the
cause that unfolds in the subsequent move out of the
TR.
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Analysis of
Trading Ranges
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W Y C K O F F S C H E M A T IC S
A successful Wyckoff analyst must be able to anticipate
and correctly judge the direction and magnitude of the
move out of a TR. Fortunately, Wyckoff offers timetested guidelines for identifying and delineating the
phases and events within a TR, which, in turn, provide
the basis for estimating price targets in the subsequent
trend.
These concepts are illustrated in the following
schematics:
-
Accumulation Schematic #1
Accumulation Schematic #2
Distribution Schematic #1
Distribution Schematic #2
Re-accumulation Schematic
Re-distribution Schematic
In Volume 6-9, we will dissect each Schematic into
relevant Events and Phases.
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Wyckoff
Schematics
Quantum Stone
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WYCKOFF
METHOD
VOLUME 6
ACCUMULATION
QUANTUM STONE
CAPITAL
TABLE OF CONTENTS
1
INTRODUCTION
2
ACCUMULATION SCHEMATIC #1
3
ACCUMULATION SCHEMATIC #2
1
INTRODUCTION
Accumulation is a very specific process, simply put it is
the process of accumulating an asset at the desired
(usually cheapest) price over a time period.
An accumulation typically stops a downtrend as the
Composite Operator begins the lengthy process of
absorbing shares. This begins with the stopping action
of a Selling Climax (SC). The idea behind accumulation
ranges is that these trendless ranges actually
discourage traders who sell in order to move on to
more active markets. The CO is using this opportunity to
accumulate the relinquished asset.
Introduction
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A C C U M U L A TION
SCHEMATIC #1
This is a common accumulation schematic and it offers
a great visual cue to analyzing any potential ranges.
Schematics are not meant as exact replicas to the way
that the range will play out. Schematics are used to give
a loose structure, it is up to you as the chartist to
interpret and analyze the price action.
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Accumulation
Schematic #1
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PS - preliminary support, where substantial buying
begins to provide pronounced support after a prolonged
down-move. Volume increases and price spread
widens, signaling that the down-move may be
approaching its end.
SC - 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
professional interests at or near a bottom. Often price
will close well off the low in a SC, reflecting the buying
by these large interests.
AR - automatic rally, which occurs because intense
selling pressure has greatly diminished. A wave of
buying easily pushes prices up; this is further fueled by
short covering. The high of this rally will help define the
upper boundary of an accumulation TR.
ST - secondary test, in which price revisits the area of
the SC to test the supply/demand balance at these
levels. If a bottom is to be confirmed, volume and price
spread should be significantly diminished as the market
approaches support in the area of the SC. It is common
to have multiple STs after a SC.
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Test - Large operators always test the market for supply
throughout a TR (e.g., STs and springs) and at key
points during a price advance. If considerable supply
emerges on a test, the market is often not ready to be
marked up. A spring is often followed by one or more
tests; a successful test (indicating that further price
increases will follow) typically makes a higher low on
lesser volume.
SOS - sign of strength, a price advance on increasing
spread and relatively higher volume. Often a SOS takes
place after a spring, validating the analyst’s
interpretation of that prior action.
LPS - last point of support, the low point of a reaction
or pullback after a SOS. Backing up to an LPS means a
pullback to support that was formerly resistance, on
diminished spread and volume. On some charts, there
may be more than one LPS, despite the ostensibly
singular precision of this term.
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BU - “back-up”. This term is short-hand for a colorful
metaphor coined by Robert Evans, one of the leading
teachers of the Wyckoff method from the 1930s to the
1960s. Evans analogized the SOS to a “jump across the
creek” of price resistance, and the “back up to the
creek” represented both short-term profit-taking and a
test for additional supply around the area of resistance.
A back-up is a common structural element preceding a
more substantial price mark-up, and can take on a
variety of forms, including a simple pullback or a new
TR at a higher level.
Note: Springs or shakeouts usually occur late within a TR
and allow the stock’s dominant players to make a definitive test
of available supply before a markup campaign unfolds. A
“spring” takes price below the low of the TR and then reverses
to close within the TR; this action allows large interests to
mislead the public about the future trend direction and to
acquire additional shares at bargain prices. A terminal
shakeout at the end of an accumulation TR is like a spring on
steroids. Shakeouts may also occur once a price advance has
started, with rapid downward movement intended to induce
retail traders and investors in long positions to sell their shares
to large operators. However, springs and terminal shakeouts
are not required elements: Accumulation Schematic 1 depicts a
spring, while Accumulation Schematic 2 shows a TR without a
spring.
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Images below show example of Accumulation #1
first image is zoomed in schematic
second image shows what happened after
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Accumulation
Schematic #1
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A C C U M U L A TION
SCHEMATIC #2
Phase A: Phase A marks the stopping of the prior
downtrend. Up to this point, supply has been dominant.
The approaching diminution of supply is evidenced in
preliminary support (PS) and a selling climax (SC).
These events are often very obvious on bar charts,
where widening spread and heavy volume depict the
transfer of huge numbers of shares from the public to
large professional interests. Once these intense selling
pressures have been relieved, an automatic rally (AR),
consisting of both institutional demand for shares as
well as short-covering, typically ensues.
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A successful secondary test (ST) in the area of the SC
will show less selling than previously and a narrowing of
spread and decreased volume, generally stopping at or
above the same price level as the SC. If the ST goes
lower than that of the SC, one can anticipate either new
lows or prolonged consolidation. The lows of the SC
and the ST and the high of the AR set the boundaries of
the TR. Horizontal lines may be drawn to help focus
attention on market behavior, as seen in the two
Accumulation Schematics above.
Sometimes the downtrend may end less dramatically,
without climactic price and volume action. In general,
however, it is preferable to see the PS, SC, AR and ST,
as these provide not only a more distinct charting
landscape but a clear indication that large operators
have definitively initiated accumulation.
In a re-accumulation TR (which occurs during a longerterm uptrend), the points representing PS, SC and ST
are not evident in Phase A. Rather, in such cases,
Phase A resembles that more typically seen in
distribution (see below).
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Phases B-E generally have a shorter duration and
smaller amplitude than, but are ultimately similar to,
those in the primary accumulation base.
Phase B: In Wyckoffian analysis, Phase B serves the
function of “building a cause” for a new uptrend (see
Wyckoff Law #2 – “Cause and Effect”). In Phase B,
institutions and large professional interests are
accumulating relatively low-priced inventory in
anticipation of the next markup. The process of
institutional accumulation may take a long time
(sometimes a year or more) and involves purchasing
shares at lower prices and checking advances in price
with short sales. There are usually multiple STs during
Phase B, as well as upthrust-type actions at the upper
end of the TR. Overall, the 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 imparts the
characteristic up-and-down price action of the trading
range.
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Accumulation
Schematic #2
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Early on in Phase B, the price swings tend to be wide
and accompanied by high volume. As the professionals
absorb the supply, however, the volume on downswings
within the TR tends to diminish. When it appears that
supply is likely to have been exhausted, the stock is
ready for Phase C.
Phase C: It is in Phase C that the stock price goes
through a decisive test of the remaining supply, allowing
the “smart money” operators to ascertain whether the
stock is ready to be marked up. As noted above, a
spring is a price move below the support level of the TR
(established in Phases A and B) that quickly reverses
and moves back into the TR. It is an example of a bear
trap because the drop below support appears to signal
resumption of the downtrend. In reality, though, this
marks the beginning of a new uptrend, trapping the late
sellers (bears). In Wyckoff's method, a successful test
of supply represented by a spring (or a shakeout)
provides a high-probability trading opportunity. A lowvolume spring (or a low-volume test of a shakeout)
indicates that the stock is likely to be ready to move up,
so this is a good time to initiate at least a partial long
position.
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The appearance of a SOS shortly after a spring or
shakeout validates the analysis. As noted in
Accumulation Schematic #2, however, the testing of
supply can occur higher up in the TR without a spring or
shakeout; when this occurs, the identification of Phase
C can be challenging.
Phase D: If we are correct in our analysis, what should
follow is the consistent dominance of demand over
supply. This is evidenced by a pattern of advances
(SOSs) on widening price spreads and increasing
volume, as well as reactions (LPSs) on smaller spreads
and diminished volumes. During Phase D, the price will
move at least to the top of the TR. LPSs in this phase
are generally excellent places to initiate or add to
profitable long positions.
Phase E: In Phase E, the stock leaves the TR, demand
is in full control and the markup is obvious to everyone.
Setbacks, such as shakeouts and more typical
reactions, are usually short-lived.
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Accumulation
Schematic #2
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New, higher-level TRs comprising both profit-taking and
acquisition of additional shares (“re-accumulation”) by
large operators can occur at any point in Phase E.
These TRs are sometimes called “stepping stones” on
the way to even higher price targets.
Images below show example of Accumulation #2
first image is zoomed in schematic
second image shows what happened after
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Accumulation
Schematic #2
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WYCKOFF
METHOD
VOLUME 7
DISTRIBUTION
QUANTUM STONE
CAPITAL
TABLE OF CONTENTS
1
INTRODUCTION
2
DISTRIBUTION SCHEMATIC #1
3
DISTRIBUTION SCHEMATIC #2
1
INTRODUCTION
As with accumulation, distribution is a very specific
process, simply put it is the process of distributing
(selling) an asset at the desired (best) price over a time
period. This is the direct opposite of accumulation
where the market participants are looking to secure an
asset at the lowest possible cost.
Typically we see periods of distribution after uptrends.
The Composite Operator begins the lengthy process of
distributing shares. This begins with the stopping action
of a Buying Climax (BC).
Introduction
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D IS T R I B U T I ON
SCHEMATIC #1
PSY - preliminary supply, where large interests begin
to unload shares in quantity after a pronounced upmove. Volume expands and price spread widens,
signaling that a change in trend may be approaching.
BC - buying climax, during which there are often
marked increases in volume and price spread. The
force of buying reaches a climax, with heavy or urgent
buying by the public being filled by professional
interests at prices near a top. A BC often coincides with
a great earnings report or other good news, since the
large operators require huge demand from the public to
sell their shares without depressing the stock price.
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Distribution
Schematic #1
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AR—automatic reaction. With intense buying
substantially diminished after the BC and heavy supply
continuing, an AR takes place. The low of this selloff
helps define the lower boundary of the distribution TR.
ST—secondary test, in which price revisits the area of
the BC to test the demand/supply balance at these price
levels. For a top to be confirmed, supply must outweigh
demand; volume and spread should thus decrease as
price approaches the resistance area of the BC. An ST
may take the form of an upthrust (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, price often tests the lower
boundary of the TR.
SOW—sign of weakness, observable 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.
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LPSY—last point of supply. After testing support on a
SOW, a feeble rally on narrow spread shows that the
market is having considerable difficulty advancing. This
inability to rally may be due to weak demand,
substantial supply or both. LPSYs represent exhaustion
of demand and the last waves of large operators’
distribution before markdown begins in earnest.
UTAD—upthrust after distribution. A UTAD is the
distributional counterpart to the spring and terminal
shakeout in the accumulation TR. It occurs in the latter
stages of the TR and provides a definitive test of new
demand after a breakout above TR resistance.
Analogous to springs and shakeouts, a UTAD is not a
required structural element: the TR in Distribution
Schematic #1 contains a UTAD, while the TR in
Distribution Schematic #2 does not.
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Images below show example of the Distribution #1
first image is zoomed in schematic
second image shows what happened after
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Distribution
Schematic #1
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D IS T R I B U T I ON
SCHEMATIC #2
Phase A: Phase A in a distribution TR marks the
stopping of the prior uptrend. Up to this point, demand
has been dominant and the first significant evidence of
supply entering the market is provided by preliminary
supply (PSY) and the buying climax (BC). These events
are usually followed by an automatic reaction (AR) and
a secondary test (ST) of the BC, often upon diminished
volume. However, the uptrend may also terminate
without climactic action, instead demonstrating
exhaustion of demand with decreasing spread and
volume; less upward progress is made on each rally
before significant supply emerges.
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Distribution
Schematic #2
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In a redistribution TR within a larger downtrend, Phase
A may look more like the start of an accumulation TR
(e.g., with climactic price and volume action to the
downside). However, Phases B through E of a re
distribution TR can be analyzed in a similar manner to
the distribution TR at the market top.
Phase B: The function of Phase B is to build a cause in
preparation for a new downtrend. During this time,
institutions and large professional interests are
disposing of their long inventory and initiating short
positions in anticipation of the next markdown. The
points about Phase B in distribution are similar to those
made for Phase B in accumulation, except that the large
interests are net sellers of shares as the TR evolves,
with the goal of exhausting as much of the remaining
demand as possible.
This process leaves clues that the supply/demand
balance has tilted toward supply instead of demand. For
instance, SOWs are usually accompanied by
significantly increased spread and volume to the
downside.
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Phase C: In distribution, Phase C may reveal itself via
an upthrust (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 in the TR.
This is a test of the remaining demand. It is also a bull
trap—it appears to signal the resumption of the uptrend
but in reality is intended to “wrong-foot” uninformed
break-out traders. A UT or UTAD allows large interests
to mislead the public about the future trend direction
and, subsequently, sell additional shares at elevated
prices to such break-out traders and investors before
the markdown begins. In addition, a UTAD may induce
smaller traders in short positions to cover and surrender
their shares to the larger interests who have engineered
this move.
Aggressive traders may wish to initiate short positions
after a UT or UTAD. The risk/reward ratio is often quite
favorable. However, the “smart money” repeatedly stops
out traders who initiate such short positions with one UT
after another, so it is often safer to wait until Phase D
and an LPSY.
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Often demand is so weak in a distribution TR that price
does not reach the level of the BC or initial ST. In this
case, Phase C's test of demand may be represented by
a UT of a lower high within the TR.
Phase D: Phase D arrives after the tests in Phase C
show us the last gasps of demand. During Phase D,
price travels to or through TR support. The evidence
that supply is clearly dominant increases either with a
clear break of support or with a decline below the midpoint of the TR after a UT or UTAD. There are often
multiple weak rallies within Phase D; these LPSYs
represent excellent opportunities to initiate or add to
profitable short positions. Anyone still in a long position
during Phase D is asking for trouble.
Phase E: Phase E depicts the unfolding of the
downtrend; the stock leaves the TR and supply is in
control. Once TR support is broken on a major SOW,
this breakdown 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
markdown are usually feeble.
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Traders who have taken short positions can trail their
stops as price declines. After a significant down-move,
climactic action may signal the beginning of a
re-distribution TR or of accumulation.
Images below show example of the Distribution #2
first image is zoomed in schematic
second image shows what happened after
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Distribution
Schematic #2
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Distribution
Schematic #2
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WYCKOFF
METHOD
VOLUME 8
RE-ACCUMULATION
QUANTUM STONE
CAPITAL
TABLE OF CONTENTS
1
RE-ACCUMULATION
2
RE-ACCUMULATION SCHEMATICS
1
RE-ACCUMULATION
In the course of every long uptrend there are extended
pauses. They are designed to torture long term holders
with protracted periods of boredom. As with all aspects
of the price cycle, Wyckoffians have discovered the
principles governing the dynamics of the trading range
(extended pause). In this post we will introduce the
concept known as Re-accumulation.
Once a trend emerges from an Accumulation it begins
to mature and changes internally. At a trend’s
beginning, strong long term holders (the Composite
Operator) are the dominant owners and almost
immediately shorter term traders jump on board the
uptrend and ride along. These trader types will not hold
positions for the duration of the uptrend, they will
repeatedly take quick profits and leave at early signs of
trouble. The Composite Operator has the intention of
staying on the trend for the long term. They expect
pauses in the uptrend that occur along the way to the
final conclusion of the bull move. The CO will use these
re-accumulation phases to add to their positions.
Wyckoffians also use these re-accumulation phases to
initiate a position or add to an existing holding.
Re-accumulation
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As the trend continues to mature, the activity becomes
dominated by trading, in contrast to investing. For a
period of time, accelerating momentum in an uptrend
can be very profitable. Upward and downward volatility
are a signature of the late stages of a trend, and a
condition of approaching exhaustion.
A common condition at the conclusion of an advance is
a false breakout of the top of the trend channel. This is
a classic sign of exhaustion and often coincides with a
Buying Climax which is a stopping action of price. The
uptrend becomes so overheated with speculation that a
blow-off price movement ends the advance.
The Buying Climax is the beginning of one of two
conditions: Distribution or Re-accumulation. This is
significant because one condition concludes with a
resumption of the uptrend (Re-accumulation). The other
is the termination of the uptrend and the first step in the
formation of a top. Mr. Wyckoff can help us to make the
all-important distinction between the two scenarios.
Re-accumulation
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The condition of Re-accumulation and Distribution begin
with the same action and in the same manner. This is a
stopping action of the prior trend. What follows is a
large and often long trading range.
After the Buying Climax (BC) an Automatic Reaction
(AR) follows, which is a big and volatile correction that
is far larger than the corrections within the preceding
uptrend. This is confirmation of the BC, if we were
unsure before. We label the BC and AR and
immediately draw a Resistance line at the peak of the
BC and a Support line at the low of the AR. If this
sounds familiar, it is because we apply the same
technique after a Selling Climax and an Automatic Rally
establishing the outer boundaries of the Accumulation.
We look for trading to be largely contained by the
Support and Resistance for the days and weeks ahead
(depends on the time frame you trade). During that time
the Wyckoffian will study price and volume cues as to
whether Re-accumulation is occurring or Distribution.
Re-accumulation
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Initially look for a series of Secondary Tests of the BC
area (Resistance) and the AR (Support). Price activity
will be abrupt and volatile with big jumps up to the highs
and reactions to the bottom of the trading range. Weak
positions are being shaken out by this extreme volatility.
The AR will scare the short term momentum traders out
with some wicked losses. It all happens very quickly.
But thereafter the careful observer will see that the
volatility is receding. Declines to Support will take
longer to complete and the volume will generally be
lower with each succeeding reaction to the bottom of
the trading range.
As the trading range grows longer and longer, trader
pessimism is on the increase. The momentum traders
are long gone and speculators are fishing in different
waters. Sometimes the catalyst for the pause is a
bearish news item.
The Composite Operator is using this turn of events to
begin accumulating positions.
Re-accumulation
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Just as in the initial Accumulation, the CO will
systematically build positions as prices correct toward
Support and will cease buying activity as the price rises
back to Resistance. It becomes harder for the price to
return back to Support and will be reflected in the bar
chart with narrowing price ranges and generally
diminishing volume.
A common mistake traders make with Re-accumulation
is to conclude it is Distribution and they initiate a short
selling campaign. The key points to be made are that
during Distribution volatility and volume increase as the
trading range matures and prepares for a bearish
downtrend. During Re-accumulation the opposite takes
place.
Re-accumulations have various ‘looks’. With the Creek
we observe diminished volatility and volume, an
indication that the Re-accumulation is nearly concluded.
Once CO's buying campaign is complete, Jumping
action will take the price out of the trading range and
into a new markup phase.
Re-accumulation
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R E - A C C U M U L A T ION
SCHEMATICS
Re-accumulation with the Spring action
It has flat or sloppy down formation. It can potentially
have lower lows with the Spring being the lowest point
of the trading range.
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Schematics
Quantum Stone
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Image below shows example of Re-accumulation with
the Spring action
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Re-accumulation
Schematics
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Re-accumulation after Shakeout
Absorption of supply happens in the trading range
without violation of support. Usually and depending on a
position of the market, this pattern exhibits strength.
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Schematics
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Re-accumulation after decline
This is a common accumulation schematic and it offers
a great visual cue to analyzing any potential ranges.
Schematics are not meant as exact replicas to the way
that the range will play out. Schematics are used to give
a loose structure, it is up to you as the chartist to
interpret and analyze the price action.
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Re-accumulation
Schematics
Quantum Stone
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WYCKOFF
METHOD
VOLUME 9
RE-DISTRIBUTION
QUANTUM STONE
CAPITAL
TABLE OF CONTENTS
1
RE-DISTRIBUTION
2
RE-DISTRIBUTION SCHEMATIC
1
RE-DISTRIBUTION
Redistributions come in many varied shapes, sizes and
timeframes. They tend to be messy with much volatility
and minimal predictability.
Trend analysis can be a useful tool during downtrends
and Redistributions. A volatile downtrend becomes
more volatile as the downtrend grows old. The MS trend
channel is breeched repeatedly, but is not violated
permanently. The Redistribution flirts with the Supply
Line at the conclusion of the sideways action and then
turns to a rapid decline.
Redistributions are very common, elusive and difficult to
trade. There are characteristics that can be understood,
identified and traded successfully.
Our mission is to find actionable characteristics in
Redistributions that Wyckoffians can benefit from. Here
is the problem in a nutshell. Recall that under Reaccumulation (pause in an uptrend) a stock, index, ETF,
or commodity is being absorbed or accumulated for a
continuation of the uptrend.
Re-distribution
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RE-DISTRIBUTION
As we have discussed in prior posts, absorption is the
activity of removing stock from the marketplace in
anticipation of a major uptrend. This is primarily the
activity of the Composite Operator whom has the
purchasing power to remove meaningful quantities of
stock from active daily trading.
Absorbing stock has the effect of reducing the volatility
of the stock, as the Re-accumulation period matures to
its conclusion, and the next uptrend begins.
At the beginning of Re-accumulation, volatility is high as
a result of the many speculator and trader types who
have latched onto the prior uptrend. The early
corrections against the uptrend are quick and volatile as
shorter term investors take profits.
Then, as the sideways trading range develops, the
corrections become more dull and contained. This is
because the C.O. and institutions are putting bids in to
buy shares on pullbacks.
Re-distribution
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RE-DISTRIBUTION
These orders create support for the stock price. Often
the last half of the time spent in the Re-accumulation
trading range sees the price making a series of higher
lows. Recall that a primary objective of the C.O. is to
carefully accumulate shares in such a way that they
don’t force prices to begin the uptrend before all of their
buying is completed.
Contrast that with the activity taking place during Redistribution. A stock in a primary bear market downtrend
lacks C.O. involvement. A stock requires C.O.
ownership and active bullish campaigning to keep the
price high and rising. When the C.O. community
abandons a stock it becomes vulnerable to bear market
behavior. In a downtrend short sellers will see enough
profit that they will begin to cover their short positions.
Bear market downtrends tend to be volatile.
Short covering is a buying activity that will cause the
stock price to reverse direction and rally quickly. A short
covering rally is the beginning of the Re-distribution
trading range. A sharply rising stock price will drive
nervous short sellers out of their positions.
Re-distribution
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RE-DISTRIBUTION
What happens during Re-distribution is that a series of
rallies and declines will occur with a general tendency
for the rallies to be sharp and volatile and the reactions
to be less so. These rallies and reactions jam the shorts
and repeats until the less resolute among them have
relinquished their positions. Only then can the
downtrend resume.
Not all C.O. types are short sellers, but the best short
sellers are Composite Operators. Their modus operandi
during Re-distribution periods is to sell short around the
top of the trading range and to potentially cover (buy to
cover) some of their position near the bottom of the
range. On balance they are increasing the size of their
short position throughout.
The reason for the buying (covering) of some part of
their short position at the bottom of the trading range is
to provide support and not prematurely push the stock
into a new downtrend before a meaningful short position
can be established. For the C.O. and institutions it is
much harder to short enough stock for a downtrend than
it is to buy stock for an uptrend.
Re-distribution
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RE-DISTRIBUTION
Therefore Re-distribution is like the evil twin of Reaccumulation. Born from volatility, Re-distribution
remains volatile throughout and then ends with the
emergence of another downtrend. Where Reaccumulation ends with a whimper (typically) and the
emergence of a steady uptrend, Re-distribution remains
volatile and slides into a new downtrend with a bang.
Re-distribution begins with volatility and ends with
volatility. Typically a Selling Climax initiates the Redistribution process. The Re-distribution process looks
eerily similar to Distribution. A review of the process of
Distribution could prove helpful. On the ARMH case
study; cover up everything to the left of the Selling
Climax (SCLX) and compare to the schematics and
prior Distribution examples. Note the family
resemblance.
The blue labeling of the SCLX, AR and ST are there to
illustrate the similarities to the start of Accumulation.
This is classic ‘stopping action’. The red labeling
illustrates Distribution and Re-distribution attributes.
Note that once the stopping action is in place (primarily
short covering) the footprints of Re-distribution become
evident.
Re-distribution
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RE-DISTRIBUTION
The attempt to support ARMH takes place at the ICE.
Note the series of lower price lows. This is a sign of
inherent weakness and is labeled as SOW (Sign of
Weakness). Once the ICE is broken there is no longer
enough demand left to rally back into the prior trading
range. ARMH is very vulnerable to a rapid markdown
when below the ICE.
After the Climactic action at the Upthrust (UT) the
volatility and price weakness become dominant. The
rallies are weak, short in duration, and lack sponsorship
from the C.O.
Re-distribution
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R E - D IS T R I B U TION
SCHEMATICS
Re-distribution
Schematics
Quantum Stone
Capital