WYCKOFF METHOD EXPALINED Who Was Richard Wyckoff? Richard DeMille Wyckoff was a famous stock trader and investor, born in the late 19th century (1873– 1934). Wykoff was a pioneer in the technical approach to stock market research. Wyckoff’s analyzed these market operators and their operations and concluded where risk and reward were optimal for trading. He shows the position of stop-losses at all times, the importance of managing the risk of any trade, and he explained techniques used to campaign within the large trend (bullish and bearish). Wyckoff also founded Wall Street Magazine. Wyckoff married three times, he died on March 7th, 1934 in Sacramento. Why Use Wyckoff’s Method The main reason for forex traders to use Wyckoff’s method is because it allows traders to recognize upcoming price moves. By marking the end of an accumulation stage, traders will be alerted to the beginning of a markup. They can then proceed to trade on the long side. On the contrary, the end of a distribution phase marks the beginning of a markdown in which traders can trade on the short side. When you understand the different stages within the price cycle, it allows you to position yourself for the next expected price tendency. You can try to buy as near to the beginning of markup and hold as near to its end as possible. Limitations of the Wyckoff Method While there is a clear concept put forth in the Wyckoff method, the details are far murkier when it comes to clearly define figures and patterns. This could be a major setback for new traders not yet familiar with the ins and outs of the market and price movements. It takes a lot of experience to master the method. WHAT IS WYCKOFF TRADING WHY IS WYCKOFF TRADING 3 NATURAL LAW THAT WORKS Composite Man Think of composite man as an evil manipulator sitting behind the scenes controlling markets by pulling levers and pushing buttons. His goal is to perpetually outwit you and move the markets to your disadvantage. Here are some of Wyckoff’s principal ideas of composite man Composite man plans and executes his deception well in advance Composite man is there to fool you to buying positions that he has already accumulated Composite man will tempt you to sell at the worst possible time Composite man rarely behaves the same way twice Composite man leaves subtle evidence of his strategy for those who understand him In other words, composite man is continually seeking to maximize his profit at “your” expense. Wyckoff’s Accumulation/Distribution Cycle Underlying Wyckoff’s system was his application of accumulation and distribution phases. He used this to explain market cycles in a generic way. We can identify these structures in many kinds of financial charts. The Wyckoff phases show us when the “smart money” is either in accumulation or distribution mode. A trader using the strategy will attempt to identify the accumulation and distribution phases well before the markup or markdown phases occur. The rules of “composite man” say that the market never repeats exactly the same price action. Although supply/demand constraints will cause market cycles to repeat in a similar way, they will do this with an infinite degree of variation that will make detection as challenging as possible. That means while the general structure will be the same, the durations and sizes of distributions, accumulations, markups and markdown trending phases will be different. This is the composite man’s attempt to obfuscate his real intentions and deny you an easy profit making opportunity. Three Wyckoff rules Rule 1: Price action is determined by supply and demand. While this rule seems entirely obvious, deep learning of supply and demand dynamics is a fundamental part of the analysis. The Wyckoff method uses several tools towards this end, namely point and figure charts, price-volume analysis, and reference to the market cycle. Rule 2: Use cause and effect to identify accumulation and distribution phases. A more basic understanding of this rule is the general principal that the longer and deeper the accumulation phase is, the more powerful the breakout trend, “markup phase” will probably be. Rule 3: Effort versus result can signal trend reversal. A simplistic interpretation of this rule is to identify divergences between volume and price action. As an example, consider where there is a high turnover of volume but little resultant price action. Wyckoff’s 3 rd rule says that this is likely to be a market turning point because it suggests an exchange between smart money and dumb money. Wyckoff trading strategy A Wyckoff strategy can be broken down into a few simple steps. For the long side: 1. Identify significant trading ranges that have high probability of being accumulation phases 2. Enter long positions before the main thrust of the markup phase 3. Take profits in long positions at the distribution top Wyckoff’s chart pattern is useful in identifying these phases. The chart below shows the schematic for an accumulation bottom. A distribution top is simply the mirror image. The Wyckoff cycle starts with A, the descent from a distribution top. This is the markdown phase where the big money starts offloading shares to the crowd. Phase A marks the steepest price descent which is the markdown period. PS is the first point of support in the descent. At this point, a minor reversal and accumulation may start, however further falls are likely. PS is generally considered a fakeout in the Wyckoff model. SC, the selling climax represents the point of capitulation of the crowd. This is where sentiment is deeply negative, as the crowd anticipates the bottom dropping out of the market. AR is the automatic rally. At this point, smarter money steps in to buy the dip pushing the market back up in a corrective wave. This rally will usually be less than a 50% retracement of the distribution top. Meaning the price will still be considerably below the previous highs. ST marks the end of phase A. Phase B starts with a retest of the previous low, where the market will push down again trying to find a bottom. ST may be at or below the selling climax (SC), but generally will be above it. Phase B continues with at least one more rally where the price tests the previous high reached at AR. This area now forms strong resistance and will tend to keep the price confined to a trading range during the accumulation period. Phase B will often culminate with a retest of the lowest support line. At this point, the price may reach the lowest point in the cycle. Most of the retail crowd has long since capitulated by this time. This is where the big money is accumulating heavily. LP represents the last point of support. By this time, the price recovery is well underway. The price will test the upper resistance lines of the trading range and rebound upwards. BU is the backup rally where the price starts to accelerate sharply to the upside as the general investor starts to enter the market again. This represents the markup phase. 5 CONSIDERATION WHILE TRADING HOW DID WYCKOFF TRADE MARKET PHASE STEPS IN ACCUMULATION STEPS IN DISTRIBUTION EVENTS IN VARIOUS MARKET PHASE 11 STAGES AND EVENTS FINDING DEMAND SUPPLY THEORY EXPLAINING CAUSE VS EFFECT EXPLAINING EFFORT VS RESULT WHY WE FAIL TO TRADE SUCCESSFULLY TOO FAST TOO FURIOUS – WHAT TO DO WHEN NOT TO TRADE SMART MONEY ACTIVITIES WHAT IS SMART MONEY WHO ARE SMART MONEY INFORMED TRADERS VS UN-INFORMED TRADERS NATURAL CONSEQUENCES – ARE THEY ENEMY SMART MONEY WORKING SYSTEM LIQUIDITY POOL DEMAND SUPPLY ZONE ORDER BLOCK TRAPPED TRADERS SMART MONEY TRICKS AND TRAPS ILLIGAL MANIPULATION INSIDERS AND MANIPULATION MARKET MAKERS – WHAT THEY DO HERD MANTALITY – SMART MONEY PREY FALSE MOVE AND SHAKEOUT MACHANISM UP-THRUST FAKE SUPPORT AND RESISTANCE FAKE CANDLE INSTITUTIONAL CANDLE VOLUME ANOMALY WHAT THEY CAN NOT HIDE, FOOT PRINT – VOLUME CANDLESTICK – OPEN, HIGH, LOW, CLOSE, POSITION. LIQUIDITY POOL WHAT IS IT, LIQUIDITY POOL ORDER FLOW SOO EASY TO IDENTIFY SMART MONEY ACTIVITY STOP HUNTING SHAKEOUT, SPRINT, TEST, UPTHRUST WHAT TO DO AND WHAT NOT TO DO DEMAND AND SUPPLY THE BUYERS AND THE SELLERS FUNDAMENTAL CONCEPT OF ECONOMIC THEORY IMBALANCE WHY IS IMBALANCE AND CONSIQUENCES MARKET CYCLES RBR, DBD, RBD & DBR SUPPORT & RESISTANCE TREND LINE AND MOVING AVERAGE ZONE THEORY ORDER BLOCK RULES TO MEASURE ZONE AND OB FTB & FTR SWAP ZONE Compression Flaglimit Engulfing Price cap SNR Quasimodu IMPULSE, STRUCTURE AND ITS STRENGTH LIQUIDITY POOL LOCATION AND CONTEXT Fake Breakout or fakey Stop Loss Hunting PROJECTION WITH A FIBO TOOLS SMART MONEY MANIPULATION & STOP HUNT VOLUME – TELLS US THE INSIDE STORY ULTRA HIGH VOLUME CANDLESTICK BACK TESTING THE UNDERSTANDING CONTROL OF EMOTION AND PSYCHOLOGY FINDING YOUR EDGE KEY TO ALL TECHNICAL ANALYSIS THEORIES SMART MONEY ORDE BLOCK BALANCING DEMAND AND SUPPLY WEPONS ON THE HAND OF SMART MONEY CONSTRUCTION AND FORCES BEHIND LOCATION AND WHERE TO FIND THESE LIQUIDITY POOL DEMAND & SUPPLY ZONE HOW TO MEASURE – ZONE / SINGLE CANDLE FUTURE MARKET IMPACT – LOOK AT THE LEFT KEY TO EVERY TECHNICAL ANALYSIS THEORY KEY TO MARKET STRUCTURE – HH,HL & LL, LH. TEST AND SPRING – IMPACT IN PRICE STRUCTURE. BREATH IN THE FAST MOVING MARKET. Order Block An Order block in price action or within a market makers profile, is a defined area where the buyers or sellers of smart money entered the market in a substantial way, moving price away from its price level to a new area of interest. The market is engineered by smart money by means of creating levels within the market place for them to use at a later date and time. A bearish order block low is a bullish candle prior to the move down, a bullish order block is the high of a bearish candle prior to the move up. These following charts show you the visuals of it. When you understand how market makers move the markets and where they want to get to in price, utilizing the order blocks within your range, will give you precision high confidence entry points. Asia Range The Asia range is simply the Asian session of trading, we use 0GMT to 5GMT to plot the high and low of that particular time slot. Typically we do not trade the Asia session, we only utilize it for trading concepts ie - asia range re test, central bank dealing range and order block generation period. The Asian range is of particular importance to how we view intraday trading. Confluence We need to look for confluence when trading, giving us more confidence in our trade ideas, set ups and entry points. Using the higher time frame levels ie monthly highs and lows, weekly highs and lows, daily highs and lows, order blocks, liquidity pools etc. when time of day aligns with price at any confluence level, then this gives us an edge when we already have in place our selected confluence zone. As a strategy on a high time frame chart, place a line using bodies of the candles, blocks, highs & lows that all align, wait for price to develop onto this level on a lower time frame, for optimal entries, or simply maintain trading of the higher time frame chart using larger stops @ 1 - 2% risk to equity. study these charts closely as the 3rd example has a lot of information within the chart. OTE & HOTE The hidden optimal trade entry concept from ICT is this, if you use an order block for example, that aligns with time and price, you can establish your fib levels not only from a previuos high or low, though starting the fib from a big figure and or daily order block levels. The first pic is an example of using the big figure as your location point for your fib to swing off. Judas Swing The Judas swing term was named by ICT, he dubbed this swing concept and utilizes it upon the London Open. The idea is, the market makers will rally or sell price, normally just above or below the Asian session high or low (depending on institutional order flow bias) tricking buyers or sellers into the market to follow its direction. As the Judas swing high or low is formed, price is quickly reversed either taking out stops and or leaving traders out of the game. Judas swings can be seen on high and low time frames, though if you are an intra day trader, once higher time frame objective levels are in place and you have your directional bias in tow, you will be looking for the Judas swing to occur on a 15 minute chart time frame. You can also see the Judas swing develop on a 1 hour chart, though the 15 minute chart will show its intension a bit more clearly, when you know what you are looking for. Liquidity Pool Liquidity pools are created above and below price, a liquidity pool can be above and below old highs and lows. The form of these highs and lows determines how current price might react to get to these levels and or move away from these levels. ICT created the term "clean lines" meaning a double type high or low that is closely at the same levels from where price moved away from, leaving liquidity above or below these areas. Price will hunt these specific areas as market makers drive price into these liquidity pools to take out stops and market orders. After the price objective is completed, they will reverse price and move away from the targeted area. The time frame objectives for liquidity pools to be formed can differ from high time frame to low time frame. Using the higher time frame designed liquidity pools can really benefit a trader and giver him or her great directional bias, either when price is hunting liquidity or moving away from liquidity. Market Structure Market structure should be looked at as an over all view of price cycles and where the market makers are making there intended moves, to either break market structure into a reversal or continue there directional bias, looking for there right price objectives. Some examples show where market structure is either broken from smart money reversals taking place or a short term correction in the market, leading to another market structure break reversal back into the original direction, ie if price has mostly been down, though market structure is broken to the upside before the main higher time frame low objectives have been reached, this is more likely to be a correction in the market to the upside. Mitigation Mitigation Blocks and or levels are levels where Block support or resistance failed. The market makers then return price to the failed block mitigating there already positions then reversing price. In this detailed chart example one can clearly see the mitigation levels used. Note - Market Makers will manipulate price in order to collect there losing positions before reversing. If a bullish order block (bear candle) is created before the move up, when price returns to the order block and fails, this order block area then becomes an area of interest for a trader, as price will sometimes re use this area to mitigate there longs, then reverse price into a broken market structure sell model. Time of day can enable us to capture the downward move in price. Smart Money Smart money has many ways to design and execute market structure price objectives, these charts illustrate there intended moves within price using support and resistance, but not before the SMR (smart money reversal) has taken place. Smart money reversals normally reverse price abruptly, leaving the average retail trader out of the game. Though with patience and a good sense of what the market makers are doing, many opportunities will arise after the reversal has taken place, especially using the higher time frame for directional bias. Using the higher time frames as directional bias, will put a trader in sync with institutional order flow. Sponsored Move In relation to market structure, the market makers will invite buying and selling more so once price moves swiftly from a higher time frame order block. Once price breaks intermediate highs and lows, this is a signal that the bigger move is about to begin. The bigger entities will enter the market leaving an extrapolated move further away from the higher time frame support or resistance levels. As retail traders we need to foresee these moves in advance. The following charts give an idea of where these areas might be starting to take off from, using accumulation and distribution as points of entry and exit. Trading Range When we take a swing high and a swing low, we now have a trading range we can work with Do we have any higher time frame highs and lows within the range? Do we have any higher time frame order blocks within the range? Do we have any order blocks or lower time frame highs and lows within the range, that might line up with these higher time frame levels? If we see a confluence within the range, this is where our points of entry could take place, using the correct risk to reward ratio for that particular trade. Price Delivery Typically a price delivery from a major liquidity source, or the source that controls price over all, are the price levels delivered at specific times of day for the minor financial institutions to govern there day to day, week to week, month to month dealings from. The major market suppliers that are the liquidity within price over all, are the market makers. Only a market maker can deliver a set price for large tier trading organisations to adhere to. IE major market orders are designed around level 1 liquidity providers. Seek & Destroy Layered high time frame support and resistance for seek and destroy set ups. Commonly price will hunt liquidity above and below short term highs anf lows before consolidation, after consolidation IE CDR areas, price will move away from that paricular price zone to come back at a later time and or day to re test the core liquidity provided within equilibrium of the seek and destroy range. Buy Model Here we can see the development of a buy model come into place after the smart money reversal was formed after the leg down the previuos day through London & New York, price then seeked the liquidity left in the market, back into the core region finishing the days high.
