THE WYCKOFF
METHODOLOGY IN DEPTH
HOW TO TRADE FINANCIAL MARKETS LOGICALLY
2nd edition
RUBÉN VILLAHERMOSA CHAVES
Copyright © Rubén Villahermosa, 2nd edition, 2022 - All rights reserved.
ISBN: 9798728544531
Independently published
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CONTENTS
INTRODUCTION
1
RICHARD WYCKOFF
7
PART 1. HOW THE MARKETS MOVE
Waves
The price cycle
Trends
Types of trend
Ranges
PART 2 - THE THREE FUNDAMENTAL LAWS
The law of supply and demand
9
9
11
14
15
17
19
19
Theory
20
Price movements
21
The auction process
22
Absorption
The law of cause and effect
23
25
Fast patterns
26
Point and Figure Charts
28
Technical analysis for the projection of targets
The law of effort vs result
30
31
The importance of volume
31
Harmony and divergence
32
Analysis table
32
Effort/Result in trends
38
Lack of interest
38
PART 3 – ACCUMULATION AND DISTRIBUTION PROCESSES
39
Strong hands vs weak hands
40
Well-informed vs uninformed
41
Fast and slow patterns
Accumulation
42
44
Control of the market
44
The law of cause and effect
45
Manipulation maneuvers
45
Counterparty, liquidity
46
The path of least resistance
46
Common characteristics of accumulation ranges
47
Beginning of the upward movement
Re-accumulation
47
48
Absorption of stock
48
Duration of the structure
49
Re-accumulation or Distribution
Distribution
49
50
The law of cause and effect
50
Manipulation maneuvers
51
Counterparty, liquidity
52
The path of least resistance
52
Common characteristics of distribution ranges
53
Start of the downward movement
Redistribution
53
54
Redistribution or accumulation
54
Control of the market
55
Duration of the structure
55
PART 4 - EVENTS
57
List of events
Event no. 1: Preliminary stop
Preliminary Support
57
59
61
Preliminary Supply
Event No. 2: Climax
63
64
Selling Climax
67
Buying climax
Event No. 3: Reaction
69
72
Automatic Rally
75
Automatic Reaction
Event No. 4: Test
77
78
Secondary Test
78
The generic test
84
Where to find tests
85
What the Test looks like on the chart
86
Difference between the Secondary Test and the generic Test
Event No. 5: False Breakout
Spring/Shakeout
UpThrust After Distribution (UTAD)
Event No. 6: Breakout
Sign of Strength
Sign of Weakness
Event No. 7: Confirmation
88
89
96
101
104
109
111
113
Last point of support
118
Last point of supply
120
PART 5 - PHASES
Phase A: Stop of the previous trend
Phase B: Construction of the cause
Phase C: Test
Phase D: Trend within the range
Phase E: Trend outside the range
123
125
127
129
131
133
PART 6 - STRUCTURES
Horizontal structures
135
136
Basic accumulation structure no. 1
137
Basic accumulation structure no. 2
139
Basic distribution structure no. 1
140
Basic distribution structure no. 2
Sloping structures
142
143
Upward sloping accumulation structure.
145
Downward sloping accumulation structure
148
Downward sloping distribution structure
151
Upward sloping distribution structure
Unusual structures
PART 7 - ADVANCED CONCEPTS OF THE WYCKOFF METHOD
How can we predict a price reversal?
Reasons for labeling
Failed accumulation or distribution
Structural failure
Weakness
Strength
Shortening of the thrust (sot)
Efficient use of lines
154
157
161
162
165
167
171
172
173
174
177
The importance of context
179
Changing labels and forecasting scenarios
180
How can we distinguish between an accumulation and a distribution
structure?
184
1. Type of test in Phase A
185
2. Type of test in Phase B and reaction
186
3. A Phase C false breakout
188
4. Price action and volume in Phase D
190
5. Overall volume during the development of the range
192
6. Weis Wave indicator analysis
How can we analyze a chart from scratch?
193
196
Going down into shorter time frames
197
Going up into longer time frames
What should we do when the context is unclear?
200
203
The controller
PART 8 - TRADING APPROACH
204
205
1. The context
205
2. The structures
206
3. Trading zones and levels
Primary positions
208
211
In Phase C
212
In Phase D
214
In Phase E
216
Table of trading opportunities
Position management
218
219
Entry
219
Stop Loss
223
Take Profit
227
Active management
231
What should we do when the price moves on without us?
237
PART 9 - CASE STUDIES
S&P500 INDEX ($ES)
POUND/DOLLAR ($6B)
EURO/DOLLAR ($6E)
BITCOIN ($BTCUSDT)
INDITEX ($ITX)
GOOGLE ($GOOGL)
AUSTRALIAN DOLLAR ($6A)
239
242
244
246
248
250
252
254
ACKNOWLEDGEMENTS
256
ABOUT THE AUTHOR
257
BOOKS BY THE AUTHOR
258
BIBLIOGRAPHY
264
INTRODUCTION
T
his second publication provides a continuation of the content from the
first book titled “Trading and Investing for Beginners”. That first book
described all the basic concepts that a beginner needs to be aware of,
laying the foundations and allowing us to take our first steps in the learning
process towards becoming a trader.
The aim of this second book is to continue moving forward with this
process of development, to continue taking steps towards improving our
skills as analysts and technical traders. If you recall, the first book detailed
three approaches to advanced or high-level technical analysis: Price Action,
Volume Spread Analysis and the Wyckoff Method. This book focuses exclusively on the subject of the Wyckoff Method as a tool for trading in financial
markets.
Who should read this book?
This book is of intermediate complexity. It is aimed at those traders and investors who already have a certain amount of basic knowledge.
Traders who have decided to specialize in Technical Analysis as a
means of approaching the financial markets will certainly find it valuable, in
particular those who want to specialize in the study of a methodology whose
principles are based on a sound, underlying logic.
A logical Technical Analysis methodology is one whose principles are
based in some way on the study of supply and demand; that is, one that attempts to analyze the true driver of the market; which is nothing other than
the continuous interaction between buyers and sellers.
1
It is this ongoing interaction that ultimately determines the overall
market sentiment, who is most likely to be in control (buyers or sellers), and
where the price is most likely to go.
What is the Wyckoff Method and why do you need this knowledge?
As you already know, the odds of winning are against you. The financial markets are controlled by large, well-informed traders and if you want to stand
any chance you need to try to trade alongside them rather than against them.
The approach is simple: when well-informed traders want to buy or
sell, they execute processes that leave their imprint on the chart, through
price and volume. The Wyckoff Method is based on identifying the intervention of professional traders, to try to elucidate who most likely has control of
the market and to enable us to accurately forecast where the price is most
likely to go. In other words, to position ourselves alongside them.
Knowing what the major traders are doing is essential in financial
markets. Essentially because they either handle insider information, or they
carry out research that allows them to make more objective assessments, or
simply because they have the ability to drive the price up or down along the
path of least resistance.
This is why we need to know what they are doing and to position ourselves in the same direction. This means that if the signals that we obtain
from the analysis of the chart suggest that they may be buying, we will want
to buy with them; and that if we determine that they are most likely selling,
we will sell alongside them.
Why this book and not any another?
It is quite simply the best content ever created on the subject. And it isn’t just
me that says so. This is the comment that is most often repeated from readers of the first edition of this book.
This book is the result of having studied a multitude of resources on
this approach, in addition to my own research and experience, from years of
playing the market while implementing this strategy. All this has allowed me
to refine and improve some of the method’s most primitive concepts, to
2
adapt them to today's markets and give them a much more operational and
real-world approach.
What will you learn?
This book will provide you with comprehensive knowledge of the Wyckoff
Method. Knowledge that will allow you to substantially improve your analysis
process, scenario setting and decision making; therefore achieving better
results.
We will follow this program:
• The first part of the book describes basic analytical tools for understanding how markets work. It explains the concepts of fractality and the
price cycle. We will learn that markets do not move in a straight line, but in
waves of varying degrees, which create trends and ranges.
• The second part comprises the unique theoretical conceptual
framework that this method offers us. This is the cornerstone, what makes
it stand above any other form of technical analysis. This is because it is the
only one that informs us of what is really happening in the market in a logical way. It does this through 3 fundamental laws:
1. The Law of Supply and Demand. This is the true driver of the market.
You will learn to read the signs left by the interactions of large
traders.
2. The Law of Cause and Effect. This is based on the idea that something cannot happen out of the blue; that for the price to develop a
trend movement (effect) it must first have built up a cause.
3. The Law of Effort vs Result. This is about analyzing the price and the
volume in comparative terms to conclude whether the actions of
the market denote harmony or divergence.
Another of its advantages is that it is a universal form of analysis, the
reading of which can be applied to any financial market and to any timeframe. There are some caveats, however. This approach is best suited to analyzing centralized markets such as stocks and futures where the volume is
genuine and representative; as well as assets that are sufficiently liquid to
prevent possible manipulation maneuvers.
• The third part of the book addresses one of the best known concepts of the method: the accumulation and distribution processes. These
3
processes are the key to understanding the context of the market. Context
has to do with determining sentiment, knowing what to expect the price to
do next, which will then predispose us to go in one direction or another.
Accumulation and distribution structures will help us to identify the
involvement of professional traders, as well as the general sentiment of the
market in real time, enabling us to evaluate as objectively as possible who is
most likely to have control.
This context provides high quality information about the state of the
asset. The context is what allows us to truly understand what is happening in
the market at all times.
• The fourth and fifth parts cover the other half of the definition of the
context: the events and phases. These concepts are unique to the method
and help us to track the development of the structures. This will help us to
predict what the price will do after the appearance of each of these structures, by providing us with a roadmap that we can follow at all times. This is
the power of the Wyckoff method. It allows you to enter a state of mind in
which you don’t have to guess anything. It liberates you, so you can act almost mechanically in the face of market changes.
• The sixth part introduces us to structures. These are made up of all
the method’s events and phases. They are simply some of the ways in
which the continuous interaction between buyers and sellers is represented on the price chart. You need to always remember that the market is a
living entity. These structures should not be treated as pre-established
patterns, as no two are ever the same.
• The seventh part will take us up a couple of notches in our understanding of the method. It presents some advanced concepts that will help
us to delve much deeper into the reasoning behind our analyses. It will give
us a much more practical perspective which we can apply to our trading
approach. In addition, we will resolve some of the most common doubts
that arise among advanced Wyckoff traders. It is, without doubt, one of the
most important parts of the book.
• The eighth part, on trading approaches, will help us to refine this last
and decisive section of any trading system. We will determine the high
probability trading areas that the method offers us; that is, those areas in
which you need to make the decision to buy or sell. In addition, different
entry and exit options will be presented, as well as different forms of position management. All with the sole objective of forecasting scenarios with
the highest probability of success.
4
Before I begin, and as I did in my first book, I must once again emphasize the importance of keeping expectations low and applying common
sense to what you do. Neither this book, nor any other, nor any course, mentoring session or specialization will guarantee that you become a successful
trader or investor. This is a path that requires knowledge and experience. The
first part –knowledge– continues here and now, with the intermediate content you will find in this book. Studying its content will enable you to continue to move in the right direction but even once you have acquired all this
knowledge, it won’t be enough. You will still need experience. And for this
there is no possible shortcut. You can only acquire experience with hours of
screen time and hard work. I wish you good luck on your journey.
5
6
RICHARD WYCKOFF
R
ichard Wyckoff (1873-1934) was a Wall Street celebrity. From the start
of his career as a stockbroker at the age of 15 he became a pioneer,
and by the age of 25 he already owned his own brokerage company.
The technical analysis and speculation method he developed grew out
of his skills of observation and communication. When working as a broker,
Wyckoff saw how the large traders played the game and, by reading the tape
and the charts, he began to observe how they manipulated the market to
obtain huge profits. He claimed that it was possible to judge the future
course of the market based on its own actions, since price action reflected
the plans and intentions of those who dominated it.
7
Wyckoff applied his investment methods and obtained high returns.
As time went by, his altruism grew to the point where he began to turn his
attention and passion to education.
He wrote several books and published the "Magazine of Wall Street”,
which became popular at the time. He felt compelled to collect the ideas he
had gathered during his 40 years of experience on Wall Street and bring them
to the attention of the general public. He wanted to offer a set of principles
and procedures on what it takes to win on Wall Street.
Those rules were embodied in the course he launched in 1931, The
Richard D. Wyckoff Method of Trading and Investing Stocks. A course of Instruction in Stock Market Science and Technique” which became better
known as the Wyckoff Method.
Many of the basic principles of the Wyckoff Method have become basic foundations of technical analysis. Wyckoff built on the early work of
Charles Dow and contributed enormously to the principles of technical
analysis. The three fundamental laws: Supply and Demand, Cause and Effect
and Effort vs Result; the concepts of Accumulation/Distribution and the
paramount importance of Price and Volume in determining price movements
are some examples.
The Wyckoff method has stood the test of time. More than 100 years of
continuous development and use attest to the value of this method for trading and investing in all types of financial instruments and time frames.
This achievement should come as no surprise since its principles are
based on the analysis of price action and volume; on judging how the market
reacts to the battle that takes place between the true forces that govern all
price changes: supply and demand.
8
PART 1. HOW THE MARKETS MOVE
W AVES
W
yckoff and the first tape readers understood that price movements
do not develop in time periods of equal duration, but rather in
waves of different sizes. This is why they studied the relationship
between bullish and bearish waves.
Price movements do not always develop in the same way, but rather
in waves of different sizes, duration and direction.
Prices do not move between two points in a straight line but move up
and down through fluctuations in a pattern of upward and downward waves.
The waves are fractal in nature and interrelate with each other; smaller waves are part of intermediate waves, and these in turn are part of larger
waves.
Each upward and downward movement is made up of numerous minor upward and downward waves. When one wave ends, another begins in
the opposite direction. By studying and comparing the relationship between
waves – their duration, speed and scope–, we will be able to determine the
nature of the trend.
9
Wave analysis provides a clear view of the relative changes between
supply and demand and helps us judge the relative strength or weakness of
buyers and sellers as the price movement progresses.
Through careful wave analysis, we will gradually develop the ability to
determine the end of a wave in one direction and the beginning of another in
the opposite direction.
10
T HE PRICE CYCLE
The basic market structure only appears in one of two forms:
▶ Trends. These are known as uptrends if they go up, or downtrends if
they go down.
▶ Ranges. These can be accumulation ranges if they are at the beginning of the cycle, or distribution ranges if they are in the higher part of the
cycle.
As we have already seen, price movements during these phases occur
in waves.
During the accumulation phase, professional traders buy all the stock
that is available for sale on the market. When they ensure through various
maneuvers that there is no more floating supply left, they launch an upward
movement. This phase of the trend is about the path of least resistance. The
professionals have already verified that they will not encounter too much
resistance (supply) that prevents the price from reaching higher levels. This
concept is very important because until they verify that the path is clear (absence of sellers), they will not launch the upward movement, and they will
perform test maneuvers over and over again. If the supply is overwhelming,
11
the path of least resistance will be downwards and the price at that point
can only fall.
During the uptrend, buyers are more aggressive than sellers. At this
stage, large, less well-informed traders and the general public also enter the
market under whose pressure the price rises. This upward movement will
continue until buyers and sellers consider that the price has reached its fair
value; buyers will see it as worth their while to close their buy positions; and
sellers will see it as worth their while to start taking short positions.
The market has entered the distribution phase. A market ceiling will
be forming and large traders are said to have completed the distribution
(selling) of the stock that they had previously bought. The market also witnesses the entry of the final greedy buyers as well as informed traders who
have entered to sell.
When they verify that the path of least resistance is now downwards,
they launch the downtrend phase. If they observe that demand still exists
and has no intention of going anywhere, that resistance to lower prices will
only leave one viable path: upwards. If the price continues to rise after a
pause, this structure is called a re-accumulation phase. The same happens in
the case of a downtrend: if the price is in a bearish trend and there is a pause
before continuing with the decline, this sideways movement is known as a
redistribution phase.
During the downtrend sellers are more aggressive than buyers so only
lower prices can be expected.
Being able to determine where the market is in the price cycle is a significant advantage. Knowing the general context helps us avoid entering at the
wrong end of the market. This means that if the market is in a bullish phase
after accumulation we should avoid going short and if it is in a bearish phase
after distribution we should avoid going long. You may not know how to take
12
advantage of the trend movement; but with this premise in mind, you are
sure to avoid losses by not trying to trade against the trend.
When the price is in accumulation or uptrend phases, it is said to be in
a buying position, and when it is in distribution or downtrend phases, it is said
to be in a selling position. When there is no interest, that no campaign has
taken place, it is said to be in a neutral position.
A cycle is considered complete when all stages of the cycle have
been followed: accumulation, uptrend, distribution, and downtrend. These
complete cycles occur in all time frames. This is why it is important to take
into account all time frames; because they might each be at different stages.
The market must be looked at from this point of view to understand the context and to analyze it accurately. The key is to remember that the smaller
graphical structures will always depend on the larger graphical structures.
Once you learn to correctly identify the four phases of price action
and adopt a completely impartial point of view, independent of any news,
rumors, opinions and your own prejudices; you will be closer to taking advantage of your trading system.
13
T RENDS
Prices change and the waves that result from those price changes generate trends. The price of a security moves through a series of waves in
the direction of the trend (impulses), which are separated by a series of
waves in the opposite direction (corrections).
The trend is simply the line of least resistance and therefore the trader's job is to identify it and analyze its evolution to decide what type of strategy to adopt at any given time.
When a market is climbing and encounters resistance (selling), it either overcomes that resistance or the price will reverse; the same happens
when the price is falling and encounters resistance; it either overcomes all
the buying or the price will reverse. Those turning points are critical moments and provide excellent zones in which to trade.
We can distinguish between three types of trends, depending on the
direction of the movement: uptrend, downtrend and sideways trend. The
most objective description of an uptrend is when the price follows a series of
growing impulses and corrections, where the peaks and troughs are increasingly higher. Similarly, we can identify a downtrend when the peaks and
14
troughs are ever lower, leaving a series of decreasing impulses and corrections. Finally, a sideways trend occurs when highs and lows keep fluctuating
within a price range.
Trends are divided by their duration into three different categories;
long, medium and short term. Since there are no hard and fast rules for classifying them according to the time frame, they can be categorized by how
they fit in relation to the one above. In other words, a short-term trend will be
observed within a medium-term trend, which in turn will be seen within a
long-term trend.
Types of Trend
You need to bear in mind that the three trends may not move in the same
direction. This can present potential problems for the trader. In order to be
effective, traders need to remove all doubt as much as possible. The way to
do this is to identify the type of trading that they want to carry out in advance.
The following chart shows the main movement (red) which is the main
progression or trend that a Position trader or investor would look for; the
fractal immediately below (green) would be the intermediate progression
that a Swing trader would look for; the one immediately below that (blue) is
the movement that a Day trader would look for.
15
When selecting a type of trading, a very important factor to take into
account is the timing (judging the entry point). Success in any type of trade
mainly requires good timing; but success in short-term trading requires perfect timing. Because of this, a beginner should start with long-term trading
until they achieve consistent success.
As trends can differ depending on the time frame, it is possible, although difficult, to hold buy and sell positions at the same time. If the medium-term trend is bullish, you could adopt a buy position with the idea of
holding it for a few weeks or months; and if a short-term downtrend appears
in the meantime, you could take a short sell position and keep the buy trade
at the same time.
Although theoretically possible, it is extremely difficult to maintain
the discipline necessary to hold both positions at the same time. Only experienced traders should try this. Until you are consistently profitable, it is better for the beginner to trade with the trend and not on both sides simultaneously.
You must learn and understand the motives, behavior patterns and
emotions that control the market. A bullish market is driven by greed; while a
bearish one is based on fear. These are the main emotions that drive the
markets. Greed leads to traders paying higher prices, resulting in what is
known as an overbought condition. Meanwhile, the panic caused by a fall
compels traders to want to ditch their positions and sell, adding more momentum to the crash until the market reaches an oversold condition.
Having these emotions is not a negative thing, as long as you know
how to channel them positively and you bear in mind that what is truly important is protecting your capital.
16
R ANGES
The market spends most of its time in this type of situation, therefore
ranges are extremely important.
Sideways trends or ranges are zones in which the previous movement
has stopped and there is a relative balance between supply and demand. It is
in ranges where accumulation or distribution campaigns take place in preparation for a subsequent uptrend or downtrend. It is this force of accumulation
or distribution that is the catalyst for what will develop in the subsequent
movement.
Trading inside the range offers optimal trading opportunities with a
very high risk/reward potential; however, the best trades are those in which
the trader is able to successfully position themselves within the range to
take advantage of the subsequent trend movement.
While no new information is generated that could significantly change
the valuations made by the market agents, in range trading the lower part of
the range is seen as an area where the price is cheap, which will result in the
appearance of buyers; while the upper part is seen as an area where the
price is expensive, which will lead to selling to participants. Both actions will
cause the market to move up and down between these zones.
17
In trend trading, since the price is already moving, part of its progress
will have been lost. By taking advantage of the opportunities within the
range, there is the possibility of capturing a bigger movement.
To be correctly positioned at the start of the trend, you must be able to
analyze price action and volume as the range develops. Fortunately, the
Wyckoff method offers a unique set of guidelines for traders to successfully
accomplish this task. The identification of events and the analysis of phases
are essential tools for the correct reading of the range.
If you don't see a clearly defined trend, the price is most likely in a
range phase. There are one of three basic interests behind this neutral or
sideways trend: either traders are accumulating, in preparation for an upward
movement; they are distributing, in preparation for a downward movement;
or the price is fluctuating up and down because there is no definitive interest.
Random fluctuations should be ignored as there is probably no professional interest in that market. It is important to understand that there isn’t
always professional interest behind every range; and that therefore, if there
is little interest in a security, the price simply fluctuates because it is in equilibrium and movements in one direction are neutralized by movements in the
opposite direction; but no major trader is taking advantage of these fluctuations to position itself in anticipation of a subsequent trend move.
According to the law of cause and effect, the price must spend some
time within the range in preparation before a subsequent move. And this
movement will be directly proportional to the time spent in the range. This
means that ranges with a short duration will generate shorter movements
and ranges that last longer will generate movements over a longer period of
time.
A range is defined by two points connected by a channel. As long as
the price stays within the range, it will undergo no major movement The key
is at the edges. When these are broken, this can open up excellent trading
opportunities.
You need to understand that the definitive breakout from the range
and the start of the trend cannot occur until a clear imbalance between supply and demand has been generated. At that point, the market must be in the
control of well-informed professionals and these must have verified that the
direction in which they will move the price is the path of least resistance.
This means that if they have accumulated with the aim of pushing prices
higher, they will first verify that there will be no resistance (selling) to stop
that rise. When they verify that the path is clear, they will initiate the movement. Likewise, if they have been distributing (selling) with the intention of
lowering prices, they need to make sure that floating demand (interest in
buying) is relatively low.
18
PART 2 - THE THREE
FUNDAMENTAL LAWS
T HE LAW OF SUPPLY AND DEMAND
T
he law of supply and demand is a basic economic model postulated as
the reason for price formation. Although the origin of the concept goes
further back, it was formalized, analyzed and expanded in its application by the British economist Alfred Marshall.
The theory of supply and demand implies a basic principle: that if the
demand exceeds the supply, the price will increase and that if the supply is
greater than the demand the price will fall.
This is the general idea which needs to be qualified, however; there is
a common misconception that prices rise because there are more buyers
than sellers or that they fall because there are more sellers than buyers.
There are always the same number of buyers and sellers in the market
because for someone to be able to buy there must be someone able to sell.
19
Theory
The market is made up of buyers and sellers who interact and match their
orders. According to auction theory, the market seeks to facilitate this exchange between buyers and sellers; and this is why volume (liquidity) attracts price.
The theory tells us that supply is created by participants who place
their sell orders in the ASK column, and demand is created by participants
who place their buy orders in the BID column. These orders are known as
"limit” orders because they remain pending execution at prices other than
the last matched price.
Another very common mistake is to dub everything that has to do with
buying as demand and everything that has to do with selling as supply. In
trading terms and in order to offer a more accurate analysis we should ideally use different terms to distinguish between aggressive and passive traders.
The terms supply and demand correspond to taking a passive approach by placing limit orders in the BID and ASK columns.
Whereas when a trader takes the initiative and goes to the BID column to execute an aggressive order (market orders), they are known as a
seller; and when they go to the ASK column they are dubbed a buyer.
The key to everything lies in the types of orders that are executed. We
must differentiate between market orders (aggressive) and limit orders (passive). Passive orders represent only intent, they have the ability to stop a
price movement but not the ability to generate one. This requires initiative.
20
Price Movements
Initiative
For the price to move higher, buyers have to acquire all the sell orders (supply) that are available at that price level and also continue to buy aggressively to force the price to go up one level and there find new sellers to trade
with.
Passive buy orders slow down the bearish movement, but by themselves they cannot drive the price up. The only orders that have the ability to
move the price up are market buy orders or those that become market buy
orders through the matching of orders.
Therefore, an upward movement in the price can occur due to the active entry of buyers or when the Stop Loss of short positions are executed.
For the price to move lower, sellers have to acquire all the buy orders
(demand) that are available at that price level and continue to put pressure
downwards, forcing the price to search for buyers at lower levels.
Passive sell orders slow the bullish movement, but do not have the
ability to bring the price down on their own. The only orders that have the
ability to move the price down are market sell orders or those that become
market sell orders through the matching of orders.
Therefore, a downward movement in the price can occur due to the
active entry of sellers or when the Stop Loss of long positions are executed.
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Lack of interest
It is also important to understand that the absence of one of the two forces
can facilitate a price movement. An absence of supply can help the price to
rise in the same way that an absence of demand can cause it to fall.
When the supply is withdrawn, this lack of interest will be represented
as a smaller number of contracts placed in the ASK column and therefore
the price may move more easily upwards with very little buyer power.
By contrast, if it is the demand that is withdrawn, this will translate
into a reduction in the contracts that buyers are willing to place in the BID
column and this will cause the price to fall with very little initiative from
sellers.
The Auction Process
For an order to be executed, it must be paired with another order with the
opposite intent. This means that for a sell operation (supply) to be executed,
it must be paired with a buy operation (demand) and vice versa.
The market moves thanks to this exchange process between agents. It
is vitally important to understand this concept, since practically all the actions that we will explain later are based on this principle.
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When well-informed traders decide to build a buy position, it is the
uninformed traders who are going to provide them with that liquidity; the
counterparty they need to match their market entry and exit orders.
In reality, this is exactly the same as any other type of market in which
goods are exchanged. If you put your house up for sale, until there is a buyer
interested in buying it, no trade can take place. For someone to buy, there
must be someone else selling what that person wants. The same thing happens in financial markets. Whether it be stocks, contracts, or units that are
being traded, for every buyer there is always a seller on the other side, and
that other side is known as the counterparty.
Absorption
As we have just seen, a trade always involves a buyer taking a position on one
side of the market and a seller taking the opposite position. This is the principle of counterparty: the buyer is the counterparty to the seller while, at the
same time, the seller is the counterparty to the buyer.
When we talk about absorption, we refer to the ability of one side of
the market to block the market in one direction, through limit orders. These
types of orders do not have the ability to push the price in one direction, but
they can stop a movement. This is exactly what happens when absorption
takes place.
Imagine that there is a lot of interest in buying an asset, that a number
of traders take an aggressive approach and go to the ASK column of the order book to buy at the last available price. As we know, for every buyer there
must be a seller. If there is an imbalance and all the sell orders at that price
level are consumed, the market will go up another level. But what happens if
all these buyers are constantly provided with the match they need? To put it
simply, the available supply at that price level would never be exhausted and
therefore the market could never move upwards. The market is being
blocked, and a process of absorption of small-scale buy positions is taking
place.
The same can happen when there is an absorption of selling positions:
there are many traders willing to sell and they go to the BID column of the
order book to execute their market orders; but the market will not go down
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as long as there is a large trader acting as a counterparty because it has interests at a higher price. All these positions will be absorbed by the large
trader, which will be carrying out its positioning campaign.
Thanks to the fractality of the market we can observe the same behaviors, regardless of the time scale. This can be represented to different
degrees when applied to the absorption process. To a lesser degree, absorption can be identified at the micro level by analyzing the order flow, at an
intermediate level by applying the law of effort vs result with which we analyze the price action and volume (as we will see below), and we can identify
it on a larger scale in terms of complete structures. You will start to fit all
the pieces together as you move through the contents of this book, until you
complete the puzzle.
Conclusion
Regardless of the origin of the buy or sell order (retail trader, institutional
trader, algorithm, etc.) the result is that liquidity is added to the market; and
this is what really matters when it comes to trading.
Price and volume are two of the tools that we can use to understand
the result of this interaction between supply and demand.
In order to know at all times
what is happening in the market, you
need to learn how to correctly interpret
the price action with respect to its volume.
This is why the Wyckoff Method
is considered a truly sound approach
for analyzing what is happening on the
chart (accumulation and distribution
processes) and to propose accurate
forecasts.
To delve further into the Law of Supply and Demand and understand
how the order matching process is carried out, I recommend that you study
my book “Wyckoff 2.0: “Structures, Volume Profile and Order Flow”, which
attempts to decipher the complex subject of the market microstructure.
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T HE LAW OF CAUSE AND EFFECT
This is based on the idea that something cannot happen out of the blue; that
for the price to change a cause that originates it must first have been constructed.
Generally, causes are constructed by a significant change of hands
between traders who are well informed and those who are not. In the case of
individual trades, the cause that makes the price rise is the desire of the
buyer to have those stocks or the desire of the seller to obtain that money.
As well as looking at the cause in terms of an individual trade, the
goal is to see the cause from a broader perspective, in terms of movements.
In this case, the market is said to be constructing a cause during periods
when the price is moving sideways. This subsequently generates an upward
or downward trend, which is the effect.
In these periods of sideways movements, stock absorption campaigns
are carried out in which large traders begin to position themselves on the
25
correct side of the market, gradually expelling the rest of the participants
until they find the path along which the price will subsequently move free of
resistance.
An important aspect of this law is that the effect generated by the
cause will always be in direct proportion to that cause. Consequently, a major
cause will produce a greater effect, and a minor cause will result in a lesser
effect. It is logical to assume that the longer the market spends in a range
developing a campaign, the greater the distance the subsequent trend will
travel.
The key is to understand that it is during the sideways phases of the
price movement that the accumulation/distribution processes take place.
Depending on its duration and the efforts we see during its creation
(maneuvers such as false breakouts), this cause will generate an upwards or
downwards movement in response (effect).
Another aspect to bear in mind is that not all ranges are accumulation
or distribution processes. This is a very important point. Remember that the
method tells us that some structures are nothing more than price fluctuations, with no cause motivating them.
Fast Patterns
There are certain market conditions in which price reversals can originate
without much prior preparation. These are the fast patterns that we introduced in my first book “Trading and Investing for Beginners”.
In these contexts there is a certain urgency in the market to change
the direction of the trend and well-informed large traders trade stocks in a
short space of time, without spending time building up a campaign.
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Four general patterns of behavior exist:
• Climax: The movement after the last impulse completely and powerfully reverses the previous impulse.
• Double top/bottom. The movement responsible for reaching a new
high/low stays at the same level as the previous high/low and then
reverses.
• Pullback. The movement responsible for reaching a new high/low
fails to reach the previous high/low before reversing.
• Bear/Bull Trap. The movement responsible for reaching a new high/
low slightly exceeds (by up to 20%) the previous high/low before
reversing.
The most interesting thing about all this is that thanks to the fractal
behavior of the market these four forms can be seen in all market movements regardless of their degree and importance. This means that, generally
speaking, both individual movements and trends will end in many cases in
one of these four ways.
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Point and Figure Charts
Initially, the scope of the effect is unknown, but we can assume it will be
proportional to the effort that caused it. Wyckoff used the point and figure
charting technique to quantify the cause and estimate the effect.
The potential targets are estimated by means of the horizontal column count. This provides a good indication of how far a movement might
travel. Accumulation would produce an upward count while distribution
would project it downward.
Unlike bar charts, which are time-based; point and figure charts are
based on volatility. For the point and figure chart to move to the right and
generate a new column, it first requires a price movement in the opposite
direction.
Counting on this type of chart is done from right to left and is delimited between the two levels on which the force controlling the market at that
time appeared first and last:
• For the projection of a count in an accumulation structure we measure the number of columns between the Last Point of Support (last event
28
in which the demand appears) and the Preliminary Support or Selling Climax (first events in which the demand appears).
• For the projection of a count in a distribution structure we measure
the number of columns between the Last Point of Supply (last event in
which the supply appears) and the Preliminary Supply or Buying Climax
(first events in which the supply appears).
• For re-accumulation ranges, the count is taken from the Last Point
of Support to the Automatic Reaction (since this is the first event in which
the demand appeared).
• For distribution ranges, the count is taken from the Last Point of
Support to the Automatic Rally first event in which the supply appeared).
After counting the number of boxes that make up the range, the result
is multiplied by the value of the box.
The typical projection is obtained by adding the resulting figure to the
price on which the LPS/LPSY is produced.
To obtain a conservative projection, the resulting figure is added to the
price of the highest extreme reached.
• In distribution ranges, the highest maximum will generally be the
one set by the Upthrust (UT) or the Buying Climax (BC).
• For accumulation ranges, the lowest minimum will generally be that
of the Spring (SP) or of the Selling Climax (SC).
Obtain a more conservative projection by dividing the area into phases. Count from and to the points where the price reversals occur. Count the
number of boxes that make up each phase and multiply this by the value of
the box. The resulting figure is added to the price of the LPS/LPSY or the
price of the highest extreme reached.
Just because the security has been extensively prepared doesn’t mean
that the entire area is an accumulation or distribution. This is why the counts
made using the point and figure graph do not always reach the biggest target
and therefore you should divide the range to generate several counts and
thus establish different targets.
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Technical Analysis for the Projection of Targets
There are traders who believe that the projection of targets using the point
and figure chart is not the most suitable technique for today’s markets.
There is an added difficulty when it comes to creating the point and
figure chart; there are several ways of doing it. This makes it less useful as
this subjectivity makes it a less trustworthy tool. Some traders prefer to simplify things and use tools like Fibonacci, Elliot, or harmonic patterns (vertical
range projection) to project targets. The problem with applying these methods is that they are not based on a real underlying logic, which means the
identification of said levels is left at the discretion of the trader, with all the
problems this entails.
The only objective fact is that we cannot know for sure what effect
the cause will have. In order to make a profit, it seems much more sensible
to apply an objective reading of the market and to use tools such as the Volume Profile approach. We will address this later.
Since the market moves under this law of cause and effect using the sideways phases to generate subsequent movements, trying to decipher what is
happening during the development of these structures can give us an edge.
And for that task the Wyckoff Method offers us some excellent tools. Wyckoff traders know that it is in these sideways conditions where trends are born
and that is why we are continuously looking for the beginning of new structures. The objective is to analyze the price action and the volume within it to
position ourselves before the trend movement develops.
A trend will end and a cause will begin. A cause will end and a trend
will begin. The Wyckoff method is centered around the interpretation of
these conditions.
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T HE LAW OF EFFORT VS RESULT
An analysis based on the law of effort vs result looks at the price action
and volume in order to determine if there is harmony or divergence in
order to interpret whether the interest in that particular action is genuine
or false.
In financial markets, effort is represented by volume while the result
is represented by price. This means that the price action should reflect the
volume action. Without effort there cannot be a result. It is about evaluating
the dominance of buyers or sellers through the convergence or divergence of
price and volume.
The Importance of Volume
Price is not the only important factor in financial markets. Perhaps a more
important factor is the nature of the volume. These two elements (price and
volume) are part of the cornerstone of the Wyckoff Method.
Volume identifies the amount of stock (shares, units, contracts) that
has changed hands. When large traders are interested in a security, this will
be reflected in the volume traded.
This is the first key concept: the participation of large traders can be
observed through an increase in volume.
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Harmony and Divergence
A significant increase in volume indicates the presence of professional money aimed at generating a movement (continuation or reversal). If the effort is
in harmony with the result, it is a sign of the strength of the movement and
suggests its continuation. If the effort is in divergence with the result it is a
sign of the weakness of the movement and suggests a reversal.
You should also be aware that the price movement will be in direct
proportion to the amount of effort spent. If the two are in harmony, a major
effort will cause a movement with a longer duration; while a minor effort will
be reflected in a movement of shorter duration. Meanwhile if there is an indication of divergence, the result tends to be in direct proportion to that divergence. A smaller divergence tends to produce a smaller result and a larger
divergence, a larger result.
Analysis Table
The following table contains a summary of all the elements we have looked
at regarding the analysis of harmony and divergence between price action
and volume:
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We will now look in more detail at the actions to which we can apply
this law of effort vs result:
In the development of a candlestick
This is the simplest evaluation. It involves analyzing price action and volume based on a single individual candlestick.
Candlesticks are the definitive representation of a battle between
buyers and sellers in a certain period of time. The final result of this interaction between supply and demand transmits a signal to us. Our job as traders
who analyze price action and volume is to know how to correctly interpret
that signal. In this case in isolation.
What we are looking for is an alignment between the traded price
ranges and volume. For a signal of harmony, we would expect to see wide
ranges at high volumes and narrow ranges at low volumes. The opposite
would indicate a divergence.
Because this is the minimum thing we should assess, the candlestick-by-candlestick analysis is especially useful for us to identify the entry
trigger and to see isolated key actions such as climaxes.
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In the subsequent shift
This involves analyzing the price action and the volume on a larger scale;
on the subsequent price shift.
We want to evaluate if that volume generates a movement in the direction of the original candlestick or if, by contrast, after observing that increase in volume, the price moves in the opposite direction. Therefore, we
would detect harmony between effort vs result if that candlestick plus that
volume cause the movement to continue in the same direction; and divergence if the market pivots.
Normally, at the beginning of each impulse there is a relatively high
volume that supports it; whereas this volume is not seen at the beginning of
a correction. It is worth bearing this in mind when analyzing the nature of a
movement.
• If we want to treat a movement as an impulse, we will expect to see
that high volume at its origin, which would indicate an institutional presence
supporting said movement and that the probability is a continuation in that
direction.
• If we see that a movement is generated without a large volume at
its origin, objectively it would appear to be a movement without any institutional participation and this suggests to us that this movement is a correction or, in the case of an impulse, it would denote divergence.
The key here is to remember that the market will only move if there
are large institutions interested in pushing it in that direction.
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In the development of movements
Here we increase the scope of our analysis to cover the price action and
volume in terms of complete movements.
As a general rule, impulses will be accompanied by an increase in
volume as price moves in the direction of the least resistance; and movements of a corrective nature will be accompanied by less volume.
Therefore, a movement is in harmony when as an impulse it is accompanied by increasing volume and as a correction, by decreasing volume. Similarly, we can detect a divergence if we see an impulse accompanied with a
smaller volume relative to what was previously seen, or in the case of a correction if the volume is relatively higher (it would be necessary to evaluate at
that point if it really is a correction).
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By Waves
This tool (originally created by David Weis) measures the volume that has
been traded in each wave (upwards and downwards). All in all, it allows
us to assess market conditions and more accurately compare bullish and
bearish pressure between movements.
A key fact to keep in mind when analyzing waves is that not all volume traded in a bullish wave will be purchases and that not all volume traded in a bearish wave will be sales. Just like with any other factor, it requires
analysis and interpretation. The analysis of effort vs result is exactly the
same. It is about comparing the current volume wave with previous ones;
both with the one going in the same direction and the one going in the opposite direction.
There is harmony if in an upward movement the bullish impulses are
accompanied by bullish waves with a greater volume than the bearish corrections. Harmony also exists if the price hits new highs and each bullish
impulse does so with an increase in the volume of the waves. By contrast,
divergence exists if the price moves upwards but the bullish waves are ever
diminishing; or if in this upward movement the bearish waves demonstrate
greater strength.
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Upon reaching key levels
This is yet another way evaluating this law of effort vs result; this time, in
terms of breakouts and trading zones.
It is quite simple: if the price approaches a level with volume and performs a real breakout, we can say that there is harmony between effort and
result in that breakout movement. That volume had the intention of increasing and has absorbed all the orders that were located there.
If, on the contrary, the price approaches a level with volume and performs a false breakout, we can say that there is divergence. All that trading
volume has been participating in the opposite direction to the breakout.
The key is to see if the price holds on the other side of the level or not.
It may take some time before continuing in the direction of the breakout with
a new impulse; as long as it does not lose the level, in principle the breakout
should be treated as if it were real.
This can be applied to any type of level. Whether horizontal (supports
and resistances), sloping (trend lines, channel lines, inverted lines, converging or diverging lines), dynamic levels (moving averages, VWAP, bands); as
well as any other level established by a specific methodology.
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Effort/Result in Trends
As well as what we have looked at above, the evaluation of effort/result can
be applied to more general market contexts such as trends.
Normally, relatively large volumes accompany the termination of a
prolonged trend movement, especially if in the latter part they are accompanied by small price advances.
Therefore, high volume after a large downtrend indicates that the decline is almost complete. It may be a selling climax and the start of an accumulation.
Likewise, high volume after a prolonged uptrend indicates that the
end of the bullish movement is imminent and that the distribution phase may
be beginning.
Lack of Interest
Reversals do not always occur when there is considerable volume (effort)
and a comparatively small price movement (result). There is another way in
which a price reversal may occur and that is due to a lack of interest.
Small volumes at the bottom of the market after a significant decline
or a bearish correction generally indicate a lack of selling pressure. If there is
no interest in going further down, an appearance now from buyers would
cause an upturn. Similarly, small volumes at the top of a market after a significant rise or a bullish correction generally indicate a lack of buying pressure that would lead the price towards a bearish reversal if sellers were to
appear.
Remember that sudden relative increases or decreases in volume are
significant and will help you identify when a movement may be ending.
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PART 3 – ACCUMULATION AND
DISTRIBUTION PROCESSES
W
hen the Wyckoff Method was devised, the financial market ecosystem was very different from today. At that time, the only product
available was the stock market, so Wyckoff’s ideas were designed
to explain the workings of these types of markets with limited and available
stock.
Today stock markets continue to operate under the same premise.
Accumulation and distribution processes develop in the same way: through
the absorption of floating stock. It is the same system that Richard Wyckoff
originally understood through his observation of how financial markets really
work.
Over time, technological advances have brought with them new financial products, such as derivatives. Derivatives are instruments whose
value derives from the evolution of other financial assets such as stocks, as
well as tangible (real) assets such as raw materials or precious metals.
These other assets, from which the derivatives are created are known as underlying assets.
The most important derivative products are futures and options. In
these types of markets there is no available and limited stock, as there is in
the stock market; instead, contracts are exchanged and the number of contracts that can be exchanged is unlimited. Under this premise, accumulation
and distribution processes in derivatives markets are not based on absorption until the availability of the stock is exhausted, but are based on aggressiveness and lack of interest on both sides (buyers and sellers).
39
The number of contracts that can be traded in the derivatives market
is limited only to what the participants want to trade. Therefore, it is these
participants who determine, based on their disposition, when an accumulation or distribution process might be generated. The idea is that at the end of
these processes, most of the market will be positioned in the same direction.
At that point one side will denote aggressiveness through its positioning and
the other side will denote a lack of interest by staying out of the market or by
maintaining very little presence. It is at that moment that the cause will start
to develop its effect.
Strong Hands vs Weak Hands
Initially, the terms strong hands and weak hands referred to whether traders
were guided by their emotions when making decisions; strong hands were
those who would not allow their decisions to be taken based on emotions,
and weak hands were those without the margin to accommodate big losses,
who in moments of high stress would abandon their positions.
This definition changed over time and came to refer to the battle between large traders (or traders with a great deal of financial capacity and
muscle) and small traders (participants with less capacity, known as retail
traders; in other words, people like you and me).
Applying a little common sense we can obtain a more objective and
real understanding of what strong and weak hands really means. The world's
most liquid markets (such as the S&P500 or large cap companies) are almost
entirely controlled by large traders. They are purely institutional markets
where retailer traders have little to do. It is a battle between the big players.
In other words, even if we were to get all the retailers in the world together to
execute a well-orchestrated maneuver, we would not have enough capacity
to move the market in our favor.
This is why referring to strong hands versus weak hands in the traditional sense no longer applies. For large traders, the liquidity that retailers
can bring to the market is of absolutely no use to them. When they enter or
exit the market they need huge amounts of liquidity, liquidity that retailers
are not in a position to provide.
40
Obviously each market has its own characteristics and the above scenario could feasibly be executed satisfactorily in a less liquid market (small
capitalization companies, some cryptocurrencies, etc.). It is therefore the
degree of liquidity that determines the nature of its participants. The more
liquid the financial market is, the more difficult it will be for it to be manipulated, understanding manipulation as a single large player having the necessary market power to build up a campaign and move the price at will.
Following this reasoning, we come to another interesting conclusion
which is that not all large traders make money consistently in the markets.
This is a myth. As I have already mentioned, the most liquid markets basically
represent a struggle between institutions, by which rationale, some will have
to assume losses at some point.
And this is indeed the case. If you analyze statistics you will see that
there are a huge number of financial vehicles with very poor returns. These
instruments are the favorite victims of large traders, because these can provide them with high volumes of liquidity. Liquidity that is necessary for their
interests, as without it they could not match their orders to enter and exit the
market.
Well-Informed vs Uninformed
And since one theory cannot be questioned without another being suggested
to replace it, it would seem much more appropriate to speak in terms of
well-informed or uninformed traders rather than strong or weak hands.
Clearly the financial capacity of the trader (whether they have more or
less financial muscle) is not the decisive factor in determining whether they
will win or lose. It is the information they have and what can be derived from
this.
When we talk about well-informed traders, we refer to various actors:
both those who may have insider information and those who through their
analysis are able to make accurate valuations about the price of an asset. By
extension, well-informed traders are also those who know how to identify the
appearance of this price on the chart (which is the very subject of VSA and
the Wyckoff Method). Using these methodologies to perform our analyses
41
enables us to identify this institutional presence and enter on the side of
those who are well positioned.
By contrast, uninformed traders are obviously those who ultimately
lose money. This is the result of having made price valuations that do not
conform to reality or having failed to correctly interpret the information on
the chart.
Fast and Slow Patterns
Normally accumulation and distribution processes require time. If there are
large traders interested in the security, interested in generating a major
campaign, they will need to carry out the absorption of the orders they require through a slow process. These slow patterns are the structures that the
Wyckoff Method tries to analyze and which we will focus on throughout this
book.
But we also know that the market doesn’t always behave like this, and
in cases where there is more urgency or the campaigns require less volume,
this type of process is manifested in fast patterns, identifiable through the
four previously explained behavior models: climax, pullback, double top/bottom or bull/bear trap.
42
Depending on the characteristics of the market, the types of traders
that are trading in it, and all the information and conditions about the asset,
one type of pattern or another will develop. The important thing is to be openminded and anticipate any eventuality.
In this book we will focus mainly on slow patterns since these are the
type that most frequently appear in the markets.
43
A CCUMULATION
An accumulation range is a sideways price movement in which large
traders carry out an absorption maneuver to accumulate stock in order to
be able to sell it at higher prices in the future and make a profit on the
difference.
Control of the Market
During the development of the bearish movement that precedes it, the control of the market will be mainly in weak hands, in uninformed traders. A reversal in the market requires strong hands, large well-informed traders, to
take control of the market.
As the price falls, control gradually changes hands. The more it falls,
the more positioning well-informed traders have. It is during the develop44
ment of the accumulation structure that the final process of intervention by
the large traders takes place, at which time the price is ready to start an upward movement.
The Law of Cause and Effect
In the case of an accumulation range, taking up buy positions (cause) will
have the effect of a subsequent uptrend movement; and the extent of this
movement will be in direct proportion to the time the price has spent constructing that cause and the volume that has been traded throughout the
structure.
To achieve this, professional traders need to plan and execute a careful strategy in which they try to absorb all the available stock for sale at the
lowest possible average price.
Manipulation Maneuvers
In the accumulation process, large traders create an environment of extreme
weakness. The news at this point will most likely be bad and many will be
influenced to enter on the wrong side of the market. Through various maneuvers, these large traders manage to obtain all the available supply, little by
little.
In the accumulation range we see a fundamental event characteristic
of this type of context, since in many cases it is the action that causes the
start of the trend movement. This is the bearish false breakout, also known
as "Spring." It is a sharp downward movement, which breaks the support level of the range and which large traders use to carry out a triple function: To
reach the stop losses of those traders who had good long positions; to induce
misinformed traders, who think that the bearish movement will continue, to
sell; and to profit from said movement.
While it is true that this false breakout event is an action that adds
strength to the projected bullish scenario, it is also true that said scenario
will not always materialize. You should be aware that on many occasions the
45
development of the uptrend will begin but not become complete. It is a
somewhat more difficult context to determine but equally valid.
At the same time, the large traders need to force those with weak
hands out of the market. These are traders that, if they are in buy positions,
will close their positions very quickly for small profits. This closing of buy
positions creates sell orders that the large traders will have to continue absorbing if they want to keep pushing the price up. One action they take to get
rid of this type of weak trader is to create a flat, boring market context, with
the aim of discouraging these traders so that they eventually close their positions.
Counterparty, Liquidity
Reaching the stop losses of buy positions and the entry of sellers in the market are both actions that provide liquidity to professional traders who are
trying to accumulate, since both result in the execution of sales, and these
sales are the counterparty that large traders need to match their buy positions.
In addition to this, when the bullish reversal pushes the price back
into the range, the stop losses of those who entered with short positions during the bearish break will also be executed, adding strength to the bullish
movement.
The Path of Least Resistance
Professional traders with interests higher up the price level will not initiate
the movement until they have verified that the path of least resistance is
moving upwards. They achieve this by carrying out various tests to check the
level of commitment of the sellers.
As with the Spring, they will initiate downward movements to check
what following this has. An absence of volume at this point would suggest a
lack of interest in reaching lower prices and the market is ready to start
moving higher.
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This is why sometimes more than one false breakout can be seen
within the range. These are tests that professional traders execute to ensure
that they will not encounter resistance at higher prices.
Common Characteristics of Accumulation
Ranges
The following are key characteristics of accumulation ranges:
• Decrease in volume and volatility as the range develops. There will
be less and less available supply and therefore, price and volume fluctuations will gradually reduce.
• Tests at the upper area of the range with little volume, suggesting
an absence of interest in selling; except when the price is ready to initiate
the movement out of the range.
• Bearish false breakouts (Springs) to previous lows; either at the
support area or at lower minimums within the range.
• Bullish movements and bars wider and more fluid than the bearish
ones. This denotes the entry of high quality demand and suggests that the
supply is of poor quality.
• Development of rising highs and lows. This sequence should already
be observed in the last stage of the range, just before the start of the bullish breakout. It denotes total control by buyers.
Beginning of the Upward Movement
When there is no more interest in continuing to sell, a turning point occurs.
Control of the security is held by informed traders and they will only close
their positions at much higher prices. A slight increase in demand would now
cause a sharp upward movement in prices, starting the uptrend.
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R E - ACCUMULATION
The re-accumulation process is exactly the same as the accumulation
process. The only difference between the two is the way the structure begins
to develop. While the accumulation range begins at the end of a bearish
movement, the re-accumulation range begins after the end of a bullish
movement.
Absorption of Stock
A re-accumulation is the result of a previous uptrend that needs to be consolidated. The hands that control the security will change during the course
of the trend. At the beginning of an uptrend, the stock is under the control of
very strong owners (professional traders, strong hands). However, as it unfolds, control will gradually shift towards uninformed traders, weak hands.
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At this point, the demand is said to be of poor quality and the market
needs to re-start an absorption process in which well-informed traders take
control again.
Duration of the Structure
A key point to bear in mind is that the duration of this structure will be influenced by the percentage of well-informed and uninformed traders who are in
control of the security.
Since the control will gradually change, if at the beginning of the reaccumulation the security is still mainly in strong hands, the duration of the
structure will be shorter. This is the context for corrective movements in line
with the trend, which are often consolidations with a short duration.
If, on the other hand, the market at that point has been transferred for
some reason to mostly weak hands, a longer period of time will be necessary
for the buying process to develop once again.
The cause of the main accumulation probably didn’t quite have the
expected effect. This structure develops in order to add new demand to the
market. In this way upward movement can continue towards said targets.
Re-Accumulation or Distribution
To avoid making the mistake of confusing a re-accumulation range with a
distribution range a very careful analysis of price action and volume is required. Both start in the same way, after the end of a bullish movement. You
need to be able to automatically detect the characteristics of accumulation
ranges, since this is one of the most compromising situations that a Wyckoff
trader will face.
We will deal with this particular issue later, as it is the source of frequent doubts. To try to solve this problem, I will later explain the most important points that you need to take into account when assessing the market
sentiment during the development of structures.
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D ISTRIBUTION
A distribution range is a sideways price movement which manages to stop an
upward movement and in which well-informed professional traders execute
sales due to their interest in seeing the price fall. These well-informed
traders will try to maintain a large position in order to close it at a lower price
and make a profit on the difference.
The Law of Cause and Effect
In the case of a distribution range, taking up sell positions (cause) will have
the effect of a subsequent downtrend movement; and the extent of this
movement will be in direct proportion to the time the price has spent constructing that cause (absorbing the buy positions).
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Preparing a major move takes considerable time. A large trader cannot build their entire position at once, for the simple reason that if they execute their sell orders with an order that contains the entire amount they are
looking for, the very aggressiveness of that order would cause the price to
shift downward to meet the demand needed to match their sell orders, resulting in them obtaining worse prices.
In order to achieve their aim, professional traders need to develop and
execute a careful strategy in which they will try to absorb all the demand
available in the market at the highest possible average price.
Manipulation Maneuvers
During this distribution process, large traders, supported by the media (often
at their service) create an environment of extreme strength. By doing so, they
hope to attract as many traders as possible, since it will be the buy orders of
these traders that provide the necessary counterparty for their sell orders.
In this situation, uninformed traders don't know that well-informed
traders are building a large selling position, because their interests lie lower
down the price level. They will be entering on the wrong side of the market.
Little by little and through various maneuvers, these large traders manage to
obtain all the available demand.
In the distribution range, as in the accumulation range, a fundamental
event will take place: the false breakout. Although it is true that this action
might not be seen in all structures before the start of the trend movement,
its occurrence adds a great deal of strength to the scenario.
Under the Wyckoff Method, a bullish false breakout is known as an
“Upthrust”. It is a sharp upward movement which breaks the resistance level
of the range and which large traders use to carry out a triple function: Reach
the stop losses of those traders who had good short positions; induce misinformed traders to buy, thinking that the bullish movement will continue; and
profit from said movement.
At the same time, the large traders need to force those with weak
hands out of the market. These are traders that, if they are in sell positions,
will close their positions very quickly for small profits. This closing of sell
positions are the buy orders that the large traders will have to continue ab-
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sorbing if they want to keep pushing the price. One action they take to get rid
of this type of weak trader is to create a flat, boring market context, with the
aim of discouraging these traders so that they eventually close their positions.
Counterparty, Liquidity
Professional traders who are building up their position are compelled to carry out these types of maneuvers. Due to the size of their positions, it is the
only way they can trade in the markets. They need liquidity to match their
orders and a false breakout is a fantastic opportunity to obtain it.
The execution of stop losses of sell positions, along with the entry of
traders with long positions, are buy orders that must necessarily be matched
with a sell order. And indeed, it is these well-informed traders who are placing those sell orders and therefore absorbing all the buy orders that are executed.
In addition, when the bearish reversal occurs after the false breakout,
the stop losses of those who bought will also be executed, adding strength to
the bearish movement.
The Path of Least Resistance
Once the range runs out of steam, the professional traders will not initiate
the downtrend movement until they can verify that the path of the least resistance is indeed in that direction.
They do this through tests to evaluate the interest of the buyers. They
initiate upward movements and, depending on the supporting participation
(this can be deduced by the volume traded in that movement), they will assess whether there is demand available or if, on the contrary, there are no
more buyers. An absence of volume at this point would suggest a lack of
interest in reaching higher prices.
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This is why sometimes more than one false breakout can be seen
within the range. These are tests that professional traders execute to ensure
that they will not encounter resistance at lower prices.
Common Characteristics of Distribution Ranges
The following are key characteristics of distribution ranges:
• High volume and volatility during the development of the range.
Major price fluctuations will be observed and the volume will remain relatively high and constant.
• Tests at the lower area of the range with little volume, suggesting
an absence of interest in buying; except when the price is ready to initiate
the movement out of the range.
• Bullish false breakouts (Upthrust) to previous highs; either at the
resistance area or at minor highs within the range.
• Bearish movements and bars wider and more fluid than the bullish
ones. This denotes the entry of high quality supply and suggests that the
demand is of poor quality.
• Development of diminishing highs and lows. This sequence should
have already been observed in the last stage of the range, just before the
start of the bearish breakout. This suggests that the bears are being more
aggressive.
Start of the Downward Movement
When there are no more buyers willing to continue buying, a turning point
occurs. Control of the asset is held by informed traders and they will only
close their positions at lower prices. A slight increase now in supply would
cause a sharp downward movement in prices, starting the downtrend.
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R EDISTRIBUTION
The redistribution phase is a range originating from a downtrend which is
followed by a new downtrend. Within a large bear market, multiple phases of
redistribution can occur. It is a pause that refreshes the security before developing a new downward movement.
Redistribution or Accumulation
This type of structure starts in the same way as an accumulation range. For
this reason a very careful analysis is necessary to avoid coming to the wrong
conclusion. This aspect is undoubtedly one of the most difficult tasks for the
Wyckoff trader: knowing how to distinguish between a redistribution range
and an accumulation range.
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Control of the Market
During redistribution periods, large professional traders who are already in
short positions sell again around the top of the range and potentially cover
(close/buy) some of their positions near the base of the range.
In general, they are increasing the size of their position during the development of the range. The reason they close some of their short positions
at the base of the range is to provide support to the price and not prematurely push it down before they can build a significant short position again.
The redistribution remains volatile during and at the end of its development before continuing the downtrend.
The hands that control the security will change during the course of
the trend. At the beginning of a downtrend, the stock is under the control of
very strong owners (professional traders, strong hands). However, as it unfolds, the stock will gradually shift towards less informed operators, weak
hands. At this point, the supply is said to be of poor quality and the market
needs to re-start a stock absorption process in which once again the large
traders take control.
Duration of the Structure
The percentage of strong hands and weak hands that are in control of the
security will influence the duration of the structure. If at the beginning of the
redistribution the security is still mainly in strong hands, the duration of the
structure will be shorter. If, on the other hand, it is the weak hands that control most of the stock, a longer period of time will be necessary for the selling process to develop once again.
The main distribution may not have reached its full potential effect.
This structure is developed to add new short positions to the market with
which to continue the downward movement.
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PART 4 - EVENTS
T
he Wyckoff Method tries to identify certain logical price reversal patterns during which the control of the market is determined.
This section describes the sequence followed by the price during the
development of these structures. You should be able to observe these events
from a practical perspective and ensure you are not rigid, but flexible in your
analysis.
Each subsection will look at a different event and offer an explanation
using the example of both of an accumulation and a distribution structure.
List of Events
Although they will be described in more in depth later, below is a brief summary of the underlying logic behind each event:
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Event no. 1: Preliminary stop
This is the first attempt to stop the current trend movement that will always
fail. It's an early warning that the trend may be coming to an end.
Event no. 2: Climax
This is the culmination of the preceding trend. Having traveled a great distance, the price will hit an extreme that will encourage the appearance of
large traders.
Event no. 3: Reaction
This is the first big signal that suggests a change in market sentiment. The
market goes from being under the control of one of the two forces to a market in equilibrium.
Event no. 4: Test
This event can be read differently depending on where it takes place. In general terms, it tries to assess the commitment of traders, or lack of, at a certain moment and direction.
Event no. 5: False breakout
Key moment in the analysis of the structure. This is the last trick that large
traders use before initiating the trend in the direction of least resistance.
Event no. 6: Breakout
This is the greatest test of a professional trader’s commitment. If they have
done a good job of absorption previously, the price will break the structure
relatively easily and continue to move beyond it.
Event no. 7: Confirmation
If the analysis is correct, a break and retest will occur which will confirm
that professional traders have positioned themselves in that direction and
continue to support the movement.
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E VENT NO . 1: P RELIMINARY STOP
This is the first event of the Wyckoff method to appear indicating the start of
Phase A, and the stop of the previous trend. In accumulation structures it is
called Preliminary Support (PS) and in distribution structures it is known as
Preliminary Supply (PSY).
Before this event occurs, the market will be in a clear trend situation.
At some point the price will reach a level that is attractive enough for the big
players to participate more aggressively in the opposite direction.
What the preliminary stop looks like on the chart
The appearance of this event on the chart is often misinterpreted because it
isn’t always accompanied by a bar with an increased volume and wider
range.
It might also be seen as a set of bars with a relatively narrow range
and a high and constant volume across them all; or even a single bar with a
high volume and a long wick. These representations ultimately denote the
same thing: the first significant entry of large traders.
It is worth remembering one of the most important quotes from Tom
Williams' book "Master the Markets" in which he more or less says that the
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market does not like large trend bars with significant increases in volume
after a prolonged movement, since these generally denote the opposite sentiment.
Seeing a large bearish bar with a peak in volume and a close at a low
after a prolonged downward movement is a very clear indication that professional traders are buying.
This action is likely to lead to an oversold condition relative to the
downward channel that the price action is moving in during the bearish
movement.
The psychology behind the preliminary stop
We are now going to study the way orders are matched during said action.
Remember that for someone to buy, there must be someone to sell.
Ask yourself what both the uninformed or "weak hand" trader and the
well-informed or "strong hand" trader will be doing at this point.
As we have mentioned, having decided that the market has reached
the appropriate price level for them to start a campaign, well-informed
traders will be absorbing all the available orders; and it is the uninformed
traders who will be providing them with all the liquidity they need to build up
their positions.
There are several types of uninformed traders that facilitate this:
• The greedy. There will be a group of traders who see the price move
abruptly and decide to enter the market to avoid being left out of a potential move in their favor.
• The fearful. This group has been holding losing positions for a long
period of time and their limit is very close. After seeing the price move
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against them again, and for fear of seeing their losses increase, they finally
decide to abandon their position.
• The smart ones. They will have been able to anticipate the reversal
and will already be in the market; but their timing is wrong and this price
movement takes them out by triggering the stop losses they set up as protection.
Uses of the preliminary stop
So what then is the use of identifying this first stop event? As we have already mentioned, this is the first action which stops the previous trend
movement and therefore allows us to draw two clear conclusions:
• At least initially we may consider no longer trading with the previous trend, since the structure has yet to be confirmed as a continuation or
reversal.
• This is an excellent point at which to take profits.
Preliminary Support
In the case of accumulation structures, it is called the Preliminary Support
(PS), which together with the Selling Climax (SC), the Automatic Rally (AR)
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and the Secondary Test (ST) produces the change of character, making the
price evolve from a bearish trend environment to a sideways environment.
Since we know that a downtrend does not stop outright, we may encounter numerous attempts to stop the decline before it is actually achieved.
This is down to the momentum of the trend. Like a moving vehicle, once it
has reached cruising speed, even if you lift your foot from the accelerator,
the car will continue in the same direction for a while, thanks to its own momentum.
All those attempts to stop it are the Preliminary Support. The more
attempts there are, the more likely it is that the final point of the downtrend
will eventually be reached without a significant increase in volume.
If repeated Preliminary Supports are observed, this suggests that professional traders have been eliminating supply from the market and when
the final low is reached there will be very few left willing to sell. This will lead
to the price reaching its final extreme without a peak in volume. This will also
be a Selling Climax, in this case without an ultra-high volume: the end of the
movement due to exhaustion. We will comment on this later when we look in
detail at this climax event.
These are actually Preliminary Supports from a functional point of
view; because for the Wyckoff Method, the Preliminary Support as such is the
penultimate attempt to stop the downtrend (the last of which is known as
the Selling Climax). Therefore, it would be more accurate to label them as
potential Preliminary Supports.
Said potential Preliminary Support will be confirmed as the genuine
Preliminary Support when the price develops the four events of Phase A that
establish the change of character.
This first intervention by professional traders doesn’t imply that the
price will reverse immediately. In certain market conditions the price could
develop a fast pattern, as we have already mentioned. Although this type of
behavior is not as likely, you should be alert to its possible development.
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Preliminary Supply
In the case of distribution structures this event is known as a Preliminary
Supply (PSY), which together with the Buying Climax (BC), the Automatic
Reaction (AR) and the Secondary Test (ST), marks the end of Phase A, the
stop of the previous bullish trend and indicates the start of Phase B, the construction of the cause.
We will most likely see numerous failed attempts before the real Preliminary Supply occurs. These attempts should be labeled potential Preliminary Supply events.
If repeated Preliminary Supply events are observed, this suggests that
professional traders have been eliminating demand from the market and
when the final high is reached there will be few left willing to buy, which
could lead to the price reaching its final extreme without any significant volume.
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E VENT N O . 2: C LIMAX
This is the second event described by the methodology and appears after the
attempted stop of the Preliminary Support/Supply.
In accumulation structures it is known as a Selling Climax (SC) while
in distribution structures it is labeled a Buying Climax (BC).
With the appearance of significant volume after a prolonged trend
(potential stop), we should be alert to the signs of this climax event. As I always say, this is one of the major advantages of the Wyckoff Method: it provides us with the context of the market. It lets us know what to look for.
However, something to bear in mind is that Preliminary Support/Supply events do not always appear within the sequence and their function can
also be performed by the climax event. That is why I insist time and again on
the importance of allowing the market a certain flexibility. We have a context
and a basic sequence but we need to let the market express itself freely,
without necessarily trying to pigeonhole it within our roadmap. Attempting to
exercise control over the market would be a mistake.
The key to determining whether we are indeed observing a climax is
found in the price: we need to see a strong reaction (Event no. 3) and a test
(Event no. 4), indicating the end of Phase A, in which the trend is ended.
Keys of the climax
After the climax event, two things can happen; a reaction (Automatic Rally/
Reaction) or a sideways movement. If a reaction appears, this will be followed by a Secondary Test; by contrast, if a sideways movement occurs, the
market is most likely to continue in the direction of the previous trend.
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An important aspect of this event is that it needs to be tested to determine whether it is genuine (with the Secondary Test). Significantly lower
volume in a subsequent test shows a decrease in selling pressure.
This event is known as “No Supply” and “No Demand” within the VSA
(Volume Spread Analysis) approach.
It is important to note that the climax will not necessarily be the furthest extreme of the structure. During its development we might observe
various tests (unsuccessful attempts to reach lower lows or higher highs)
during Phase B as well as the test event in Phase C (Spring/UTAD) in which
there is normally a false breakout of the structure.
What the climax looks like on the chart
Although the principle is the same, it can manifest itself in different ways in
terms of how the price and volume are represented.
The prevailing view in the world of price and volume analysis is that
this event will be observed as a bar with increasing volume and expanding
ranges. Though this definition is correct, it is incomplete, since there are other ways it may be depicted.
On the one hand, it can be seen, on a set of bars with a relatively narrow range and a high and constant volume across all of them. Another form
of representation might be a single bar with a high volume and a large wick
at the bottom.
All these representations ultimately denote the same thing: that the
large traders have been extremely active.
Regardless of the characteristics of the climax event, if we observe
the genuine Automatic Rally/Reaction and Secondary Test, we should automatically label the previous movement a Climax.
The psychology behind the climax
As you will recall, due to the very nature of the markets, for someone to sell,
someone else must be willing to buy. So, at this point it is a good idea to ask
ourselves who is absorbing all the stock that is sold during the Selling Climax or bought during the Buying Climax.
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Logically, the counterparty in question can only be a large trader since
only they have the necessary capacity. It is this large trader that is absorbing
all these orders, managing to stop the abrupt fall or rise in price.
They have probably decided that the price is in an over-extended condition and they are happy to start a campaign in that zone to absorb and position themselves.
What are the reasons that lead the uninformed trader to provide the
liquidity that these large traders need? Let’s recall the types of liquidity
providers that we already mentioned when describing the preliminary stop
event:
• The greedy. There will be a group who see the climax movement and
enter the market for fear of it passing them by.
• The fearful. Another group, generally with medium to long-term positions, will have survived much of the previous trend movement. They are
incurring latent losses and when they see a new movement going against
them they decide to close their positions to avoid further actual losses.
• The smart ones. A last group of traders, believing themselves to be
the smartest in the class, will want to anticipate the reversal and at this
point they will probably already find themselves with open positions. This
third type of counterparty appears when the stop losses protecting their
positions are triggered.
Uses of the Climax
Being able to identify this event is very important because it signals the entry
of professional traders and therefore it indicates a supported and quality
action.
What advantage can we obtain by correctly identifying this event?
Since it is an action in which the previous trend movement stops and it suggests there is professional involvement, we can draw two clear conclusions:
• We should start to consider no longer trading with the previous
trend. At least until we can confirm whether the structure it creates is a
continuation or a change of direction.
• It is the last clear opportunity to take profits from our open positions, if we haven’t already done so at the stop event.
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Opening positions at this point is not recommended because the risk
is too high. However, it is true that more experienced Wyckoff traders can
take advantage of this type of context to engage in short-distance trades
looking for the rebound towards event no. 3 (Automatic Rally/Reaction).
Selling Climax
The Selling Climax is ultimately very similar to the Preliminary Support. Both
the way it appears on the chart and the psychology behind the action are
exactly the same. We should also initially treat it as a potential Selling Climax since we will only receive confirmation of its authenticity when the two
subsequent events that confirm the end of Phase A (Automatic Rally and
Secondary Test) appear.
The Selling Climax is a very powerful sign of strength. After a period of
falling prices, the market will reach a point where, exacerbated by very negative news, it will quickly crash. At this point, prices are now attractive to the
smart money, who will start buying or accumulating at these low levels.
The Selling Climax occurs after a significant bearish move. It is the
second event to appear after the Preliminary Support and takes place within
Phase A that stops the previous downtrend.
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This climax movement is generated for the three reasons that we detailed previously. Together they cause a snowball effect that pushes the
price further and further down.
The Wyckoff Method places special importance on this event, since its
appearance allows us to define the limits of the range; because the lowest
price marks the lowest end of the structure (support zone).
Selling Exhaustion
A downtrend will not always end with climatic volume. There is another way
it can come to an end. This occurs when the selling action that is controlling
the condition of the market gradually starts to disappear.
Sellers are no longer interested in lower prices and close their positions (take profits). This lack of aggressiveness from short positions creates
a potential market floor due to exhaustion.
Obviously, this disinterest will be represented on the chart through
candlesticks with a normal or narrow range and an average or even low volume.
The curious thing about this action is that, although it is not a climax
event that forecasts the end of a trend, many Wyckoff traders still label it a
Selling Climax. This doesn’t make much sense.
Although I always recommend looking at the actions of the market
from a functional point of view, this time we must observe this exhaustion
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from an analytical point of view in order to understand how to label it within
the structure.
To do this, I propose to the entire Wyckoffian community a new event
that identifies this end of the downtrend due to exhaustion. Something like
"Selling Exhaustion" could be representative of the action to which it refers.
A significant aspect of this Selling Exhaustion is that a sign of its possible appearance is when the price undergoes continuous Preliminary Support actions. Climax actions will be observed as the downward movement
develops where overall volume is probably in decline. This suggests to us
that an absorption of sell orders is taking place. Professional traders have
stopped selling aggressively and are beginning to take advantage of the
bearish continuation of the trend to take profits from their short positions.
This can cause a market floor to develop without seeing an expansion
in price ranges and in volume at the last low. This indicates that we are witnessing a Selling Exhaustion event.
Buying Climax
A Buying Climax is a strong sign of market weakness. After an uptrend, the
price will lead to a rapid rise, supported by favorable news and irrational buying on the part of uninformed participants.
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At this point, the market will have reached a level which is no longer
of interest. Well-informed traders will abandon their buy positions and even
start to take up short positions, waiting for a price reversal.
The Buying Climax is the second event to appear after the Preliminary
Supply and takes place within Phase A which stops the previous uptrend.
This climax movement is caused by professional traders capable of
initiating a price movement; and it is followed by uninformed traders who
make their trading decisions generally based on their emotions.
This is a trap. A trick where it appears there is a certain amount of
aggressive buying taking place when in reality the intention behind it is totally the opposite. All purchases are being blocked with sell orders. The price
cannot rise because someone with the capacity to do so is executing a
process of absorption.
The appearance of a Buying Climax allows us to define the limits of
the range; because the highest price marks the upper end of the structure
(resistance zone).
There are very clear similarities between Preliminary Supply and Buying Climax events. Both the way they can appear on the chart and the psychology behind the actions are exactly the same. The only difference between the two events is that the Preliminary Supply fails to stop the previous
uptrend, while the Buying Climax manages to achieve this (at least temporarily).
We should initially treat this event as a potential Buying Climax since
we will only receive confirmation of its authenticity when the two subsequent events that confirm the end of Phase A (Automatic Reaction and Secondary Test) appear.
Buying Exhaustion
An uptrend will not always end with climatic volume. There is another way it
can come to an end. This is when the buying action that is controlling the
condition of the market gradually starts to disappear.
Buyers are no longer interested in higher prices and close their positions (take profits). This lack of aggressiveness from long positions creates a
potential market ceiling due to exhaustion.
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Obviously, this disinterest will be represented on the chart through
candlesticks with a normal or narrow range and an average or even low volume.
Although this action does not have the characteristics typical of a
climax event, the methodology still labels it as such. For this reason, it might
be interesting to differentiate between the end of a trend due to a climax and
one due to exhaustion.
My suggestion to the Wyckoffian community is the creation of a new
event that identifies this end of the uptrend due to exhaustion. In this case,
"Buying Exhaustion" seems to me the most suitable label.
One sign that we might be witnessing Buying Exhaustion is the appearance of repeated and ever higher Preliminary Supply actions.
Potential Preliminary Supply events will be observed where overall
volume is probably in decline. This suggests to us that a gradual absorption
of buy orders is taking place, where professional traders have stopped buying
aggressively and are beginning to take advantage of the bullish continuation
of the trend to take profits from their long positions.
This can cause a market ceiling to develop, without seeing an expansion in price ranges and in volume at the last high, in turn indicating that we
are witnessing a Buying Exhaustion event.
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E VENT N O . 3: R EACTION
After the appearance of the potential climax there will be a reaction, visually
represented by a major movement in the opposite direction, ultimately confirming the appearance of the climax event.
In accumulation structures this is called an Automatic Rally (AR),
while in distribution structures it is labeled an Automatic Reaction (AR).
This ChoCh (Change of Character) has major implications because it
signals a change in the market context; the ChoCh emerges to end the previous trend and start a sideways price movement.
This change of character must be confirmed by the last event of
Phase A: the Secondary Test. Once this appears we can then expect the market to move into a new environment from that moment on.
The implications of its development
As the structure develops, the distance that this movement travels will be
one of the elements that we must take into account in order to determine
what the big players are doing.
We must bear in mind that a short-distance reaction does not have
the same implications as a significantly longer one (in comparative terms).
For example, in a market in which the last bullish movements have developed with an average of 50 points; and suddenly a 100-point Automatic Rally
is observed, this suggests a greater underlying strength.
When we see a potential reaction that is constantly fluctuating, hasn’t
traveled a great distance and has no significant volume, this denotes that
there is no great intent to push prices towards that side and suggests that
the market is not yet in a state of equilibrium. If this happens after a potential Selling Climax, it shows us that there is not a great deal of interest in
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pushing up the price. The control of the market still remains in the hands of
bearish traders. With this apparent weakness, the most sensible thing is to
expect a redistribution process that results in lower prices. Something that
would add strength to this scenario would be to see a Secondary Test that
ends below the potential Selling Climax.
The same occurs for analyses that indicate a higher probability of a
distribution pattern developing. If we see that the bearish reaction movement (Automatic Reaction) is zigzagging up and down, hasn’t traveled a great
distance, with no peak volume observed and that on top of that the Secondary Test ends above the high established by the Buying Climax, this
strongly suggests the appearance of a re-accumulation structure.
The anatomy of the reaction
Generally, the volume at the beginning of the movement will be large; it is
the end of a climax event and usually this price reversal takes place with
climatic volume (with the exception of the appearance of a Selling/Buying
Exhaustion event). As the movement progresses, the volume will decrease
until it is relatively low at the end. This diminishing volume suggests a lack of
interest in continuing in that direction and will put an end to the reaction.
Practically the same thing happens with the price ranges. At the beginning of the movement the ranges will be wide, with good trend candlesticks/bars that will progressively narrow as they approach the end of said
event.
Through continued practice you will develop the judgment necessary
to know when the narrowing of the ranges and the decrease in volume have
reached a point where the movement is likely to stop. There are no fixed or
mechanical rules, it is simply a matter of experience.
Uses of the reaction
It delimits the boundaries of the structure
This is one of the most important elements of the structures described by
the Wyckoff Method, since it marks one of the limits of the structure.
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• The Automatic Rally establishes the upper limit of the range, delimiting a clear resistance zone where new selling activity can be expected to
occur on subsequent visits.
• The Automatic Reaction establishes the lower limit of the range,
delimiting a clear support zone where new buying activity can be expected
to occur on subsequent visits.
It identifies the climax event
The reaction is hugely significant because at times it will not be very clear
when the genuine climax has appeared. As a result, we can use the change of
character that comes after this reaction to identify the climax event.
• The Automatic Rally will help identify the genuine Selling Climax.
• The Automatic Reaction will help identify the genuine Buying Climax.
It provides us with the market context
If we have correctly identified the climax and the reaction, the market’s
change of character is underway and we know that the price will test this
climax action through a Secondary Test. This gives us our road map. This is
very important since it provides us with the context and what we can expect
the market to do. This can even help us in terms of our trading approach:
• If you have previously correctly identified the Selling Climax and
now the Automatic Rally, you can move down to a shorter time frame to
look for the development of a minor distribution structure that generates
the end of the Automatic Rally and the bearish reversal that the development of the Secondary Test is looking for.
• If you have previously identified the genuine Buying Climax and now
the Automatic Reaction, you can move down to a shorter time frame to
look for the development of a minor accumulation structure that generates the end of the Automatic Reaction and the bullish reversal that the
development of the Secondary Test is looking for.
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Opportunity to take profits
If in an act of recklessness you were to trade on a climax event looking for
precisely that rebound, you shouldn’t hold the position for the entire development of the range, because initially you won’t know where the structure is
one of reversal or continuity. The sensible thing to do would be to close the
position at the Automatic Rally/Reaction for a small profit.
Automatic Rally
The Automatic Rally is a bullish price movement that develops after the end
of the Selling Climax and appears as the first sign of buyer interest.
Part of Phase A, this is an event which stops the previous downtrend
and takes place after the Preliminary Support and the Selling Climax.
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Why the Automatic Rally occurs
During the downtrend the price will have moved down a considerable distance and will possibly reach an oversold condition during the development
of the Selling Climax, where the following actions take place:
• Exhaustion of the supply. Aggressive sellers are no longer entering
the market.
• Short covering. Sellers who entered higher up close their positions.
• Appearance of demand. New buyers enter after observing the climax event.
The market has reached levels that no longer interest sellers, which
will cause a lack of supply. The withdrawal of sellers, both those who have
stopped selling aggressively, and those who have taken profits from their
short positions; coupled with the appearance of new buyers, who may have
entered with mean reversion strategies, will cause the price to drive upwards
with ease.
In this case, buyers who have entered at the Selling Climax usually do
not intend to hold their positions because they are almost certainly looking
for short-term trades and will take profits during the Automatic Rally, putting
an end to its development.
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Automatic Reaction
The Automatic Reaction is a significant bearish price movement that appears
as the first sign of seller interest. It is part of Phase A which stops the previous downtrend and develops after the Preliminary Supply and the Buying
Climax.
Why the Automatic Reaction occurs
The market will have moved up enough to produce a series of events that
together give rise to the development of the Automatic Reaction:
• Exhaustion of the demand. There are no aggressive buyers left who
are willing to keep buying.
• Long covering. Buyers who entered lower down close their positions, taking profits.
• Appearance of the supply. New sellers enter after observing the
previous climax event.
The previous market rally may have reached an overbought condition
leading to a lack of demand. The withdrawal of buyers, both those who have
stopped buying aggressively, and those who have taken profits from their
long positions, coupled with the appearance of new sellers, will cause the
price to drive downwards with ease.
Sellers who have entered at the Buying Climax are probably speculating, looking for a quick downward move and will take profits during the Automatic Reaction, which will put an end to its development.
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E VENT N O . 4: T EST
Secondary Test
The Secondary Test is the fourth event that takes place in the accumulation
and distribution structures described by the Wyckoff Method. It establishes
the end of Phase A, which stops the previous downtrend, and the start of
Phase B, in which the cause is constructed.
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Functions of the Secondary Test
As with each event, its identification is important as it informs us about the
market context. It gives us an indication of what to expect from that point on.
• In the case of accumulation structures, this event occurs with the
emergence from a downtrend into a context of sideways price movements.
• In the case of distribution structures, the market moves from an
uptrend to a range context.
This is very interesting because, as we know, the price action within
Phase B will be a continuous fluctuation up and down between the limits of
the structure.
In this underlying context, our trading approach here should be to wait
for the price at these extremes and look for a reversal in the opposite direction. We could do this directly in the time frame in which we are working,
looking for a certain candlestick configuration; or we could move down into a
shorter time frame to look for a smaller reversal structure (if we are in the
upper zone, we would look for a smaller distribution structure; and if we are
in the lower zone, we would look for a smaller accumulation structure).
In functional terms, the appearance of the Secondary Test provides
confirmation that the participants who had total control of the market up to
that moment, as evidenced by the fact that it was in a trend context, have
now abandoned it. And that the market is now in a state of equilibrium, where
buyers and sellers are comfortable trading (building up the cause for the
subsequent effect), leading to continuous fluctuation of the price within the
trading range.
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Characteristics of the Secondary Test
For the Secondary Test to be successful, the bearish movement must be accompanied by a narrowing in the price ranges and a lower volume than that
seen in the climax event.
Although some authors defend the idea that, in accumulation structures, the Secondary Test must remain above the low established by the Selling Climax, the fact is we should remember that the market is not a rigid entity, but rather it is constantly changing due to its very nature. Therefore we
should accept a certain amount of flexibility when observing price movements.
With this in mind, the position where the end of the Secondary Test
takes place can offer us an interesting perspective on who (buyers or sellers)
has more control of the market at this point:
• A Secondary Test ending in the middle part of the range implies neutrality, denoting equilibrium among the participants.
• A Secondary Test in the upper third of the range indicates a certain
imbalance in favor of buyers.
• A Secondary Test slightly below the low of the range suggests a
certain imbalance in favor of sellers.
This characteristic, together with the rest of the elements that have
been discussed above, as well as those that will follow, are signs that we
need to take into account whether we are dealing with an accumulation or a
distribution structure. It is about tallying up the points in favor of one side or
the other, and the more of these signs that we observe in favor of one direction, the stronger our analysis will be. The more signs we observe that denote
strength, the more control we can assume the buyers have and vice versa.
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The Secondary Tests of Phase B
Although the “official” Secondary Test is the one that appears in Phase A, this
is a behavior that we will continue to observe in different phases of the
structure’s development.
Once Phase B has started, we should be on the lookout for any type of
test at either of the two extremes of the range.
This type of test helps us to assess the strength and weakness of buyers and sellers during the construction of the cause. Sometimes tests might
even occur at both the upper and lower end of the structure.
Depending on the subsequent effect on the range (whether it becomes an accumulation or a distribution), the same action is labeled differently. Obviously, until the price leaves the range there is no way of knowing
the real intention behind the cause that was being constructed, so any realtime labeling of the action is difficult.
As well as looking at the market in the traditional way, we also need to
think in functional terms and differentiate price behavior from two perspectives: as a concept (action) and as an event (depending on the location).
Secondary Test at the upper extreme
The price breaks through the previous high created in the action that stopped
the trend but does not move up very far before re-entering the range, in a
minor false breakout.
Initially it is a movement that denotes underlying strength since the
price has been able to penetrate the resistance zone of the range, and this
could not have happened if there were no aggressive buyers present.
A subsequent assessment will confirm whether it is really a test of
strength in which orders have been absorbed with the intention of pushing
the price up; or whether it is an action involving distribution (selling) in order
to push the price down.
This new high can be used to establish a new upper end where we will
look for the bullish real breakout (in Phase D) or the bearish false breakout of
the structure (in Phase C).
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When we are looking at an accumulation/re-accumulation range, this
event is labeled an Upthrust Action (UA); while in the case of a distribution or
redistribution structure it is known simply as an Upthrust (UT).
This is the only difference between these labels. If the signs we have
up to now lead us to the conclusion that we are probably in an accumulation
range, we will label it an Upthrust Action. If we think there is more probability
that there is distribution taking place, we will label it an Upthrust
When a UA occurs and price remains above the resistance level for
some time before falling, this upward movement can be labeled a minor Sign
Of Strength (mSOS) since it is a type of test that denotes greater strength.
Secondary Test at the lower extreme
This is a test at the lows of the structure that produces a lower minimum. It
is generated due to the aggressiveness of the sellers and a lack of interest
on the part of the buyers; which suggests that further tests to that area are
likely in the future.
This type of test denotes a lot of underlying weakness. Informed
traders know that the price is overvalued and are anxious to sell. Hence this
extreme weakness. This event is generally more likely to appear when the
Phase A Secondary Test has produced a lower minimum. There is extreme
weakness in the market and this zone will need to be tested in the future.
Using this new low we can draw a new support level where we can
wait for the real bearish breakout or the terminal shakeout before the upward trend movement.
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If, based on the signs that we have observed up to that moment, we
believe that we are facing an accumulation structure, we will label this event
a Secondary Test as Sign of Weakness (ST as SOW). It may be a sign of momentary weakness framed within a context of greater strength.
When the signs suggest that the range is one of distribution or redistribution, this event is known as a minor Sign Of Weakness (mSOW). One indication that we may be facing a mSOW is if the Phase A Secondary Test is a
poor bullish movement, which hasn’t traveled very far (lack of buyer interest).
As I said before, we can only know what the correct label is once the
direction of the range is confirmed. However, this doesn’t help us in terms of
our trading approach. We need to use the signs to determine the probability
that the price will go in one direction or another. If you see total equilibrium
and there is nothing to suggest that it is more likely to be an accumulation or
a distribution, label such events as Secondary Tests in Phase B (ST in B). This
neutral label can be used to identify that test movement without any connotation regarding its strength or weakness.
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The Generic Test
A test, by definition, is an attempt, assessment or examination of something.
In this case, what is being tested is the intention of large traders to continue
in that direction.
The test can be considered successful if a candlestick appears that
suggests a lack of participation of smart money. And without this participation the market will not be able to go very far.
If professional traders have interests higher up, they will want to
make sure that the supply has been eliminated or absorbed before starting
the move upwards. On the other hand, if they anticipate lower prices, they
will do their best to confirm that there are no buyers willing to complicate
the move downwards.
As the market enters a zone where there was previously a high volume, there can be one of two results:
• Valid test. The volume is now low, which clearly indicates a lack of
interest and suggests that the market is now primed for a shift in the trend
towards the path of least resistance.
• Failed test. The volume is still high (relatively), which would indicate
that there are still traders willing to keep pushing the price. The best thing
to do in this case is wait or for repeated tests to appear that confirm that
there is no stock available; or that the market is continuing in the direction
of its latest movement.
As a result of the above, these tests can be a good moment to enter
the market. If the test is valid, we can “bet” in favor of the force that is applying the most pressure and that in theory has greater control of the market.
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Where To Find Tests
Due to their generic nature, tests are actions that can be useful for making
trading and investment decisions in different market contexts, the most recommended being:
Test after a false breakout
Known as the Spring test (bearish false breakout) or the Upthrust test (bullish false breakout), it takes place during Phase C, the test phase, prior to the
breakout of the structure.
It is the moment in which the market offers the best risk/reward ratio
because if the test is genuine, we will be very close to the end of the structure (where the Stop Loss order should be placed) and the price could travel
some distance to the opposite end of the range (where we could take profits
or carry out position management).
Break and retest
This occurs during Phase D, where the price has started the trend movement
within the range. This is a critical moment, since we are evaluating whether
the breakout at the extreme of the range will be real and the trend movement will continue outside the range; or whether it will be a false breakout
after which the price will re-enter the range once more.
The risk/reward ratio is not as generous as in the test after a false
breakout. However, this may still be a great opportunity. If we are correct in
our analysis, the price will develop the effect of the entire cause that has
been built during the development of the range.
Test in the trend
The price needs to be in Phase E of the structure which is when the market
begins to move out of the range.
If the trend is very fast, it will sometimes take time to stop, at least
temporarily, before developing a new structure in the direction of that trend.
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In cases in which the trend develops quickly, if we see this action developing
it will provide us with an opportunity to position ourselves with the movement.
What the Test Looks Like on the Chart
In Volume Spread Analysis these types of candlesticks are known as No Demand (bullish) and No Supply (bearish) candlesticks.
• A No Demand candlestick is a bullish candlestick with a narrow
range and lower volume than the previous two candles.
• A No Supply candlestick is a bearish candlestick with a narrow
range and lower volume than the previous two candles.
The test is considered valid when the candlestick has a lower volume
than the previous two candlesticks, denoting a lack of interest in that direction.
When the context is potentially one of underlying strength (such as a
Spring, a bullish breakout of the Creek or an uptrend) we will look for that
test, in addition to showing a lower volume compared to the two previous
candlesticks, to occur on a bearish candlestick (No Supply). The smaller the
range of that candlestick, the better.
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By contrast, if our analysis tells us that we are seeing a potentially
weak market context (such as an Upthrust, a bearish breakout of the Ice or in
the middle of a downtrend), we will look for the test to occur on a bullish
candlestick with a narrow range (No Demand).
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Difference Between the Secondary Test and the
Generic Test
Conceptually it is the same action: a movement that is developed to assess
the commitment of traders in one direction and that must necessarily be
accompanied with a decrease in the price ranges and in the volume if it is to
be considered valid.
The only difference is that the Secondary Test is a specific event of
the Wyckoff Method, with the structural connotations already mentioned;
and the generic test is a universal event, well known in VSA (Volume Spread
Analysis) methodology that focuses primarily on the action itself and what
its result suggests, without taking into account its location within the structure.
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E VENT N O . 5: F ALSE B REAKOUT
The false breakout is the key event all Wyckoff traders are waiting for. There
is no other event that adds greater strength to the analysis. This makes it the
most important event that can occur in the financial markets.
In accumulation structures this is called a Spring (SP), while in distribution structures it is labeled an Upthrust (UT).
After a period in which the large traders will have built up a large part
of the position they want, they use this behavior as a turning point to initiate
the trend movement that will take the price out of the range and will develop
the effect of the whole cause.
For us to expect a possible false breakout, two actions must have previously occurred:
• An end to the previous trend movement, whether with climatic volume or not.
• The construction of a significant cause. This is the development of
Phase B, which suggests that professional traders have been absorbing
orders, thus building their positions.
Counterparty and the search for liquidity
As we previously commented on the auction process in the section on the
Law of Supply and Demand, for an order to be executed, it must be paired
with another order with the opposite intention. This means that for a sell operation (supply) to be executed, it must be paired with a buy operation (demand) and vice versa.
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This is the way financial markets move: by seeking liquidity. If large
traders were not able to find the counterparty they need to match their orders, it would be impossible for the market to shift.
Liquidity describes the orders pending execution; these are limit orders. These orders are used to enter and exit the market, but they can be of a
different nature depending on the position held by the trader at that time. If
they are currently not in the market they can use them to enter long or short.
If they are in the market they can be used to exit it by taking profits or losses.
And where do the large traders find this liquidity? A large number of
these orders tend to be located on the other side of the support and resistance levels, that is, at the extremes of the structures. Logically, participants
see these range extremes and it leads them to believe that in the future,
when the price reaches that same zone, the market will pivot again.
This information is interpreted differently by different traders, which is
why there are all kinds of limit orders pending execution. Some want to anticipate the pivot, others seek to enter for momentum, others set up their
Stop Loss at that point assuming that if it exceeds this zone, support or resistance will have been effectively broken and it would confirm that their
analysis has been wrong, etc. The reasons are manifold.
The only objective fact is that due to all this, areas known as liquidity
zones are created that are extremely useful because we can expect an imbalance between supply and demand to appear in them, offering us a trading
opportunity.
This information is very relevant because in the event in question, all
the orders executed by uninformed traders or weak hands are being absorbed by well-informed traders or strong hands.
Behavior
The action is simple: it is a movement that attempts to break a previous liquidity zone that initially denotes intentionality towards the direction of the
break, but in reality it is just another trick.
What occurs is a false breakout, where large traders take on all those
pending orders in order to initiate the desired trend.
Therefore, they need to create the illusion that it is a genuine breakout
move in order to attract more traders and absorb all those orders.
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If we take any chart, regardless of the market or time frame, we will
see that prior to any significant trend movement there has first been a false
breakout. It’s necessary. This matching of orders is the fuel needed by large
traders to be able to move the market.
The critical factor when analyzing what is happening after the price
reaches that liquidity zone is to observe how the market reacts immediately
after this action. Once the price interacts with that zone, only two things can
happen; orders are absorbed and the price continues in the same direction, or
a reversal occurs. Drawing conclusions from that action and reaction is our
job as traders. Understanding this will raise your trading a few levels. You will
become more alert to this possibility and over time you will learn to profit
from its behavior.
What the false breakout looks like on the chart
False breakouts can be observed in different ways. What is important is not
how the false breakout is represented but the implications it has. It matters
little whether the action is executed over one, two or more candlesticks, or
whether the range of the candlestick is higher or lower, or whether the volume is high or low. All of this is interpretable and we would reach the same
conclusion regardless of how it is ultimately represented. What is relevant
about this particular action is the result: that the price has tried to break
some type of previous price level and has been rejected; there has been no
interest in continuing in that direction and it is most likely that this movement has been used by the large traders to position themselves on the opposite side.
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On 1 candlestick
This is the well-known hammer candlestick. It is a candlestick that penetrates the liquidity zone and in which practically the entire movement is reversed within that same candlestick, leaving a significant wick at its end.
What these wicks denote is a backlash against prices continuing to
move in that direction. The traders who were waiting in the opposite direction
to the breakout are being aggressive and have managed to gain control of
the market at least temporarily.
Pattern of 2 or more candlesticks
The underlying action is exactly the same as in the example of a single candlestick. The only difference is that in this case the behavior develops over a
longer time frame.
The fact that the price takes longer to reverse and move back into the
previously established breakout zone is a sign that there is less strength in
the false breakout. In other words, the less time the reversal takes, the
greater the strength of the false breakout.
Smaller structure
In this possible scenario, the price remains in a possible false breakout position for a longer period of time.
Market control is not very well defined and that is why a smaller
structure is required. This will ultimately represent a false breakout in the
larger structure. This is a clear example of the importance of context.
• In a potential Spring position we will be looking for a smaller accumulation structure that will generate the bullish reversal.
• In a potential Upthrust position we will be looking for a smaller distribution structure that will generate the bearish reversal.
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Functions of the false breakout
This movement initiated by the large traders in the market has several functions:
Drive breakout traders out of the market
I have previously presented these as being greedy. They are those traders
who see the price reach a new extreme and, believing it to be a breakout that
will continue in that line, enter the market adding more pressure in that direction.
It is important to note that it will not only be manual traders who,
guided by their emotions, will enter the market. A myriad of automated
strategies programmed to trade breakout systems will generate entry signals at those levels.
These robots may activate other momentum strategies, which will add
even more pressure to the movement. For this reason, these types of false
breakouts are usually accompanied by a considerable increase in volume. It
is an important trading zone for many strategies and will therefore result in a
large number of orders being matched.
All of these participants will have to take a loss when the price turns
and reaches their Stop Losses, the activation of which will add even more
aggressiveness to the reversal.
Drive the fearful out of the market
This group has been holding losing positions for a long period of time and
their limit is very close. After seeing the price move against them again, and
for fear of seeing their losses increase, they finally decide to abandon their
position.
In the case of a potential Spring, this type of trader will have been in a
buy position for a long time and will find themselves incurring considerable
latent losses. Losses that they will finally decide to accept when they see
the initial moment of the bearish breakout, thinking that lower prices will
follow.
The same would happen in reverse to the trader who has a short position and sees the beginning of the bullish breakout, thinking that the price
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will continue to rise. They don’t consider the possibility that it might be a
false breakout (Upthrust) and they close their position taking a loss.
Drive the smart ones out of the market
They tend to have read the market well and have correctly anticipated the
price reversal, but have entered too early.
In the context of an accumulation, they may have already bought at
some point during the development of the structure and will have placed the
stop loss at the low of the support level; which will be reached upon the appearance of the Spring.
In the context of a distribution, the trader will already have sold and
will be ejected from market in the Upthrust action, when their protective
stop loss is reached, which will be located above the resistance level.
Profiting from the maneuver
The large traders that unbalance the market and cause the false breakout
take advantage of the price shifts caused by the breakout trading activity and
close their positions obtaining a small profit on the difference.
In other words, they will be positioned lower before starting the Spring
movement and just before the bullish reversal they will close their position.
Also they will position themselves long before the start of the Upthrust, closing the position at a high.
Signs indicating a potential false breakout
At what point can we start to look for a false breakout? This is a difficult task
because, as we have seen, the market can develop an accumulation or distribution structure through fast or slow patterns. But our advantage lies in
always expecting the price to follow the most common structures. For this
we rely on the events and phases that are described in this book. In view of
this, we won’t bother with fast patterns as far as looking for the false breakout is concerned.
We can only determine whether we are observing a false breakout
which is going to dissect the entire structure after evaluating the reaction of
the price to this possible action. But prior to that, on what basis can we de94
termine that we are looking at a false breakout? There are basically two
signs we need to look out for:
1. That the structure has developed its phases proportionally.
2. That we have not previously seen a false breakout at the opposite
extreme.
In real time, these are the two main indicators that will tell us that we
are in a possible false breakout situation. As we will see later in the section
on phases, Phase B is generally the phase with the longest duration. So, until
we see that Phase B has lasted proportionally longer than Phase A, we won’t
be in a position to assume we have entered into Phase C. In other words,
from the moment Phase B has exceeded the time spent in Phase A, we can
then start to look for the Phase C test event, the false breakout.
If it is the first false breakout to occur in the structure this will be a
second sign providing us with some confidence in the possibility that this is
the terminal shakeout. This is difficult to perceive because during the development of Phase B the market will normally fluctuate between the limits of
the range and leave behind minor false breakouts at the highs and lows.
Nevertheless, if we find ourselves in a situation in which we haven’t yet seen
a false breakout and we are observing this possible behavior in real time, it is
an indication that adds confidence to the approach. This is because, as we
know, most trend movements will originate from a false breakout.
It is an entirely different matter if we have previously seen a false
breakout at the opposite end. Imagine that you are in a potential Spring situation but have previously observed a false breakout at the upper limit. That
potential Spring situation could simply be a real bearish breakout, which will
continue in search of lower prices, especially if the current movement has
been started after the previous false breakout at the top. In this case, we will
have to wait for the subsequent price confirmation to have more confidence
in our assessment that it is a false breakout.
Avoiding labeling mistakes
It is important to clarify that a false breakout can only be labeled a Spring or
an Upthrust After Distribution when it originates the movement that breaks
the structure.
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The Spring must necessarily cause the upward breakout of the range
and the trend development of the entire effect. Anything other than this and
it should not be labeled a Spring. It is simply a test.
The same goes for an Upthrust After Distribution. If this bullish false
breakout does not trigger the subsequent bearish breakout of the structure
then it should not be labeled a UTAD. A UTAD is false breakout of the highs of
the structure, which also marks the start of the bearish breakout and of the
trend movement outside the range.
Spring/Shakeout
In the context of trading the term Spring i is an abbreviation of the word
Springboard.
This concept was introduced by Robert G. Evans, a prominent student
of Richard D. Wyckoff. It is a refinement of the original concept Wyckoff developed, which is known as the Terminal Shakeout. Wyckoff referred to this
term as a position that the market reaches during the development of an
accumulation range, in which the price is in a position to leave the range, in
order to initiate an upward movement.
Remember that an accumulation range is a phase of the market cycle
in which large traders perceive value in the price (they believe it to be undervalued) and carry out a buying process with the intention of selling at higher
prices and obtaining profit from the difference.
The Spring event describes a bearish move that breaks a previous
support zone, the purpose of which is to carry out a transfer from weak
hands or uninformed traders to strong hands or well-informed traders.
Types of Spring
From the moment a support level is broken, we must remain very attentive
and carefully observe the behavior of the price and the volume.
We shouldn’t be in a buy position, but if we already are, we will need to
decide whether to stay in the market or exit immediately, depending on the
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way the price falls. If the price rebounds strongly from the level with a slight
increase in volume, this indicates that the asset is developing technical
strength.
There are three types of Spring depending on the degree of supply that
is observed at the moment of the breakout:
Spring #1 or Terminal Shakeout
The supply appears on the scene in force (great deal of selling interest). This
is evidenced by a sudden increase in volume and an expansion of the price
ranges that result in a major penetration of the support line.
In essence, the Spring and the Terminal Shakeout are all about the
same action: a bearish move that breaks through a previous support area.
But there are differences between them, and these are found in the intensity
(volume) of its development and how far it travels. While the term Spring is
used to define shorter movements with a low or moderate volume; Terminal
Shakeout is used to define movements with a much deeper penetration and
higher volume.
The supply is in control of the situation. There is extreme weakness
and the price falls. For this type of Spring to be successful, a great deal of
demand must enter the market to propel the price up again, with wide price
ranges and relatively high volume.
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If after penetration, volume remains high but price ranges begin to
narrow this is a first indication that demand may be entering the market.
If the demand does not appear, the price will continue to fall and it will
need to build a new accumulation area before a substantial upward movement can take place.
Spring #2
Moderate penetration is observed as the price breaks out downwards with an
increase in both volume and price ranges.
There is floating supply (traders willing to sell), but this is not as overwhelming as in Spring #1. This latent supply must be absorbed by the professional traders if they want to raise the price, so it is most likely we will see
successive tests in that area.
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Spring #3
There is a shortage of supply (lack of aggressiveness among sellers). This is
evidenced by the fact that the breakout doesn’t penetrate very far, with a
decrease in volume and a narrowing of the price ranges, suggesting a complete lack of interest on the bearish side.
This is a very powerful Spring on which buy positions can be immediately taken.
There is one final variant in which the event develops within the limits
of the range (minor Spring). This event denotes greater underlying strength,
although professional traders prefer the false breakout to occur beyond the
range. This way it does a better job of absorbing the remaining supply from
weak hands.
The Spring event is an important sign of strength, because a failed
breakout provides us with a greater degree of confidence when taking action
later.
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The Ordinary Shakeout
The Spring and the Terminal Shakeout are two similar events which occur
during the development of an accumulation range. But there is another variant; the Ordinary Shakeout, which differs because of the location in which it
takes place. The Ordinary Shakeout is defined as a strong bearish push without extensive prior preparation, occurring during the development of an uptrend; in other words, in a re-accumulation context.
The Ordinary Shakeout is characterized by wide price ranges and increased volume. However, the volume can be high, medium, or low.
The Spring test
With the exception of Spring #3, the event needs to be tested because some
supply still exists and a positive result is not guaranteed.
Be very careful if the testing process has not occurred as it may take
place at some point in the future. For the test to be successful, it should develop with a narrowing of the ranges, a decrease in volume, and should remain above the Spring/Shakeout level. All this would indicate an exhaustion
of supply and suggests that the price is ready to start the upward movement
with relative ease, representing a good signal to buy.
If the test does not meet these characteristics, it is considered to be a
poor quality test and suggests there will be new tests later since a Spring
with significant volume needs to be tested successfully before the upward
movement can start.
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UpThrust After Distribution (UTAD)
An Upthrust After Distribution is the bullish false breakout that occurs as a
test event in Phase C within distribution and redistribution ranges.
It is a bullish movement whose objective is to check the ability of
buyers to push prices higher after reaching a key zone, such as the break of
previous highs.
Theoretically it is an Upthrust (UT), but when it happens in Phase C it
is called a UTAD because a previous distribution process has already taken
place, regardless of whether there were previous Upthrusts in Phase B.
The volume that will be observed in this action will be moderate or
high, with a significant number of orders being matched in this key zone.
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minor Upthrust After Distribution
As with the minor Spring, this is a bullish false breakout that occurs within
the structure.
This false breakout will reach certain previous highs and although the
best thing to do is to wait for the trap to occur at the maximum limit of the
structure, in reality this type of minor false breakout denotes greater control
on the part of the sellers, since they have not allowed the price to rise further
and have appeared aggressively selling at those previous highs. This behavior
indicates a structural failure of weakness, a concept that we will study later.
Although it is true that the term UTAD is used only to identify the false
breakout of the maximum highs of the structure, in functional terms what
interests us is observing said behavior, even if it only reaches a lower local
high. This is why it might be interesting to also label this event a minor UTAD,
although some Wyckoff traders treat it simply as a Last Point of Supply
(LPSY).
The Upthrust After Distribution test
A Secondary Test does not always appear after the UTAD, but it can happen.
This is due to the large amount of supply entering the market, which causes
an immediate bearish movement in the form of a Sign of Weakness, denoting
a great deal of urgency.
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As with the Spring, it is generally better if the test occurs. Waiting for
the test to appear could mean missing an opportunity, but waiting for it to
happen will ensure you don’t take a potentially bad short position on an action that could be a real bullish breakout.
If a test appears, this bearish movement denotes less enthusiasm
than that seen in the UTAD. This is generally manifested through a stop of the
movement on a level below that of the UTAD and a narrowing of the price
and volume ranges, which indicates the exhaustion of buyers and confirms
the distribution scenario. You can take short positions at the top of this rise.
If the test does not stay below the level established by the high of the
UTAD or there is high volume, it might not be a false breakout. The most sensible thing to do is to wait for some additional signs of weakness before selling, such as new false breakouts and successful successive tests.
Terminal Upthrust
This is similar to the Terminal Shakeout. It has the same characteristics as a
normal Upthrust but the scope of the action is generally more severe. The
volume can be extremely high or the penetration unusually large. Even so,
the result is the same. In a short period of time the price re-enters the range,
indicating strong bearish pressure.
Ordinary Upthrust
Like the Ordinary Shakeout, it is a false breakout with little preparation during the development of the downtrend movement. It offers a very good opportunity to go short, because we will be trading in line with the latest distribution.
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E VENT N O . 6: B REAKOUT
After the Phase C test event (shakeout or LPS), the price will develop a trend
movement in the direction of least resistance.
In accumulation structures this is called a Sign of Strength (SOS),
while in distribution structures it is labeled a Sign of Weakness (SOW).
When new information appears, the valuations of agents change and
the market enters a new state. An inefficient state where one of the two
sides (buyers or sellers) stops trading in the belief that value and price are
converging in that price zone. This inefficiency is represented as a breakout
in which the price leaves the trading range within which it was fluctuating.
The market is in a state of imbalance and this causes a strong movement that breaks out of the structure initiating the development of the cause
that has been previously constructed. At that point the large traders will
have already absorbed all the liquidity they need to create their positions and
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will have verified (through the shakeout and the test) that they will not find
much resistance in the subsequent advance of the price in that direction.
But it alerts us to an imminent potential opportunity. This opportunity
lies in the immediate action, in the confirmation test after the breakout.
Change of Character
This is the second Change of Character (ChoCh) of the structure. If you recall,
the first occurs with the Reaction of Event no. 2, in which the market goes
from a trend context to a range context. The change of character can be observed from the beginning of Phase C to the end of Phase D.
In this case, this new ChoCh changes the market context, ending the
sideways movement of the price and starting a new trend phase.
The ChoCh is not just about a strong movement. In fact it is made up
of two events: a strong movement and a slight correction. This combination
makes up the change of character.
What it looks like on the chart
The context is one of fast patterns and this means that said movement develops through candlesticks which are accompanied by a relative increase in
the price ranges as well as an increase in volume.
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This movement will break through previous levels of liquidity with
ease, denoting strong momentum. It is the maximum representation of the
imbalance of the market and the aggressiveness of traders.
A breakout without volume
Generally, breakouts should occur with increasing volume, although it is true
that sometimes we might see them without a particularly large increase in
volume. This suggests to us that the liquidity that remains available is essentially low and that the traders in control won’t need to make any special effort to easily shift the price.
In the case of a bullish breakout, if we see that it occurs with candlesticks with a narrow range and average volume, in principle we should be
wary of its intentionality, although it is possible that there is very little floating supply, that is, very few traders left willing to sell. So the absence of sellers, coupled with moderate aggressiveness from buyers, can cause that upwards breakout without relatively high volume.
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Keys to the breakout event
This is a key moment because we could be seeing a possible false breakout,
so we need to carefully evaluate the price action and volume after said
event. There are certain signs to look out for that might help us:
No immediate re-entry into the range
This is the most reliable sign of intent in favor of the breakout. The main signal that indicates that the breakout may be real is that the price stays out of
the range and that it fails in its attempts to re-enter the equilibrium zone.
As well as observing an accompanying increase in the price and volume ranges; and that the movement breaks previous control zones (previous
highs or lows depending on the direction), the most powerful indication that
the breakout is real is if the price doesn’t re-enter the range. This denotes
that there is no longer any interest in that old equilibrium zone and confirms
that the imbalance movement is being supported by the large traders.
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Representation of a lack of interest
Another indication that would add strength to the theory of a real breakout
would be the subsequent appearance of indecision candlesticks: narrow
range, fluctuating, and with less volume than in the breakout movement.
Ultimately, it is about seeing a price behavior that suggests that these
new price levels are not being rejected. This would be demonstrated by a
breakout movement represented by candlesticks denoting strength and an
increase in volume; and a correction with indecision candlesticks and declining volume.
Breakout distance
Meanwhile, another indication to take into account is the distance that the
price manages to travel. Although there is no predefined distance, this
should be obvious. In other words, a movement that manages to break away
enough points from the structure will offer us greater confidence.
A major breakout tells us about the major capacity that the participants have had in pushing the price in that direction. Obviously, the general
behavior will continue to be determined by the subsequent reaction in the
test after the breakout, but the fact that the price has traveled a great distance is significant as a sure sign of intent.
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A breakout is not a trading opportunity
In terms of our approach, this action does not represent a trading opportunity. This is mainly because the price is now in a very sensitive area, where a
huge number of orders are being matched and the control of the market
could change.
What at first appears to be a real breakout could turn into a false one.
In real time it is impossible to know for sure whether we are seeing a real or
a false breakout. Keep in mind that the vast majority of breakouts are maneuvers designed by large professional traders to build up liquidity that end
up becoming failed breakouts and create reverse trading opportunities.
Each market action must be confirmed or disproved by the subsequent price action. This is why it is better to wait for the subsequent test
which will definitively confirm the action. The only way to be able to intuit
what is more likely (a real or false breakout) is to see how the price reacts
after this event.
Even so, the trade is obviously not guaranteed to be successful. The
market is an environment of constant uncertainty and it is totally out of our
control. As discretionary traders, the only thing we can do is look for as many
indicators as possible that tell us the control is being held by one side or the
other to try to position ourselves. In the end it is a question of probabilities.
Sign of Strength
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The Sign of Strength (SOS) is a bullish movement that originates at the low of
phase C (Spring or LPS) and ends with a breakout in the upper part of the
range (JAC - Jump Across the Creek). This is a major show of strength that
denotes how eager the institutions are to enter the market. They are very
bullish and buy aggressively.
All this generates the change of character prior to the start of the
bullish movement outside the range. It is followed by a correction towards
the broken Creek, before generating the BackUp (BU) or BackUp to the Edge
of the Creek (BUEC).
To determine that what we are seeing really is a show of strength, the
bullish movement needs to move upwards with ease and intent. This would
be represented by wide ranges and high volume, with the price breaking and
staying above the resistance level of the structure.
minor SOS
If the bullish movement reaches the upper third of the structure but fails to
break it, this would be labeled a minor Sign Of Strength (mSOS). This is a lower quality movement of strength.
If we were to see a movement with these same characteristics in
Phase B, we could also label it a minor SOS event.
Sign Of Strength Bar
This is a bullish bar with a wide range, closing at a high and with an increase
in volume; although it could also be a bullish gap. It indicates the presence of
high-quality, strong demand. It is at this point where there is institutional
buying.
In essence, it indicates the same behavior as the Sign of Strength but
on a smaller scale, at the candlestick level. It is a good example of what we
understand by market fractality. This SOS bar is actually a complete SOS
movement in a shorter time frame.
It could be used as an entry trigger. If we see a sign of strength bar
(SOS Bar) in our trading zone (after a false breakout, after a breakout and in a
trend), this is the definitive sign that major professional traders are supporting the bullish movement and offers us with a good opportunity to go long.
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Sign of Weakness
The Major Sign of Weakness (MSOW) is a strong bearish movement whose
origin is at the high of Phase C (UTAD or LPSY) and causes a breakout of the
lower part of the range (ICE) before starting a new downtrend. It is a sign of
weakness that shows the aggressiveness of the participants in pushing the
price down.
To determine the existence of a sign of weakness, we would expect
the downward movement to progress with ease, to travel a relatively long
distance with candlesticks showing bearish intent, represented by wide
ranges and high volume and that also manage to break and stay below the
level of support of the structure.
minor SOW
If after the test event in Phase C this movement of weakness is not able to
break the structure, we would label it a minor Sign of Weakness (mSOW).
Any movement that during the development of Phase B meets these
characteristics in price and volume could also be labeled in this way.
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Sign of weakness bar
Visually it appears as a bearish bar with a relative increase in the price and
volume ranges and with a close in the lower part of the candlestick’s range,
although it could also be identified by a bearish gap.
It signals the aggressiveness of the sellers and is therefore a point
where professional traders are selling.
It’s main function for us would be as an entry trigger for sale trades. If
we see a sign of weakness bar (SOW Bar) in our trading zone (after a false
breakout, after a breakout and in trend), this is the definitive sign that major
professional traders are supporting the bearish movement and offers us with
a good opportunity to go short.
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E VENT N O . 7: C ONFIRMATION
When a breakout event appears, it is only a "potential" one until it can be confirmed by its test. Just as with false breakouts, Signs of Strength or Signs Of
Weakness need to be tested.
If the test is successful, we will have more confidence in how we label
the previous movement and this subsequent movement, its test, is the confirmation event. In other words, the test will confirm whether or not we are
observing a genuine movement with intent.
Under the Wycoff Method, just as the bullish breakout move is labeled
a Sign of Strength (SOS) or Jump Across the Creek (JAC), the corrective
movement confirming the breakout is labeled the Last Point of Support (LPS)
or the Back Up to the Edge of the Creek (BUEC).
In the bearish example, the breakout as we know is caused by a Sign
of Weakness (SOW) and the corrective movement that would confirm it is
labeled the Last Point of Supply (LPSY) or the Fall Through the Ice (FTI), al113
though this last term is less well known. The Ice is the support zone in these
structures and this term comes from an analogy similar to that of the Creek.
But how can we know whether to expect a confirmation event? Obviously we can’t for sure. We need to look for as many signs as possible that
indicate a greater probability of one scenario occurring over the other. In this
case, a confirmation test would be preceded by an impulse movement, evidenced by an expansion in price ranges and an increase in the volume being
traded. At this point our main scenario should involve waiting for a correction
to look for a trading opportunity.
What the confirmation looks like on the chart
This is the most delicate moment, because we need to assess whether we
are seeing a potential breakout or just a false breakout.
I recommend reading back over the section in the previous chapter
which discusses the keys in the breakout event. For a confirmation action,
what we want to see is exactly what was described above:
• That the market travels a significant distance in the breakout
movement.
• That the test movement denotes a lack of interest, that is, with narrow-range, zigzagging up and down candlesticks with low volume.
• That the price does not re-enter the range.
As mentioned above, we will have greater confidence in the breakout
movement if it is accompanied by an increase in price ranges and in volume.
Similarly, we want to see that the corrective movement that tests the broken
structure is accompanied by a decrease in price ranges and volume in comparative terms.
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This is the natural action for all movements that make up a trend: impulse movements that show intentionality and corrective movements that
denote lack of interest.
Warning sign after the breakout
If there is a relatively high volume at the confirmation test, it is best to proceed with caution, since this volume indicates that there is latent interest in
that direction.
And as we know, the large traders will not initiate the expected move
until they have made sure that the path is free of any resistance. Therefore,
we should wait for successive tests to be carried out on the zone.
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A corrective move with wide price ranges and high volume cancels
out the possibility that the first move was a breakout and the most likely
thing to happen at this point is that the price re-enters the range leaving the
potential breakout as just a false one.
Trading opportunity
This confirmation event appears in an ideal location to enter the market or to
add to an open position.
Originally this was Richard Wyckoff’s preferred location for entering
the market. In our favor we will have identified all the price action to our left,
showing the effort of professional traders to carry out an accumulation or
distribution campaign. For this reason it offers us an opportunity with a relatively low risk.
If you want to buy, a good option would be to wait for a candlestick
denoting strength to appear (SOS bar) and place an entry order, or a stop order at the breakout of the candlestick, or even a buy limit order at a certain
level, waiting for the price to fall back to that level. Place or move the stop
loss of the entire position below the Last Point of Support and the broken
resistance line (Creek).
If you want to sell, wait for a good candlestick denoting weakness
(SOWbar) to appear and enter the market using the order that best suits your
personality as a trader. Place or move the stop loss above the Last Point of
Supply and the broken support line (Ice).
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Quantifying the entry trigger
Unfortunately, the major disadvantage of all discretionary approaches is that,
by their very nature, the analyses and forecasting of scenarios involved is
subjective.
This subjectivity is the reason why methods that have a real underlying logic such as the Wyckoff Method may not be successful in the hands of
every trader.
As you may have already read elsewhere, human intervention in a
trading strategy is undoubtedly its weakest link, and this is obviously due to
the emotional aspects that govern our actions.
To mitigate this, many experts recommend making sure that your
trading strategy is as objective as possible. But this is not an easy task, much
less for Wyckoff traders. There are so many elements involved in predicting
scenarios that it would be impossible to create a strategy with entirely objective rules, to ensure it always works in the same way.
One solution that is in our control is to try to quantify the trigger that
we will use to enter the market. This is, without doubt, a simple measure that
can help us to incorporate a certain amount of objectivity into our strategy.
If you are only trading using bars or candlesticks, you may want to
quantify what happens when a certain price pattern appears. Say we were
buying, we could quantify a simple price reversal, consisting of a bearish
candlestick, followed by a bullish candlestick. And from there we can make
it as complex as we want. We can add other variables. For example we could
imagine that there is a lower moving average, that the second bullish candle
is higher by a certain number of pips, that a buy stop order is used at the
breakout of the candle, etc.
If you are also trading using volume-based tools, you may want to add
other variables such as the price being above the POC (Point of Control), VAH
(Value Area High), VAL (Value Area Low) o VWAP (Volume Weighted Average
Price); or that the bullish candlestick is also accompanied by a significant
increase in the Delta (Difference between Bid and Ask).
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The options are endless, from the simplest to the most complex; the
only limit is our imagination. Of course, this is hard work. If you don’t know
how to code it (by programming a robot) you will have to do it by hand and
this will require a lot of time. Moreover, when doing a Backtest, you will need
to take other aspects such as the quality of the data, the cost of fees
(spreads, commission, swap), latent problems (slippage), as well as other
issues concerning the optimization of strategies into account.
Last Point of Support
El Last Point of Support (LPS) is the action that immediately precedes a Sign
of Strength (SOS). It is an attempt by sellers to push the price lower, but it
fails as buyers appear aggressively, giving rise to a new bullish impulse.
There are different types of Last Point of Support, depending on the
movement that precedes it.
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• Last Point of Support after a false breakout If the price has just gone
through a Spring/Shakeout, the Last Point of Support would be the tests of
those two events.
• Last Point of Support within the range. If the price has just come out
of a Sign of Strength, the Last Point of Support will appear on the bearish
correction.
• Last Point of Support outside the range. Here we have on the one
hand the break and retest (the confirmation event, the Back Up to the Edge
of the Creek); and on the other hand all the corrections that have developed during the bullish phase outside the range.
Because we know that the market moves in waves, after the bullish
impulse (Sign of Strength) we would expect a bearish correction (Last Point
of Support). This correction is the demand’s last point of support. It is a price
point where buyers appear to stop the decline, generating a higher low. This
higher low is a prior stop before the start of a new impulse movement upwards.
Many traders, guided by their lack of understanding, will be buying
during the development of the sign of strength (SOS). But this is not the right
move; it is best to wait for the next reaction (LPS) and look for a market entry
trigger at that point.
Sometimes the Last Point of Support will occur at the same price level on which the Preliminary Support appeared because that is where the
large traders began to buy the asset.
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Last Point of Supply
El Last Point of Supply (LPSY) is the action that immediately precedes a Sign
of Weakness (SOW). This is an attempt by the price to go up but is blocked by
the sellers, who have already taken short positions and have appeared again
to protect their positions.
There are different types of Last Point of Supply, depending on the
movement that precedes it.
• Last Point of Supply after a false breakout. If the price has just
come from an Upthrust After Distribution, the Last Point of Supply would
be its test.
• Last Point of Supply within the range. If the price has just come
from a Sign of Weakness, the Last Point of Supply will appear in the bullish
correction.
• Last Point of Supply outside the range. Here we have on the one
hand the break and retest (the confirmation event, the Fall Through the
Ice); and on the other hand all the corrections that have developed during
the bearish phase outside the range.
After breaking the Ice (support) with a Sign Of Weakness we would
hope to see a bullish movement with narrow price ranges. This would denote
the difficulty of the market to continue rising. We would preferably wait for
the volume to be low, indicating a lack of interest from buyers; but we need
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to be alert because a high volume could signal increased interest from sellers to go short again in that zone.
Last Point of Supply zones are ideal for taking up new or added short
positions since they are the last waves of distribution prior to the start of a
new bearish impulse movement.
The price reached in the Last Point of Supply will sometimes coincide
with the level at which the Preliminary Supply appeared. This is because in
distribution structures, it is at this Preliminary Supply level where the distribution initially began.
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PART 5 - PHASES
T
he analysis of phases helps us to structure the accumulation and distribution processes, providing us with an overall market context. Once
the overall context has been identified, we will be in a position to know
what to expect.
Context is a very important aspect of the Wyckoff Method, affording it
a significant advantage over other approaches to technical analysis. For example, a trader who operates using traditional technical analysis may see a
resistance level in a particular area and look to go short in that area waiting
for a bearish reversal in the market, while a Wyckoff trader who has been
able to correctly identify the phases and analyze the price dynamics within
the range, may have determined that there is a greater probability of a real
breakout of the price above the resistance level and might even consider
buying, expecting the start of a bullish uptrend outside of range.
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The Wyckoff Method describes five different phases –from A to E–, and
each has a unique function:
• Phase A. Stop of the previous trend.
• Phase B. Construction of the cause.
• Phase C. Test.
• Phase D. Trend within the range.
• Phase E. Trend outside the range.
By analyzing price and volume, we can correctly identify when each
phase begins and ends. It is very important that our analysis up to that point
is correct if we are to take advantage of the signs that underlie its development.
The phases are based on the fact that all campaigns (accumulations
and distributions) require a certain time until they are complete. During this
time the price develops the structures that we have already mentioned. The
power of phase analysis lies in the fact that the development of these structures generally follows repetitive patterns. This means that if we are able to
correctly identify what is happening (accumulation or distribution), we will
be in a better position to successfully predict scenarios.
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P HASE A: S TOP OF THE PREVIOUS TREND
Phase A is made up of the first four events:
• Preliminary Support or Preliminary Supply.
• Selling Climax or Buying Climax.
• Automatic Rally or Automatic Reaction.
• Secondary Test.
Prior to the beginning of this first phase, the market is controlled by
one of the two sides. As we know, control by the sellers will be shown as a
downtrend, and control by the buyers as an uptrend.
The price may be reaching interesting levels, where the big players
start to see value. That is, they see a potential profit in the difference they
have observed between the price they assign based on their valuations and
the current price. It is time to start developing an absorption campaign. But
we will not be able to identify this sign of genuine interest until the first
events of the method appear. The Preliminary Stop with its peak volume already alerts us to an increase in participation and a possible mass closure of
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positions. Most likely, the large traders have started to sense that the price is
becoming overextended and they are starting to take profits.
The Climax, which, while it can also appear without climatic volume
(Selling Exhaustion and Buying Exhaustion), delimits one of the extremes of
the structure and its action, is very significant in finally exhausting those who
maintained control of the market up to this point.
The appearance of the Reaction is one of the events that provides us
with the most information, since it confirms that something is happening.
The price had previously been in a prolonged trend and this reaction is the
first significant indication that there is some interest building on the other
side.
The Test marks the end of the first phase, giving way from that point to
the development of Phase B. Phase A is useful, above all, for managing our
position; that is, when we are already in the market with an open position. The
full development of this Phase A will indicate that it is a good time to close
said position. However, Phase A is not useful from the point of view of looking
for new trades, because at every point during this phase there is complete
uncertainty about whether it really is a new range or not.
This is the main problem in the identification of Phase A. Until the
moment in which the Secondary Test appears we cannot know whether there
really has been a change of character meaning the market will move laterally from there on, or whether it is simply a brief consolidation of the price
which will then continue in the direction of the trend.
To try to solve this problem we must use our critical judgement to
observe these first four events, but above all:
• We should identify some kind of climatic volume, either at the preliminary stop or at the climax. This is the only thing that tells us that professional traders are involved, which is just what we are looking for; we will
have time later to discern whether they are positioning themselves with or
against that movement.
• The reaction event is key. If the reaction is a very powerful movement, of a size not previously seen during the course of the trend, this is
the only way to discard the possibility that it is a simple consolidation that
will continue later in favor of the preceding trend..
• No matter what, we must wait for part of Phase B to develop. This
sideways movement will be the definitive signal that confirms the change
in the state of the market.
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P HASE B: C ONSTRUCTION OF THE CAUSE
Phase B is made up of the successive tests (Secondary Test in B) that can
occur both at the upper and lower edge of the structure:
• Upthrust Action or Upthrust.
• Secondary Test as Sign of Weakness or minor Sign Of Weakness.
In proportional terms we want this phase to be longer than Phases A
and C. This is a general guideline because, although there will be occasions
when the phases are of equal or even shorter duration (as in the four fast
patterns already described), this proportionality in duration is what we are
most likely to find.
In the event that said proportionality is not met; that is, that Phase B is
shorter than Phase A or C, this will denote an urgency on the part of the
traders and add greater strength to the trend movement that follows. We
should not dismiss such opportunities. If we find ourselves in a primary position, we could assess the possibility of entering the market, even though we
are in the midst of a rapid accumulation or distribution process. Everything
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will remain subject to the dynamics of the price action and the volume that
we have analyzed within that structure.
As mentioned in the last point of Phase A, the development of this
Phase B will be the definitive sign that confirms the change of character. If
we see some sideways movement after the end of the previous trend, we can
now be sure that we are observing a structure that can be analyzed under
the principles of the Wyckoff Method.
We should be looking for this context. where the asset is already in the
middle of this sideways movement, when we are scanning the market in
search of opportunities. At that point the market will have already developed
some form of Phase A and we are now objectively in the midst of the construction of the cause of the subsequent movement. This is where we want
to be. From this point on we can monitor the asset more actively and be prepared for the appearance of a false breakout.
And this proportionality is another of the advantages of Phase B. Being aware of this, and waiting for the right proportion of time to elapse, is of
vital importance. It allows us to know when to expect the terminal shakeout
that will definitely unbalance the market in one direction or another.
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P HASE C: T EST
This is made up of the False breakout event:
• Spring/Shakeout.
• UpThrust After Distribution (UTAD).
Before starting the trend movement, large traders will force this false
breakout action in order to check that there are almost no traders willing to
enter in the opposite direction and that therefore the path of least resistance
is in their direction.
If they observe high participation in this zone, it means that there is
still interest on the opposite side. All available liquidity has not yet been absorbed and therefore control of the market is not yet unbalanced towards
one side (buyers or sellers). In these circumstances two things can happen:
• The large traders consider the campaign to have failed. They are not
fully committed to reversing the market and changing direction. This will
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cause the price to continue in the same direction as the previous trend,
which would lead to a re-accumulation or redistribution structure.
• That Phase B stretches out until complete absorption occurs. The
valuations of agents will be clearly out of this equilibrium zone. They will
do their best to exhaust participants who are interested in trading in the
opposite direction. In this case, the price will need to carry out successive
tests in these trading zones until the lack of interest is verified.
A very important aspect to bear in mind is that the shakeout event
might not necessarily happen right at the edges of the structure. Ideally it
will, since the greater this movement, the more liquidity it will have been
able to capture and therefore the more “gasoline” the subsequent movement
will have. But this shakeout can happen without reaching the extremes. It
would still be a Test event in Phase C and we could label this action a minor
false breakout acting as an LPS/LPSY.
In any case the labels are not really important. We must think above
all in functional terms and what really interests us is to know what is really
happening. There’s no point in knowing the terms used by the methodology to
label each market action if we don’t understand in depth what lies behind
each of them.
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P HASE D: T REND WITHIN THE RANGE
Phase D is made up of the Breakout and Confirmation events:
• Sign of Strength/Jump Across the Creek or Sign of Weakness.
• Last Point of Support/Back Up to the Edge of the Creek and Last
Point of Supply.
If our analysis is correct, after the key false breakout event the price
should now develop a clear trend movement within the range with wide candles and an increase in volume before causing a real breakout of the structure.
The edges of the structures are the last barrier that must be overcome
to conclude that one side has definitive control. If the price reaches that
zone, interacts with the liquidity that is located there pending execution and
there is too much opposition (there are still many traders willing to trade
against said movement), one of three outcomes are possible.
• The price may fall again after creating a Last Point of Support/Supply within the range before attacking that zone again. Most of the participants are still interested in that direction but for some reason there are
still traders willing to trade in the opposite direction. The price may re-en131
ter the range again and begin to fluctuate around that edge of the structure. Participants interested in the opposite direction will not have sufficient capacity to push the price even to the middle of the range, which
would be a continuing sign of strength of the traders that drove the attempted breakout. If there is no additional information to change the evaluations of the agents, they will once again go for the breakout of that zone
in the immediate future.
• The large traders who have previously constructed their campaign
decide to pay the price that it will cost them to cross said zone and start
the breakout movement from there, absorbing all those orders at a worse
price. This action would be represented on the chart by a significant increase in volume. This is the same action as the one described above, the
only difference being that instead of going back until these traders are
exhausted, the major players cause the real breakout by aggressively absorbing all the available liquidity, which denotes greater urgency to push
the price in that direction and offers more guarantees that the structure
will develop as expected.
• The attempt fails and a new false breakout develops in its place, a
new Phase C Test that would cause the real breakout on the opposite side.
If the price has been developing structurally as planned, this possibility will
be the least likely to happen. However, we must be aware of it and keep it
in mind. In this case, we simply weren’t able to correctly identify in which
direction the absorption process was taking place, or that new information
on the security appeared, changing the valuations of the agents at that
moment, causing a series of actions that resulted in the reversal of the
market in that zone.
We must bear in mind that the market is a struggle between large
professional traders, between funds and institutions with all kinds of interests. An important point to note is that not all institutions that trade in financial markets make money. The truth is that a large number of them lose just
as often as the vast majority of retail traders. These losing institutions are
the preferred victims of large traders because they handle significant
amounts of capital and act as succulent providers of liquidity for well-informed traders.
If the breakout develops relatively easily and if the price and volume
give off the right signals, we should then look for the confirmation event to
develop. For this to happen, as I have already commented, it is essential that
the price holds on the other side of the structure and does not immediately
re-enter the range. Moreover, we want to see that this test movement is generated with little interest.
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P HASE E: T REND OUTSIDE THE RANGE
• Sign of Strength or Sign of Weakness.
• Last Point of Support or Last Point of Supply.
The price leaves the structure in which the cause has previously been
building and begins a trend as an effect of that cause. This successful breakout and confirmation are the definitive signal that large traders are positioned in that direction.
As the trend progresses, we must implement all the tools at our disposal to assess strength or weakness: type of trend, speed, depth and projection of movements. This content is covered in detail in the price action section of my first book "Trading and Investing for Beginners."
Correctly analyzing these signs will put us in a position to know when
is a good time to look for an entry point to join the trend (signs that indicate
the trend is strong) and when it is better to stay out of the market (signs that
show the movement is weak) to avoid entering on the wrong side or even to
consider the possibility of trading against the trend (signs that denote a
trend reversal).
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Identifying Phase E is important because it will put us in a context in
which we should only be looking to trade with the trend. Later, in the primary
positions section, we will look at the different ways we can enter the market
depending on the context and the trading zone in which we find ourselves.
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PART 6 - STRUCTURES
C
onscious of the fact that it is practically impossible for the price to
develop two identical structures, the Wyckoff Method offers a flexible
approach to analyzing the market.
Financial markets are a living entity. Due to the continuous interaction
between buyers and sellers they are in a constant state of change. It would,
therefore, be a mistake to apply fixed patterns or structures to a reading of
the market context. It would make no sense to approach the market thinking
that it should behave just as the patterns and structures we are studying
suggest.
The reality is that every moment is unique and will be different from
another in the future, because it is practically impossible for the same set of
circumstances to exist at two different times. For two structures to develop
in an identical way, the same participants would have to be involved in both
cases and also behave in exactly the same way, which is impossible.
The price can develop different types of structures depending on the
conditions of the market at the time. This is why we need an approach that
confers some flexibility to price movements but at the same time is governed by certain fixed elements, offering as much objectivity as possible to
our definitive interpretation. These fixed aspects of the method are the
events and phases that make up the development of the structures.
It is important to keep an open mind and try to gain as deep an understanding as possible of the methodology. The objective is to be able to identify the development of a structure, even if it doesn’t quite match the ideal.
There will be occasions when we are able to work in real time with structures
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that are very similar in appearance to those found in reference books, but on
other occasions this will not be the case.
This is no reason to be discouraged. Advanced Wyckoff traders understand that these accumulation and distribution processes may be observed
differently depending on how balanced or unbalanced the market is in favor
of buyers and sellers.
This is the key to everything. Depending on the situation of the market
at that time (who has more control), the price will develop one type of structure or another.
H ORIZONTAL STRUCTURES
Two basic accumulation and distribution structures are described below,
along with a brief glossary of terms, providing a general overview of price
movement dynamics according to the premises of the Wyckoff method.
As just mentioned, these could be considered the ideal structures, but
the important thing to bear in mind is that the market will not always display
them in the same way.
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Basic Accumulation Structure No. 1
Creek. Resistance level for accumulation or re-accumulation structures. It is set by the high generated by the Automatic Rally and by any highs
that may develop during Phase B.
CHoCH. Change of Character. This indicates the environment in which
the price will soon move. The first CHoCH is established in Phase A where the
price moves from a downward trend environment to a consolidation environment. The second CHoCH occurs from the low of Phase C to the high of
the SOS in which the price moves from a consolidation environment to an
upward trend environment.
Phase A. Stop of the previous bearish trend.
• PS. Preliminary Support. This is the first attempt to stop the downward movement that will always fail.
• SC. Selling Climax. Climax action that stops the downward movement.
• AR. Automatic Rally. Bullish reaction. An upward movement that
establishes the high in the range.
• ST. Secondary Test. Test of the level of supply in relation to the climax action. Establishes the end of Phase A and the start of Phase B.
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Phase B. Construction of the cause.
• UA. Upthrust Action. Temporary break of the resistance level and reentry into range. This is a test at the peak generated by the AR.
• ST as SOW. Secondary Test as Sign Of Weakness. Sign of weakness
in the form of a test. Temporary break of the support level and reentry into the range. This is a test at the low generated by the SC.
Phase C. Test.
• SP. Spring. Bearish false breakout. This is a test in the form of a
breakout below the lows of Phases A and B. There are three different types of Springs.
• Spring Test. Downward movement towards the lows of the range in
order to check the commitment of sellers.
• LPS. Last Point of Support. Last support level of the supply. Test in
the form of a bearish movement that fails to reach the low of the
range.
• TSO. Terminal Shakeout or Shakeout. Definitive false breakout.
Abrupt movement breaking the lows that penetrates deep through
the support level and a fast recovery.
Phase D. Bullish trend within the range.
• SOS. Sign of Strength. Bullish movement generated after the Phase
C Test event that manages to reach the top of the range. Also called
JAC. (Jump Across the Creek).
• LPS. Last Point of Support. Last support level of the supply. These
are the rising lows that we find in the upward movement towards
the resistance level.
• BU. Back Up. This is the last big reaction before the bull market
starts. Also called BUEC (Back Up to the Edge of the Creek).
Phase E. Bullish trend outside the range Succession of SOS and LPS
generating a dynamic of rising highs and lows.
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Basic Accumulation Structure No. 2
Second variant of the methodology in which the test event in Phase C fails to
reach the lows of the structure.
This generally occurs because current market conditions denote underlying strength. The objective of the price is to visit that liquidity zone, but
the large traders buoy up the market by aggressively buying. They don't allow
the price to drop further so that no one else can buy lower down.
These types of ranges are more difficult to identify, because the lack
of a false breakout event makes it harder to predict a bullish scenario. The
primary trading zone is in the potential Spring. For this reason when buying in
a possible LPS we will always be wondering if the price will first visit that
zone of price lows and develop a Spring before starting the uptrend movement, as is most likely.
In terms of your trading approach, the result of this type of pattern
with no false breakout is that a first show of bullish strength that occurs
from the low of the LPS to the breakout of the range will usually pass you by.
So, the only viable buying opportunity in this type of structure is found
in the BUEC, in the test after the breakout. It is here where we need to be
alert to look for the entry to go long.
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Basic Distribution Structure No. 1
ICE. Support level for distribution or redistribution structures. It is established by the low generated by the Automatic Reaction and by any lows
that may develop during Phase B.
CHoCH. Change of Character. This indicates the environment in which
the price will soon move. The first CHoCH is established in Phase A where the
price moves from an upward trend environment to a consolidation environment. The second CHoCH occurs from the high of Phase C to the low of the
SOS in which the price moves from a consolidation environment to a downward trend environment.
Phase A. Stop of the previous bullish trend.
• PSY. Preliminary Supply. Preliminary resistance. This is the first attempt to stop the climb that will always fail.
• BC. Buying Climax. Climax action that stops the upward movement.
• AR. Automatic Reaction. Bearish reaction. Bearish movement that
establishes the low of the range.
• ST. Secondary Test. Test of the level of demand in relation to the
climax action. Establishes the end of Phase A and the start of Phase
B.
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Phase B. Construction of the cause.
• UT. Upthrust. Same as a UA event in the accumulation process.
Temporary break of the resistance level and re-entry into range. This
is a test at the peak generated by the BC.
• mSOW. minor Sign of Weakness. Same as an ST as SOW event in the
accumulation process. Temporary break of the support level and reentry into the range. This is a test at the low generated by the AR.
Phase C. Test.
• UTAD. Upthrust After Distribution. Bullish false breakout. This is a
test in the form of a breakout above the highs of Phases A and B.
• UTAD test. An upward movement that climbs to check the level of
commitment of the buyers after the UTAD.
Phase D. Bearish trend within the range.
• MSOW. Major Sign of Weakness. Bearish movement that starts after
the UTAD that manages to reach the bottom of the range generating
a change of character.
• LPSY. Last Point of Supply. Last support level of the demand. These
are the diminishing highs that we find in the downward movement
towards the support level.
Phase E. Bearish trend outside the range. Succession of SOW and
LPSY generating a dynamic of diminishing highs and lows.
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Basic Distribution Structure No. 2
Second variant of the methodology in which the test event in Phase C fails to
reach the highs of the structure.
The reverse logic of the example of accumulation structure no. 2 It
denotes a greater underlying weakness. The price tries to reach the liquidity
that is up in the highs but this is prevented by the large traders that are already positioned short.
Due to the absence of a false breakout, confidence in a bearish scenario is lost because we will always be in doubt as to whether the price will
move towards the highs in a false breakout move before generating the imbalance downwards.
If we take a conservative approach to trading and we always look for
the appearance of the bullish false breakout, we will let the first downward
impulse movement pass us by; leaving us with the only opportunity in the
test after the breakout (LPSY).
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S LOPING STRUCTURES
Up to now I have only described structures with a horizontal development as
being the basic pattern. They are the easiest to identify and for the trader
who is just starting to delve deeper into the Wyckoff Method, I would recommend working with this type of structure almost exclusively.
Below is a description of a few types of sloping structures. Although
they are certainly more difficult to see, they actually develop in exactly the
same way as horizontal structures. Do this test; take one of the examples
below and in your head try to rotate the image to fit the structure as if it were
horizontal. You will see that the general behavior, events and phases follow
an identical pattern to the horizontal ranges. The only element that varies is
the condition of the market. In this case the context is one in which either
the buyers or the sellers initially have greater control.
In general, we can assume that a structure with an upward slope suggests a certain underlying strength, that is, a greater control by the buyers;
and that structures with a downward slope denote a certain weakness,
greater control by the sellers.
Initially, upon identifying the Phase A end of trend we will establish
the limits of the range horizontally. However, if observe that in Phase B the
price does not respect these edges and begins to move outside the structure,
we should perhaps start thinking about a possible sloping structure. We
could connect these edges and see if the price really is staying within the
limits of said structure.
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On other occasions we will simply open a chart and it will be very obvious that the price is staying within the extremes of a sloping structure.
Connect the lows and highs of Phases A, B, and C. You can draw one limit
first and clone the line on the opposite side. The important thing is to ensure
that the channel contains practically all of the price action within it. The
more times the price touches these edges, the more confidence we will have
that said structure is being respected.
It is worth stressing that we don’t necessarily need to see the perfect
touch points of the price at these limits to determine that the price is following this structure. It doesn’t need to be completely precise, but it should jump
out at us clearly, allowing us to connect all the extremes, even if this means
drawing a zone with a fairly wide area rather than a thin line.
I would always recommend you don’t completely discard horizontal
levels. Personally, they offer me greater confidence and it is possible that the
price will re-enter the original structure and you can continue working on it.
There are four possible sloping structures you might encounter:
• Upward sloping accumulation structure.
• Downward sloping accumulation structure.
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• Downward sloping distribution structure.
• Upward sloping distribution structure.
Upward Sloping Accumulation Structure.
This is the variant that denotes the greatest underlying strength. After the
Phase A end of the trend, the price begins to fluctuate up and down during
the development of the structure, with a clearly visible series of rising highs
and lows.
Buyers are somewhat aggressive, believing the asset's price should be
higher. They don’t allow it to fall into oversold zones in order to protect their
position.
These structures are not easy to trade in. This is mainly because once
any previous high is exceeded the sensation may be that a false breakout is
imminent, turning the market downwards once again. In reality this is simply
the nature of the movement: impulses and corrections.
And this perception will be even stronger in the potential BUEC zone.
Although this is the most conservative entry point, and one that gives us
greater security, visually we will see the price trading at very high levels so it
won’t appear to us as an optimal entry point (subjectively).
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The market, oblivious to all this, will continue its course and if it really
is an accumulation process, at that point it will initiate a trend movement out
of the range, in search of higher levels of liquidity.
The example of Bitcoin below is most enlightening. In it we can identify one of the concepts that we will study later on: a structural failure of
strength.
After the steep fall, we can see how the price accumulates rapidly
(green box), before starting a new structure a few levels higher. This is, in
itself, a sign of underlying strength. We see that there is a very high volume
traded in that fall and seeing a reaction after the rise suggests that the sentiment is bullish, at least in principle. If, when analyzing the context, we see
that below the current price there are high volumes, the simplest interpretation is that the buyers have entered aggressively at this volume, otherwise
the price could not have moved upwards.
Other interesting signs that suggest an accumulation are the decrease in volume during the development of the structure and the predominance of the upward waves of the Weis indicator.
In addition to this, the key element that marks a turning point in the
control in that structure is found in the Upthrust action. In the upper part of
the structure a smaller distribution pattern has developed. This pattern could
have acted as a UTAD and caused a bearish breakout. This is the behavior
that we expect to happen after a false breakout, but what we see is a total
inability of the price to fall. After this minor distribution pattern, the price
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cannot even reach the bottom of the upward sloping structure it has been
following. This is a perfect example of a structural failure of strength.
The pattern then develops a local shakeout, which acts as a Test event
in Phase C, causing the definitive imbalance and it continues to rise.
It is also worth pointing out the location of the High Volume Node and
the VPOC of the structure, and how the price is unable to cross this high
trading area, thus suggesting control of the bulls. To gain a more detailed
understanding of the Volume Profile tool and how it fits in with the Wyckoff
Method, I recommend you study my latest book “Wyckoff 2.0: Structures, Volume Profile and Order Flow”.
Here is another example of an upward sloping accumulation structure. In this case, the slope is quite steep, which suggests that the current
market condition is one of underlying strength.
We see that there isn’t climatic volume at the definitive stop (Selling
Exhaustion) and how, from there, the price begins a clear succession of rising
highs and lows. Decreasing volume during the development of Phases A and
B suggesting absorption. The price has difficulty in rising above the High Volume Node but once it succeeds after the Shakeout it continues to show
strength and manages to breakout upwards with good bullish candles (SOSbar).
It’s interesting to see how the Back Up develops on the upper part of
the structure (Creek) in confluence with a high trading volume level (weekly
VWAP).
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Downward Sloping Accumulation Structure
This is the accumulation variant showing the greatest weakness. The downward slope, that dynamic of decreasing highs and lows, already denotes total
control by the bearish traders. The weakness is latent, but even so, the buyers finally appear and cause an accumulation.
After observing the appearance of the first trend stop events, the
weakness will be so high that the market will not be able to support the development of a horizontal structure and instead signs of weakness will appear that generate ever-decreasing lows.
Structurally, the price will follow the downward dynamic, fluctuating
between the upper and lower extremes of the channel. The new lows will
travel a shorter and shorter distance displaying a very common pattern of
trend exhaustion (Shortening Of the Thrust).
It is also probable that the market will develop some type of structural failure, where at a certain moment the price no longer follows the dynamic
that would have taken it to the lower part of the structure, and instead finds
a support level somewhere in the middle. It may have bottomed out and is
getting ready to start the uptrend movement.
Confirmation of the Shortening Of the Thrust pattern and the structural failure would be provided by the price now developing a strong bullish impulse. Ideally we would want to see this impulse actually break the bearish
structure, changing the dynamics of the market. Now would be the time to
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wait for a bearish correction to position ourselves in favor of the imbalance
caused by buyers.
In this example we see how the price is respecting the extremes fluctuating up and down inside the channel. As already mentioned, identifying
this kind of structure can be very subjective, so it needs to be very obvious
and the lines should be drawn in a very unforced way. The idea is that they
contain most of the price action.
It is worth highlighting in this chart how the monthly VWAP works. It is
the darkest dynamic line marked on the chart. As you can see the price reacts to it every time it touches it. After the first touch in the Secondary Test,
the price stays constantly above it, a sign that would suggest some control
on the part of the buyers.
As always, the key event is the shakeout that causes the development
of the effect of the constructed cause. After said Shakeout, the price develops a Last Point of Support above the VPOC of the structure, which is followed by the JAC and the Back Up, that will again look for a confluence zone
(weekly VWAP and Value Area High), before moving into Phase E out of range.
We can see another clear downward sloping accumulation structure
full of details in the example below.
After the end of the trend in Phase A, we see that the price mainly
trades in the lower part of the range, unable to carry out any test on the upper part, which suggests a certain underlying weakness. Little by little the
volume decreases with respect to that seen in the Selling Climax and, after
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the appearance of the Shakeout, a sign of strength is now able to send the
price to the upper area of the range (minor Sign of Strength).
At that point, we can already see how the lows of Phases A, B and C
travel a minuscule downward distance, in this case suggesting the appearance of the Shortening Of the Thrust (SOT) pattern and its bullish effect.
Although the first bullish movement does not have enough strength to
break the structure, just managing to perform the test suggests a change of
character. At that point the price develops an internal shakeout to a previous
high in confluence with the weekly VWAP. However, this time the market is
unable to test the lower part of the structure, developing a structural failure
of strength evidenced in that Last Point of Support. Objectively we already
have the Shakeout, the sign of strength and the structural failure = potential
imbalance in favor of the buyers.
From there and through two signs of strength, the price manages to
break the range and we see how it searches for the confluence zone before
developing a break and retest (Back Up). This zone is made up of the Creek of
the broken structure, the weekly VWAP (green dynamic line) and the Value
Area High of the profile. Yet another example of the functionality of these
types of context-supported trading levels.
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Downward Sloping Distribution Structure
This is the distribution structure that presents the greatest weakness. After
the appearance of the first events suggesting the end of the previous trend
movement, the very weak condition of the market will cause the development of subsequent movements in the form of decreasing highs and lows.
Visually, this will be represented by a downward channel in which the
price bounces off the extremes while following the dynamic.
The key, as always, lies in the correct identification of the Test event in
Phase C that gives rise to the bearish breakout movement. We will constantly be looking for said test event to occur in the form of a false breakout (in
this case an Upthrust After Distribution –UTAD-). As I have mentioned countless times, this is the event that instills the greatest confidence in a trader
for forecasting scenarios and therefore in most cases we should wait for its
appearance.
This final shakeout can be expected either in the form of excess in the
upper part of the structure, also suggesting an overbought condition; or as a
local shakeout at some significant previous high. The more obvious and exaggerated the shakeout, the more confidence it will give us. This is because
it suggests that it has captured more liquidity and that, therefore, the subsequent movement will have greater momentum.
The main difference with respect to downward sloping accumulation
structures is that, in this case, we will not see that loss of momentum char-
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acteristic of the Shortening Of the Thrust pattern, nor will we see any type of
structural failure.
It is certainly a difficult type of scenario to trade in, because the trader
will subjectively see the price as being relatively low and may determine that
it is not the place to go short. However, we need to try to eliminate this subjectivity and look for the objectivity that this type of reading offers us.
Due to the almost total control of the sellers, the price will move very
quickly. We need to be fully alert or we might well miss the movement. However, this might not be a bad thing. If you have been able to correctly read the
situation and you have seen that the market has turned in favor of the bears,
even if you miss out on a trading opportunity because you weren’t quick
enough in your decision making, at least you will save yourself a loss by not
being on the wrong side of the market (buying).
In this example of a downward sloping redistribution structure, we see
that the end of the trend occurs while the volume is high throughout the development of Phase A and that during Phase B there are also unusual volume
peaks, characteristic of distribution schemes. Moreover, bearish Weis waves
predominate at all times.
The price manages to position itself below the high volume node and a
subsequent bullish correction will test this area, resulting in a Last Point of
Supply event before generating a real bearish breakout (SOW). Once below
the structure, a new test takes place up to the lower edge before the fall
continues.
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A trader who doesn’t take into account these structural dynamics and
who doesn’t know how to correctly identify all the signs inside it would very
possibly see the price fall in a potential oversold condition and decide to
adopt a bullish position. But the truth is that the market was flooded at every
point with weakness and this was reflected in the price action and the volume.
Yet another example of a distribution scheme with very characteristic
signs. Volume peaks, predominant Weis waves and a Phase C shakeout that
triggers the bearish breakout move.
The UTAD test takes place in a very important location, in the VPOC of
the range. This is the most traded price level. In addition, it converges with
the upper part of the structure. This is the ideal location to look for an entry
in a short position. Another example of how the Volume Profile can help us to
better analyze the market context.
Such was the underlying weakness that there was no possibility of a
break and retest (LPSY) on the lower part of the structure.
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Upward Sloping Distribution Structure
This type of dynamic initially shows a certain underlying strength, evidenced
by that succession of increasing highs and lows until, in its final development, the aggressiveness of the sellers comes to the fore, turning it into a
distribution structure.
As mentioned in the previous structures, the Shortening Of the Thrust
pattern acts as a useful indicator for evaluating the structure. In this case,
the price may hit new highs but travel a very short distance from the previous highs, denoting a lack of momentum.
If, on top of this, the price displays some sort of structural failure that
denotes weakness (it doesn’t reach the top of the structure), this would be
one more sign that suggests that the control may be shifting towards the
bears.
As always, this take on the situation will be supported by the appearance of a false breakout (UTAD) either at the upper end of the structure in
the form of excess resulting in an overbought condition; or at some significant previous high.
We shouldn’t forget those complementary tools that analyze the volume data, such as the Volume Profile and the analysis of Weis waves. The
location of the trading zones of the volume profile will always help us when
making decisions, while the wave analysis will allow us to take a more detailed look at the interest being traded in the movements and these elements will sometimes be the key to a correct analysis.
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Example of an upward sloping redistribution structure with no false
breakout of the limits. Among the most significant details here is the climatic volume in the middle of the range. This is a warning sign since this should
not appear as a general rule in accumulation structures and therefore could
provide additional evidence that the bears are in control.
The Shortening Of the Thrust pattern also stands out very clearly between the highs established by the Automatic Rally in Phase A, the Upthrust
in Phase B and the UTAD in Phase C. New highs but with little distance between them, suggesting this loss of momentum.
In the Phase C UTAD we see how the price tries to leave the value area
of the volume profile and is rejected. The market is not interested in trading
higher prices and this is a further indication that the sellers are in control.
This action could also be seen as the test event in Phase C, testing the highs
inside the structure. In real time it is undoubtedly a difficult pattern to trade
in.
The price manages to position itself below the VPOC of the profile
after an initial weak movement. This action is accompanied by a large bearish Weis wave. At this point the directional bias should be clear. We are now
in a position to come up with ideas for trading short.
Here again we see how important it is to take volume levels into account. The break and retest (LPSY) will look for the confluence zone of the
broken structure and the VPOC and from there it will launch the bearish continuation in Phase E.
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On this occasion, the test event in Phase C manages to reach the top
of the structure, breaking all its highs. As we know, this action adds more
strength to the bearish scenario.
The angle of the upward slope is very steep, suggesting great underlying strength at its beginning. Strength that is dissipated and blocked with the
appearance of volume peaks during the development of Phase C.
An unquestionable sign of weakness that sends the price down to the
origin of the movement in the AR and that also manages to develop a new
bearish leg. Not before going to visit up to two times the most traded volume
level (VPOC) of the structure before then continuing to trade downwards.
Again an impressive example of the effectiveness of these volume levels.
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U NUSUAL STRUCTURES
This category includes all the other structures that don’t follow a horizontal
or sloping pattern.
If we wanted to be pretentious, we could classify almost every accumulation or distribution range as a structure under the Wyckoff Method, regardless of their shape, including the traditional chartism patterns of head
and shoulders, wedges, triangles and others that we all know.
Trying to justify every movement and development of a structure using the approach of the Wyckoff Method does it no favors. Wyckoff has little
to do with these robotic patterns. Its analysis goes much deeper than that.
So the best thing to do is distance ourselves from any possible link that may
connect traditional chartist patterns with the Wyckoff Method.
It’s easy to label any range in hindsight. But this is of no use from a
trading perspective. Labeling old charts is a very interesting exercise for
novice traders, to help them put their knowledge into practice and to feed
their subconscious to prepare them for real-time trading. But once you have
achieved a certain knowledge of the methodology, it doesn’t make sense to
continue labeling old charts.
If we really wanted to, we could turn any chart it into a beautiful
structure that would fit perfectly within the events and phases of the Wyckoff Method. But our focus shouldn't be on this. What is the use of having detailed knowledge on where to put each label in a hypodermic (V-shaped)
market reversal if you can’t apply it in real time?
As I say, studying unusual structures is a waste of time and energy,
mainly because, as the name suggests, they don’t appear with any regularity.
Our advance lies in waiting for the classic structures to appear.
Classic structures which follow a strict sequence of events and phases, but which also allow a certain flexibility, based on the particular market
conditions. A perfect example of this are the sloping structures: classic
shapes in which all the events and phases are perfectly visible, but where the
underlying condition slightly modifies the final development (a certain bullish or bearish dynamic).
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This FDAX chart is a very good example of what I am talking about.
Having followed its full development, I could go back and label each of the
movements if I wanted to, but in real time it would be almost impossible to
trade in a chart with this sort of behavior. A structure blocked at the lows but
which in turn develops increasing highs. It makes no sense to focus on it.
In addition to these types of untradable structures, now is a good time
to remember that theory and practice in real time often don’t go hand in hand
and that you need to have a sufficiently open mind.
Looking at this chart from the S&P500, while it is true that a very genuine structure can be seen towards the end, a lot of traders would have
found it hard to identify Phase A in real time.
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The price starts rising, then develops an extensive downward movement and from there moves upward again exceeding the previous high. Could
this sequence be the BC, the AR, the ST? It could, but that’s not what’s important. The important thing is that there has been a change of character; that
the price has gone from a trend context to a sideways one and that a new
cause is going to be constructed that will have an effect. This is all that matters, the context behind the price action.
Many traders continue to look only for “textbook” structures and although, as we have seen, they appear regularly, the interpretation that the
methodology offers us is much more interesting than just that. Here we see
another example which is exactly the same. If we observe the market from
the strict point of view trying to identify the perfect movements with the
right proportionality that in theory there should be between phases, when we
see this type of development we may have problems in identifying it.
If we treat the three movements that I have marked as the SC, AR and
ST, Phase B would be very short since the only objective event that can be
seen on the chart is the Phase C false breakout. In this case what do we do if
the theory tells us that Phase B should be longer than Phases A and C?
There’s not a lot we can do. The theory is great for generalizing about the
events, but actual trading and analyzing in real time requires a much more
open mind.
Once you achieve a certain degree of knowledge about the methodology, you should focus on looking at the market in terms of price dynamics
and not in terms of labels.
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PART 7 - ADVANCED CONCEPTS OF
THE WYCKOFF METHOD
M
y intention is not to describe the Wyckoff Method in its purest version.
There may be Wyckoff traders that prefer to do so, but we know that
today's markets have changed substantially from when Richard
Wyckoff studied them. It is our job to adapt to these changes.
If there is one thing that is unchanging and which gives this approach
an edge over others, it is the principles on which its teachings are based. Regardless of how the markets and their traders have changed, everything continues to be governed by the universal law of supply and demand. This is the
cornerstone of the methodology.
The following section describes a few advanced concepts that you
should know and clarifies a series of doubts that often arise.
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H OW CAN WE PREDICT A PRICE REVERSAL ?
Predicting the end of a movement is not an easy task. The objective is to
identify the point at which the start of a movement in the opposite direction
is likely to originate as soon as possible. We are going to base our prediction
of these market reversals on identifying candlesticks showing intent that
develop in favor of one direction or another.
The person behind this and other concepts is Roman Bogomazov. Roman is the director of the Wyckoff Analytics academy where he brilliantly
teaches the principles of the Wyckoff Method. He is without doubt one of the
leading figures in this area thanks to his in-depth knowledge and the contributions he makes to the Wyckoffian community.
To predict a price reversal, the first thing we need to do is identify the
last candlestick showing intent in favor of the direction of the current
movement. We are going to assume that this marks the current control of
the market in the short term because in all probability the price will continue
in that direction (in the direction of who has control of the market).
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In other words, if the price is in the middle of a bullish movement and
above a candlestick showing bullish intent, we are going to assume that the
control of the market is held by the buyers; by contrast, if the price is in the
middle of a bearish movement and below a candlestick showing bearish intent, we will assume that the current control of the market is held by the
sellers.
With the appearance of new candlesticks showing intent in favor of
the movement, the control of the market will continue to move in that direction, anchoring itself in those new candlesticks.
The key here is that we will know the control of the market has shifted
when the price breaks the last candlestick showing intent in the direction of
the market with another candlestick showing the reverse intent. To do this,
we need to mark the extremes of the full range of that last candlestick
showing intent and a closing price in the opposite direction would alert us to
a possible reversal of the movement:
• To determine the end of a bullish movement and the possible start
of a new bearish one we need to see that a bearish reversal bar closes below the low of the intentional bullish bar that until then indicated the control of the buyers.
• To determine the end of a bearish movement and possible start of a
new bullish one we need to see that a bullish reversal bar closes above the
high of the intentional bearish bar that until then indicated the control of
the sellers.
This concept, used to identify a market reversal, is very important as
we can apply it to predict the end of any of the events described in this book
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which make up part of the theory. This gives us a certain amount of objectivity in our analyses.
If we don’t want to go down into a shorter time frame to look for a
possible minor pattern that will determine the price reversal in the longer
time frame, we can stay in that longer time frame and wait for this candlestick of intent to appear as a sign that the price might be reaching the end of
its movement and to alert us to a possible reversal.
In other words, that after the Selling Climax we will probably see that
bullish reversal bar that will end the movement. And once the next bullish
movement has started, we will probably see that bearish reversal candlestick alerting us to the end of the Automatic Rally. And we can apply this to
all events in the range.
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R EASONS FOR LABELING
All the theory that we have looked at up to now is essential learning if we
want to master this approach and truly understand how the market moves,
but the Wyckoff Method, or my way of understanding it, goes much further.
It's not just about the almost robotic labeling of a chart and leaving it
at that. We have learned what underlies each event; how it is generated, how
it is represented on the chart, the psychology behind it etc. But as I say, the
method is much richer than that. I say this because, due to the very nature of
the market, it is practically impossible for two completely equal structures
to exist. Although it is true that every day we see “textbook” patterns, which
can very closely resemble the classic examples, in most cases the market
will develop less conventional structures, in which it is much more difficult
to identify these events.
It is therefore essential not to look for exact copies of these events
(mainly the end of trend events that make up Phase A) and to focus on the
importance of the action as a whole. We will probably come across many
charts in which we see the end of a trend movement and the start of a sideways process, but we might not be able to correctly identify those first 4 end
of trend events. In these circumstances, we might dispose of the asset and
miss out on a future trading opportunity.
Which would be a mistake. As I say, the important thing is not whether
we can precisely identify those 4 end of trend events, but that the market has
objectively generated this end of the trend. We may not be able to clearly
identify the Climax, Reaction and Test, but we can objectively see the market
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has stopped and started a change of character (migration from a trend to a
sideways context).
As we can see in these examples, although these structures don’t look
anything like the classic ones we have been studying, if we were to open a
chart and find ourselves at the point that I have marked with an arrow, it
would not be unreasonable to assume that an accumulation process has
been developing below. It might be more or less difficult to identify the
events of the methodology, but we can objectively see that the price has
been rejected at a certain level on several occasions (Creek) and that it has
finally managed to break out and position itself above it. This is the key.
If we really tried, we could probably label each and every one of the
movements but I repeat, this is not the important thing. What is important
about the methodology is the underlying logic behind it. For the price to rise,
there must first be an accumulation; and for it to fall, a distribution. The way
or manner in which these processes develop are not significant factors.
This approach requires a very open mind. It may be enough to make
some feel their heads will explode, but it is what it is. Luckily, we do often see
the classic structures, but the continuous interaction between supply and
demand means that these processes can develop in an infinite number of
ways, and we have to be prepared to observe them. Rather than thinking
about labeling each and every price movement, we should focus on trying to
determine, according to the signs we observe, who is most likely to be in
control of the market, based on the theory we have studied.
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F AILED ACCUMULATION OR DISTRIBUTION
When an analysis of all the signs seen on the chart suggests that the market
is unbalanced in favor of one side but at the moment of truth the opposite
side pushes more aggressively, this leads to a failure of continuity or a failed
structure.
During the development of structures, the two sides are fighting for
control of the market. This can change (in favor of buyers or sellers) continuously, depending on the types of traders involved and their valuations of the
asset.
Since we know that it is impossible to determine which way the structure is going (accumulation or distribution) before seeing the effect of the
cause, we perhaps shouldn’t use the term “failed” structure. A failed accumulation is really just a distribution structure and vice versa. But it is a very
interesting concept that helps us to understand an important market dynamic; knowing what types of traders are involved and how they intervene based
on the time frame.
When the price reaches a potential Spring at the lows of the structure
and from there manages to reach the top again, it is obvious that down there
the buyers have entered with a certain amount of aggressiveness; but we
don’t know when they will decide to close their positions. They may simply be
short-term traders taking advantage of a visit to a liquidity area (either at the
highs of the structure or an intermediate area) to find the counterparty with
which to match their orders so they can close their positions there and take
profits. This closing of long positions would cause a loss of bullish momentum and possibly a further downward turn.
Or maybe the traders who have bought at the Spring have a longerterm perspective and will do their best to stay in the market and defend their
position if necessary, leading to the full development of the accumulation.
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We also don’t know if there may be longer-term traders involved, with
a greater ability to move the markets who are looking for this bullish movement, to take advantage of it and go short aggressively.
You also need to bear in mind that not all large traders win in a systematic and recurring way over time. Many of them are often forced to take
losses and this context of a failed structure could be a perfect example. As Al
Brooks says in his books on Price Action, in liquid markets even the slightest
price movement is generated because a large trader is buying and another is
selling. It is a battle between these large institutions and therefore some of
them will incur losses in some of their trades.
The key to identifying a failed structure is if you see absolutely all the
signs in favor of one direction but it fails at the decisive moment (in the
break and retest), and an imbalance is generated in favor of the opposite
side.
For an example of a failed accumulation, we would need to see that
all the signs suggest that the control of the market is in the hands of the
buyers, and that the price develops a potential Spring, that the bullish breakout is real from the point of view of the price action and volume; but that finally in a position of a potential BUEC the price isn’t able to continue to rise,
and an imbalance is caused in favor of the sellers, turning it all into a distribution structure.
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For a failed distribution we would need to see the same but in reverse:
signs in favor of the sellers, development of a potential Upthrust, real bearish
breakout and aggressive buying occurring at the break and retest that flip
the structure into an accumulation.
It is important to be aware that we don’t know the ability of the
traders involved to continue controlling the market. At any moment a trader
with greater capacity could appear and cause a reversal. What at first
seemed to be unbalanced in favor of one side, with the appearance of this
new player, may suddenly be tipped in favor of the opposite side.
So we have these two very important factors to assess:
• We don’t know the intention of the traders who are supporting the
current move. If they are short-term traders who will close positions in the
next liquidity zone or if, on the contrary, they have a longer-term perspective and will continue until the structure develops completely.
• We don’t know if traders with greater capacity might suddenly intervene. At the moment of truth, in the break and retest that would confirm
the direction of the structure, aggressive traders may appear with a greater
capacity to move the market by pushing in the opposite direction, since
they may have a different longer-term approach.
This is a problem we will often come across, so our advantage lies in
trading in favor of the last imbalance and for this it is crucial that we identify
the most critical event: the false breakout.
The false breakout, as already mentioned, is the most decisive action
in the functioning of the market. Its underlying logic is so powerful that we
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should always be compelled to align with it. Therefore, if all the other signs
are consistent, we should always trade in the direction of the last false
breakout; that is, we should go long after seeing a potential Spring and short
after seeing an Upthrust.
Some may come to the conclusion that waiting for the price at the
extremes and trading only in potential Upthrust/Spring situations is the most
convenient measure to simplify the whole analysis; and there is certainly
some logic to that. The good thing about the Wyckoff Method is that by offering a way of understanding how the market moves as objectively as possible,
every trader can use its principles to develop their own strategies.
The signals given off during the development of a structure from its
very beginning are significant and help us to forecast scenarios with greater
probability. For example, if I were to observe certain distributive characteristics in a structure and later see that it is developing a potential bearish
breakout or potential Spring, the analysis of the context would lead me to
predict a bearish breakout; while the trader who only trades false breakouts
at the extremes without evaluating anything else will do the opposite. And
generally the market will continue to develop (in this example) a distribution
structure because the imbalance is latent and has been evident during the
development of the range.
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S TRUCTURAL FAILURE
This is a very simple concept that can help us when evaluating the dynamics
of movements.
All structures suffer this kind of failure; both upward or downward
sloping structures as well as horizontal, convergent or divergent ones.
First you need to identify the structural logic on which the price
movement is based. This will be determined by the successful touches that
respect a structure formed by two areas of supply and demand. This is key at
first: identify the structure that has been validated by the price. The more
touches there are, the more confidence we should have in the structure being valid.
At that point, and based on the principle of the price continuing in the
same direction, it would be safe to assume that the market will continue to
move respecting that structural logic, moving from one extreme to the other.
If the price doesn’t develop another test on the opposite side and instead generates a reversal before reaching said zone, we will say that it has
developed a structural failure, since it has not continued to follow the original dynamic and this is a strong sign of a new scenario in favor of the price
reversal.
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Based on this concept, we can consider the Last Point of Support and
Last Point of Supply events to be structural failures in which the price is
blocked in its attempt at a false breakout before initiating from that point the
subsequent movement that breaks the structure.
Weakness
A structural failure that denotes weakness occurs when the price, after validating a structure on several occasions, is then unable to continue moving
based on this logic and is unable reach the top of the structure.
This inability to continue moving as it had been up to that moment
denotes underlying weakness. Buyers are no longer in control of the market.
Sellers have started to appear more significantly.
This signal does not suggest an immediate downward reversal. Rather,
it is one more element to take into account, in order to correctly read the
market context.
It could simply be a temporary stop of the previous trend, which will
go on from there to develop a period of consolidation, during which it will reaccumulate before continuing to rise.
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Strength
An action in which the price was unable to reach the lower part of the structure that it had been following up to then would denote underlying strength.
In other words, if the price has hit a series of decreasing highs and
lows which fit perfectly within some upper and lower limits, we would assume that the market would continue behaving in the same way and therefore we would look for a new test on the opposite side of the structure. If, for
example, the price is coming down from a test on the upper part of the structure, the dynamic suggests that it would have to do a new test on the lower
part. If during the development of this movement the price reverses without
reaching that lower part, we would say that the market has generated a
structural failure and it is a sign of market strength since buyers have not
allowed the price to fall further.
If, in addition to this sign, this movement were to cause a false breakout of some relevant previous low, we would be in a potential Spring situation
with significant underlying strength, due to the fact that it coincides with
that structural failure. The reason for this action is that buyers have entered
aggressively, tipping the balance of control in their favor. These buyers have
interests higher up the price and block the price drop. They don't want the
price to go down. They don't want anyone else to be able to get in on the bullish movement.
This sign does not suggest an immediate upward reversal; rather, it is
one more element to take into account in order to correctly read the market
context.
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S HORTENING OF THE THRUST ( SOT )
This is pattern involving a change of direction. It is an analytical tool that
Wyckoff originally used to measure the loss of momentum or exhaustion of
an impulse movement or thrust.
Visually it is represented by a price line that travels an ever shorter
distance each time it reaches an edge of the range, hence we say the thrust
is shortening.
• In an uptrend example, we would observe how each new high travels
a shorter distance than the previous high. This suggests a deterioration in
demand and signals a possible downward turn.
• In a downtrend example, we would see a decrease in the distance
traveled by the new low in relation to the distance traveled by the previous
low, suggesting a deterioration in supply and signaling a possible upward
turn.
The basic idea is that there is a lack of continuity in that direction. An
exhaustion of the forces that until now seemed to control the market. This
loss of momentum suggests a major correction is about to happen, perhaps
even a trend reversal.
For this behavior to be valid, a minimum of three thrusts in the direction of the trend are required. After seeing three or four impulse movements,
you should start looking for this shortening pattern in the final thrust.
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• When the price advance shortens but there is high volume it means
that the major effort received little payoff: divergence of Effort/Result. In
the case of a bearish example, it would mean the appearance of more demand, and in a bullish example, the appearance of more supply.
• When the price advance shortens and there is also low volume it
means exhaustion. In the case of a bearish example, it would mean the
supply was withdrawing, and in a bullish example, it would mean the buyers were withdrawing from the market.
When there are more than four thrusts and shortening persists, the
trend may be too strong to trade against.
What would confirm the change of direction would be a strong impulse movement in the opposite direction. Following the shortening of the
thrust, we would want to see the new impulse in the opposite direction accompanied by a high volume, denoting intentionality. After this impulse that
changes direction, we could wait for a correction in which to enter the market in the direction of the new impulse movement.
Always keep the context in which the shortening of the thrust develops in mind:
If the price breaks the top of a range and reverses, this action is a potential Upthrust. If, after a few bearish waves, there is a shortening of the
thrust and this suggests a buy operation, you must bear in mind that the
price has just come from an Upthrust and that it will most likely continue to
fall. Any buy operation should be avoided, but if it is taken, it should be closed
quickly after a weak response. The same would happen if we were to see a
bearish pattern after a potential Spring, the directional bias would be marked
by the false breakout, casting doubt about the viability of a short approach in
the SOT.
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The Shortening Of the Thrust pattern can also be represented by individual bars as well as movements. In this case, we would see how successive
bars make less and less progress. If it also happens in a trading zone in
which, due to the context, we are in a position to trade against it, the situation would be ideal.
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E FFICIENT USE OF LINES
Retail traders who are new to the markets tend to like to draw lines to identify support and resistance levels in the hope that the market will respect
them. But you need to be clear about something, the market doesn’t care
how many lines you have drawn on the chart, or how thick or thin they are, or
their color.
Unless you have some statistical study that proves it, using lines on
their own as a trading approach is not advisable. In other words, you
shouldn’t buy or sell simply because the price has touched a particular line.
The lines simply represent the bigger picture, which is who is primarily
in control of the market. If we see a bull market in which a bullish line or
channel can be quite obviously drawn, the objective reasoning is that buyers
are in control. If what we see channeled between two extremes is a clear
downward movement, this means control is in the hands of the sellers. And
finally, a horizontal sideways movement with repeated pivoting at the two
extremes tells us that there is a balance between both participants.
Visually identifying how the price follows certain lines (which are subjective) simply puts us in a position to see that the price, for whatever reason,
is following this dynamic; and that based on the principles of technical
analysis, it is most likely that it will continue to behave in the same way in
the future. But no more than that. It should not be used as a tool by itself to
make buying or selling decisions.
Therefore, the idea behind drawing lines, whether it’s to create horizontal ranges, or any type of channel or simple trend lines is to:
1. Identify the structural dynamics that the price is following.
2. And based on this, to provide us with interesting trading zones,
which will be at the extremes of said dynamics.
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Let’s continue with our analysis based on this logic. If we have just
reasoned that an uptrend line or channel shows us a market controlled by
buyers, based on this it would be reasonable to buy while the price continues
to respect this dynamic, and only trade short after this dynamic is broken, not
before.
Now, say you have identified a bullish channel, what are the best locations to try to trade in (regardless of whether you want to buy or sell)? There
is no doubt that the ideal thing to do is wait for the price at the extremes. This
is the second advantage offered to us by correctly identifying the structural
dynamic.
I should point out here that the fact that the market is rising doesn’t
necessarily mean that a trend-following strategy (in this case buying) will
have a better result than a strategy of going against the trend (in this case
selling). It is simply a matter of identifying where the path of least resistance
is (looking at the ascending or descending dynamic) because trading in the
direction of the dynamic, initially at least, offers a greater possibility of success (since we are trading in line with whoever has the control).
If what you are looking for is to anticipate a market reversal (which is
not recommended), at least wait for the break of the trend line that reveals
what dynamic the price is now following. It could be a sign of a loss of momentum, although without taking into account anything else, any trade hoping for a price reversal would be too risky.
Now, and continuing with the example of the uptrend, if the price approaches the lower part of its channel or trend line, is its location reason
enough to buy? Absolutely not, with the exception of the case mentioned
above.
In this example, what we can see is that the price is following a dynamic of visiting both extremes. Under the principle of expecting the market
to continue doing what it has been doing up to now, you might want to look
for a long position waiting for a new upward impulse. But that's it, that’s as
far as the power of the lines goes. They provide us with an indication of the
market sentiment and can help determine the market bias. Based on the
dynamics of the price, we would be in an interesting area to look for buy positions. However, this doesn’t necessarily mean that we should buy.
The best thing to do would be to use this information, together with
other analytical tools, such as the Wyckoff Method approach. If we identify
the price as being in a location conducive to taking long positions, instead of
immediately buying, why don’t we wait for the break of the downward dy-
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namic and wait for the price to develop an accumulation pattern in that
zone? This would seem like a more useful use of lines.
In summary, drawing lines and identifying the price dynamic has two
useful functions:
1. If you are looking to trade in a price reversal, wait for the dynamic
to be broken.
2. Look for the development of a minor accumulation/distribution
structure at the extremes of said dynamic.
The Importance of Context
If, through an analysis of the lines, be they trend lines or some type of channel, we determine that we are in an interesting trading zone (at the extremes), it might be time, if the trader so decides, to move to a shorter time
frame in order to identify a minor accumulation/distribution structure in that
location.
Looking at the chart below with a longer time frame, imagine you are
located in an interesting area for this reversal to take place, waiting for a
movement to the opposite extreme. An efficient use of the context would be
to move down to a shorter time frame to try to trade in that minor accumulation structure that will generate the reversal.
As you can see, lines by themselves offer little in the way of predictive
power; but used together with other tools they can be very useful from a
trading perspective.
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C HANGING LABELS AND FORECASTING SCENARIOS
Since the control of the market can vary during the development of a structure, we need to continuously assess the price action and volume as new
information reaches the market and is displayed on the chart. In view of this,
we will always give greater relevance to the latest information that we have.
When we forecast a scenario, we always take into account all the information available up to now; that is, based on market conditions at the
present time. The present time is the most important context, and the second
most important context is whatever immediately preceded it.
For this reason a particular action may initially suggest one thing but
its status may change, because all market actions have to be confirmed or
rejected by the subsequent price action.
It is of no use keeping a scenario permanently active. Many critics of
technical analysis use this to try to discredit it. They see an approach which
they believe cannot be modified. The reality is that the market is not static
and that each moment is unique, with new information continuously reaching the market without interruption.
That is why sometimes we will be forced to change our perception of
the sentiment behind an action and, as a result, the label that we initially
gave it. As we have already discussed, labels are not really important. What is
important is the underlying action, as suggested by that particular movement. And what that movement suggests to us is determined by the action
that follows it.
It may be that what at first looks to be a false breakout acting as a
Phase C test (which would eventually give rise to the break and continuation
outside the range), is simply a test that denotes intentionality in that direction. But we can only assess this after seeing the subsequent price action.
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For example, if a potential Spring fails to develop a single upward
movement that denotes a certain strength (at least a minor SOS), we would
have to reassess the sentiment of that action and instead of seeing it as a
bearish false breakout, suggesting an upward directional bias, we would see
it more as a test of weakness.
Looking at the example in the chart above, with the price at point 1, we
could say that we were in a potential Spring situation. Then after seeing that
it doesn’t develop any show of strength, our sentiment about said action
should change and when it hits the new low at point 2 we would label it a
simple test.
Another important thing to note is that we can only reasonably predict
the next move, never beyond that. Based on what the price has been doing,
we can assess the probability of a certain movement developing subsequently. And when that movement ends, we will be in a position to predict the
next one. It doesn’t make any sense to be in Phase B and to already attempt
to determine whether an accumulation or distribution structure will develop.
That is completely misplaced. It’s not Wyckoff.
And herein lies one of the advantages of the Wyckoff methodology; it
provides us with a clear road map, a context in which we can expect certain
price movements. If the price is in the position of potential bearish shakeout
(Spring) and our analysis confirms it, we will then wait for the subsequent
bullish breakout movement. And when this movement develops in the way
we expect it to (with increasing price and volume), then we can predict the
next movement, back to the level of the broken structure. And when we are
in said BUEC position, we can then assess the situation and predict the subsequent trend movement outside the range.
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This is the dynamic we should follow. It’s not about inventing anything,
it is simply about following and evaluating the price action and volume in
real time, to determine what the next movement is most likely to be.
The “why” is simple; and the reasoning can be found once again in the
previously mentioned cause of failed structures:
• We don’t know the intention of the traders who are supporting the
current move. If they are short-term traders who will close positions in the
next liquidity zone or if, on the contrary, they have a longer-term perspective and will continue supporting the movement until the structure develops completely.
• We don’t know if traders with greater capacity might suddenly intervene. At the moment of truth, in the break and retest that would confirm
the direction of the structure, aggressive traders may appear with a greater
capacity to move the market by pushing in the opposite direction, since
they may have a different longer-term approach based on their valuations.
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H OW CAN WE DISTINGUISH BETWEEN AN
ACCUMULATION AND A DISTRIBUTION STRUCTURE ?
This is the most recurrent question among traders, which makes sense because if we had an objective answer we would be able to develop a definitive
strategy to earn money easily.
But unfortunately this isn’t the case. It’s impossible to know in real
time whether we’re dealing with an accumulation or a distribution structure.
The only moment in which we can confirm what has happened in the range is
after seeing the complete development of the structure; when the cause and
effect have fully developed. But by that point it’s of no use to us, it is too late
to take advantage of the market. We need to enter the market before the
effect of the cause is fully developed.
When predicting a scenario we always speak in conditional terms,
using the word "potential", since there is no certainty about anything. The
market is an environment of complete uncertainty and our focus should be
on analyzing the signs that we have observed so far in the most objective
way possible, in order to try to determine where the imbalance will occur.
As we have seen, there are certain signals that inform us about who is
taking control of the market during the creation of the cause. Below is a
form of summary, highlighting the most important points, which should be
taken into account when assessing the market sentiment.
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1. Type of Test in Phase A
This is the first evaluable sign offered by the structure. The idea is simple: we
divide the vertical range of the structure into two parts. Depending on where
the Secondary Test occurs, we will learn something about the condition of
the market up to that moment. Let's remember:
• A Secondary Test ending in the middle part of the range implies neutrality, denoting equilibrium among the participants.
• A Secondary Test in the upper third of the range indicates some imbalance in favor of buyers.
• A Secondary Test slightly below the low of the range suggests a
certain imbalance in favor of sellers.
Analyzing the type of test in Phase A is a very early action in the development of the structure, but it is worth assessing what situation originated the subsequent development right from the start. It is about building up
more and more evidence in favor of one side or the other (buyers against
sellers).
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2. Type of Test in Phase B and Reaction
This is the second sign, which allows us to assess the apparent strength or
weakness of the market.
In general, we will draw one of two clear conclusions:
• Test on the upper part of the structure would denote strength.
• Test on the lower part of the structure would denote weakness.
The logic behind these conclusions is that it is impossible for the price
to move to that end of the structure and perhaps even penetrate the line if
there are no large traders supporting that movement with conviction. This
gives us some confidence when deciding whether there is harmony in the
development of the movement.
In general terms, since it occurs at a very early stage in the development of the structure, this type of test would denote a certain urgency in the
direction in which it occurs. A test at the upper end suggests buying momentum, while a test at the lower end would indicate a great deal of weakness in
the market.
A subsequent assessment of the price action will help us to determine if this movement has been able to hit the stop losses of the traders that
are positioned on the opposite side, thus freeing up any resistance in market;
or if, on the contrary, the movement has been used by traders to enter aggressively in the opposite direction.
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In other words, a test on the upper part of the structure that manages
to break (UA) the highs even slightly and reaches that liquidity zone can be
read in two ways:
• On the one hand, this movement may have served to absorb the stop
loss orders of those who are positioned short. By doing so the large traders
manage to eliminate that downward pressure before subsequently starting
the upward movement at a lower cost. This action would be confirmed later if we were to see that the price reaches a certain support level and is
unable to continue falling.
• On the other hand, other large traders may have taken advantage of
this test at the highs to enter the market with short positions. This action
would later be confirmed with a visit to the lows of the structure, a genuine
representation of weakness.
Therefore, what happens after this test will be very useful for our
analysis. We might even be observing a Phase C test, hence the importance
of evaluating the subsequent reaction of the price. An inability to visit the
opposite end would alert us to a structural failure, a sign that would add
strength to a move in the opposite direction; as, if it really were the false
breakout in C, the price should at least reach the opposite extreme almost
immediately.
These types of behaviors (a test at one extreme and then structural
failure at the opposite extreme) are generally characteristic of schemes that
initiate the trend movement out of range without a prior false breakout at the
full extremes of the range.
In the case of an accumulation, the test at the top (UA), plus the inability to reach the bottom, denotes a lot of underlying strength. Most likely
the market will generate a bullish breakout from some intermediate point of
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the structure (LPS) without developing that Spring that we always look for in
the lower part.
In the case of a distribution, the test at the bottom (ST as a SOW), followed by the inability to perform a test at the top of the structure, denotes a
lot of weakness and quite possibly the market will develop an LPSY as a
Phase C test event.
3. A Phase C False Breakout
The third and principal sign. This is the event that most critically impacts our
analyses and forecasts.
This is the behavior that fills us with the greatest confidence when
trading. A false breakout in a liquidity zone, plus a subsequent re-entry into
the range, denotes a strong rejection of the price to continue moving in that
direction. At that point the path of least resistance is towards the opposite
side.
The minimum objective of a false breakout is to visit the opposite end
of the structure. If we are observing this event in Phase C it will give rise to a
real breakout and subsequent trend development outside the range.
When analyzing a chart the most important thing is the present, what
the price is doing right now in relation to what it was doing. And the second
most important thing is whatever immediately preceded it. That is, if the cur-
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rent movement is preceded by a false breakout, this false breakout is the
critical event that would mark the directional bias of our analysis.
We need to continuously assess any new information that reaches the
market, since the control of the market can vary during the development of a
structure. Therefore, we will always give greater relevance to the most recent information that we have to hand.
Does this mean that the false breakout is more important than any
other action that has previously occurred in the range? Absolutely. By the
very nature of the movement, the false breakout alone should be valid
enough to compel us to align ourselves in its direction. But you need to be
careful. This issue here is deciding whether the action is indeed valid,
whether we are really seeing a false breakout that is going to reverse the
market. To be as sure as possible that this is the case, we would need to see
a subsequent movement of intent that runs through the entire trading range.
This is the most important trading event: a false breakout and a show of aggressiveness in the opposite direction.
It is about objectively analyzing and building up more and more evidence in favor of one side or the other. Remember that this false breakout
doesn’t always appear at the extremes. As we have just seen in the previous
section, knowing how to read the signs can alert us to the imminent development of the effect.
If we are in a potential upward breakout situation and we have not
previously seen a Spring at the low of the structure, but we do have a test at
the top and later a structural failure at the bottom, we know that this sort of
behavior is characteristic of an accumulation pattern whose Phase C test
event is a simple LPS. Therefore we will also be in a position to favor the
BUEC and bullish continuation.
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4. Price Action and Volume in Phase D
This sign is about simply trying to apply the Law of Effort vs Result to the
price action and volume.
If a false breakout has just happened, we would then want to see candlesticks that denote intent in favor of the subsequent movement. And this
intent is represented by wide ranges and a high volume (SOS/SOW bar).
The real value of a false breakout lies in whether it has the legs to
continue or not. As already mentioned, all actions must be subsequently
confirmed or rejected. We could be in a position of a potential false breakout
and initially treat that action as such; but if the subsequent movement that
should lead to a breakout of the structure doesn’t develop, the market sentiment changes.
The false breakout is a search for liquidity, but it must also be able to
subsequently generate a movement with a certain momentum that at least
reaches the opposite end of the structure and preferably causes a breakout.
For example, if we observe a potential UpThrust After Distribution
(UTAD), ideally we want to see that it is followed by a movement with strong
bearish momentum, which manages to break the lows of the structure before continuing its distributional development. If it fails to break the structure due to the market condition, we want to at least see it reach that low
part in a minor Sign of Weakness (mSOW) movement. If not, the market
would denote a certain amount of underlying strength and would cast doubt
on whether it was really a genuine upthrust.
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A price that moves with wide ranges, good distance, closing at its extreme and accompanied by an increase in volume is the clearest indication
that this movement is being supported by large traders. The market could not
develop these movements without their intervention.
On lower timeframe charts, this sort of a movement with intent will be
seen as a succession of decreasing highs and lows, the perfect representation of a healthy downtrend movement.
We want to see the appearance of high volume in the specific breakout action, suggesting that intent and absorption of all the passive orders are
located in that liquidity zone. Sometimes a candlestick with a wide range
and a wick at its end may even appear. For example, in the event of an attempted bullish breakout, this type of candlestick with a wick at the top
could initially suggest the possibility of a false breakout, since such a wick
objectively indicates the entry of sellers. But we must remember that we are
in a liquidity zone, therefore we would expect to see these sorts of orders
being executed. The key is in the ability of buyers to absorb said supply, to
keep pushing and not let the price re-enter the range.
While it is true that we could see a real breakout with low volume (due
to a lack of interest from the opposite side), under normal conditions an absence of volume in said behavior should initially lean us towards treating the
action as a potential false breakout (although obviously we would have to
wait for the subsequent price reaction).
Therefore, the most visual characteristic that indicates a real breakout move will be a wide range candlestick that manages to close near the
extreme and is accompanied by high volume.
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5. Overall Volume During the Development of the
Range
The third most important sign. As a general rule, volume taken in isolation
during the development of the structure also shows a certain identifiable
pattern:
• During the development of the structure accumulation processes
will be accompanied by a decreasing volume.
• In distribution processes, high or unusual volumes may be seen during the development of the range.
Obviously these are general guidelines, which means that this will not
always be the case.
In the case of accumulation structures, a decreasing volume suggests
that a process of absorption of the available liquidity is taking place. Since at
the start there are a lot of traders willing to sell, a greater number of transactions take place, which leads to higher volumes. As time goes by, during
the development of the range, units continue to be exchanged but obviously
with less intensity, which is represented as a decreasing volume. By the time
the Phase C test event takes place, practically all the floating liquidity in the
opposite direction to where the campaign is developing has been eliminated.
A very different thing happens in distribution processes. An important
characteristic of these patterns is that they tend to develop much faster
than accumulation processes. And this is the reason why you can see major
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fluctuations in price and constant high volumes. This shorter duration makes
it necessary to execute transactions with a certain speed. While in accumulation campaigns a certain amount of time elapses before stocks are exhausted, in distribution processes the urgency to sell causes rapid development accompanied by high volatility.
6. Weis Wave Indicator Analysis
This tool has nothing to do with the standard indicators we are all aware of.
The Weis wave indicator collects and analyzes volume data to graphically represent the accumulation of transactions made per price movement.
That is, depending on the configuration we assign to it, the first thing the
code does is identify the start and end point of a price movement. Once this
is determined, it adds up all the volume traded during the development of
that movement and represents it in the form of waves.
As you can see on the chart, all waves start from a baseline set at 0
(just like the standard vertical volume).
We can use this tool to carry out analyses based on the Law of effort
vs result. These analyses can be carried out with two different approaches:
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In the development of movements
The basic rule when looking for harmony and divergence is that the movements that we initially consider to be impulses should be accompanied by
large waves, increasing waves with respect to the previous ones, which
would suggest an increase of interest in the direction of that movement.
Meanwhile, corrections should show small and decreasing waves in comparative terms, suggesting a certain lack of interest in that direction.
Upon reaching trading zones
In the same way, an analysis that suggests harmony would be represented by
a large bullish wave whose price movement manages to break a resistance
zone. The reading we would make of this is that this impulse movement has
achieved a real breakout. Meanwhile, an analysis that suggests divergence
would show the same upward movement that breaks a previous resistance
level but does so with a very small Weis wave, denoting that very little volume has been traded and therefore suggesting that the large players are not
supporting the movement.
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I cannot stress the importance of continuous analysis enough. We
may see a potential Spring, followed by a bullish movement, accompanied by
a large Weis wave, which manages to break the Creek of the structure (so far
the ideal scenario). At that point we will be predicting an upward continuation (BUEC potential). However, a high volume might appear that will push
the price back into the range and a big bearish wave may be observed, now
suggesting the possibility of a potential Upthrust.
The takeaway here is that just because we have seen signs that would
back up our initial prediction, it may not actually pan out that way. As previously mentioned, new information is continuously reaching the market and
we must be aware of this.
In the example described above, in a potential BUEC situation, we
would need to see bearish waves that denote a lack of interest, in order to
forecast the bullish scenario with greater confidence.
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H OW CAN WE ANALYZE A CHART FROM SCRATCH ?
This is one of the first obstacles a novice trader must overcome when starting to analyze charts from the point of view of price action and volume.
The first thing to say is that when it comes to a chart, the cleaner, the
better. There’s no point in having a hundred thousand objects drawn on it. The
only thing this does is hide the most critical piece of information: the price.
That is why, once a structure has been fully developed, I prefer to eliminate
absolutely all the labels. This removes any possibility of any drawn-on elements interfering with the subsequent analysis. At most, you should leave
the levels of the structures you’ve drawn so you can easily see where the
price is coming from.
In this type of analysis, where we’re trying to work out the market context, it is essential that we start our analysis on a higher time frame and from
there go down to a lower time frame. But at which time frame in particular
should we start? At whichever is necessary. The weekly chart will usually
show all of the relevant price action and it’s not necessary to go higher up to
a monthly chart.
Once the chart is open, the first thing we are going to look for are the
end of trend movement events and the subsequent sideways movement of
the price. In trading terms and as we discussed previously, what interests us
is to see that the market is building the cause of the subsequent movement;
in other words, that it is already in Phase B.
Obviously there will be times when you open the chart of an asset and
nothing will be clear, or it may still be developing a trend movement that was
preceded by a range in equilibrium. In these cases there is nothing to do but
wait until you see that change of character that indicates the appearance of
Phase A.
At other times you will identify those end of trend events as well as
the generation of a certain cause in Phase B and the market may be in a po196
tential breakout/false breakout situation. This is the ideal moment to move
to a lower time frame.
It is about identifying the general context in this higher time frame, to
determine which scenario would be more interesting to work on, whether to
enter the market with a long or short position. In summary, positioning ourselves effectively on a longer-term chart will help us decide in which direction we predict the price will go.
Until we are clear about this context from the chart with the longer
time frame, we cannot start to look at the shorter time frame.
Going Down Into Shorter Time Frames
From longer to shorter structures
Once the general context is clear; in other words, that based on where the
price is on the higher time frame chart we have decided whether we want to
position ourselves long or short; and that we have identified the trading
zones both at the top and the bottom, we can move down to a shorter time
frame to begin a new analysis there.
We could then open the 8, 4 or 2-hour chart as an intermediate time
frame. There is no hard and fast rule about which one it should be, specifically. Look for the chart in which you can observe a smaller-scale structure
rather than the one seen in the macro chart.
Having done the initial analysis (on the monthly, weekly or daily chart),
you may decide that the market situation is conducive to entering the market to buy. At that point you would hope to see the development of a smaller
accumulation structure to support this idea. For example:
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• Let’s say we are in a potential Spring (Phase C) situation in the
longer time frame. Ideally we would hope to see signs in a smaller-scale
structure that suggest the entry of buyers. On the one hand, the macro
structure would suggest we are in a situation conducive to trading and at
the same time we would be seeing a potential smaller-scale accumulation
structure that, if confirmed, would act like the possible Spring of the larger
structure, leaving us with an extraordinary Risk/Reward ratio.
• If we are in a potential BUEC (Phase D) situation after a bullish
break and the analysis of the signs confirms this, in that position we should
expect the continuation of the development of the structure. Therefore we
would look for a smaller-scale re-accumulation structure as a test on the
broken structure, which will then continue subsequently with the trend
movement out of range.
• If we are in the middle of an uptrend movement (Phase E), we will
expect to see the development of minor re-accumulation structures to try
to position ourselves long in the direction of the movement. We don’t know
the momentum behind the market movement and the imbalance in favor
of that direction may have a certain urgency. This urgency can generate the
development of rapid structures and that is where we want to be.
This is the dynamic with regard to context analysis that we have to
keep in mind, how smaller structures fit into larger structures.
But we need to proceed with caution. The fact that we are initially
biased in favor of one direction should not undermine our objectivity when
analyzing that minor structure. As we already know, we would be in a key
area, a liquidity zone which is likely to encourage the entry of huge volume
into the market. In other words:
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• The potential Spring situation is, at the same time, a potential real
bearish breakout. The analysis of the larger structure may suggest that up
to now the buyers have control. However, if during the development of this
minor structure we do not observe these same signs, and by contrast we
see the appearance of strong sellers, it would not make sense to continue
predicting an accumulation pattern and instead we should consider a bearish scenario.
• The potential upward breakout situation is, at the same time, a potential Upthrust. If at the time when we should be expecting the development of a smaller accumulation pattern acting as a BUEC of the larger
structure, the price generates a smaller distribution structure, this would
activate the short scenario and turn the smaller distribution structure into
an Upthrust of the larger one.
Hence the importance of having an open mind and not being too rigid
with respect to directional biases. You should also always have both long and
short scenarios prepared, so that when the moment arrives you can take decisions quickly.
If you want, you can continue moving down into shorter time frames
to analyze the structures. The key is to prioritize the development of larger
structures over smaller ones. With this principle in mind, it is at the discretion of each trader to decide how short a time frame to go into. Keep in mind
that the lower you go, the more noise you will see.
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Going Up Into Longer Time Frames
From shorter to longer structures
Another question new traders frequently ask themselves is what type of
structure they should work with, when should they move from one structure
to another
It is a somewhat more complex question that already suggests a certain knowledge of the methodology. After assimilating all the theoretical
knowledge, the subconscious begins to reason and raise these types of interesting doubts. This is tremendously significant: it shows you are doing a
good job.
In contrast to the analysis of the context, in which you should prioritize the development of longer structures, fitting the smaller structures
within these, when it comes to the initial identification of a structure we
should prioritize the development of the structures in shorter time frames,
before moving to longer time frames, if required to do so by the price.
When the market is developing the effect (trend movement) of a previous cause (accumulation/distribution range) we should be looking at
charts with shorter time frames for two basic reasons: to identify minor
structures so we can align ourselves in the direction of the movement, and to
identify the end of said trend movement.
We have already commented on the first of these reasons in the previous section and it is one of the situations in which we should go down to a
lower time frame. Here, we are looking at when to go up to a higher time
frame.
In a context in which things are moving fast, smaller structures may
begin to develop. This could be the origin of the development of larger visible
events in higher time frames. For example, if the market is falling and we
observe the development of a fast accumulation pattern on a shorter time
frame, the effect of this smaller accumulation may be the generation of the
Automatic Rally event visible on a longer time frame.
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It may initially seem a bit confusing but it’s actually quite simple. Let’s
look at that example again but in reverse: If the market is climbing during the
development of Phase E after an accumulation, we may observe a distribution scheme that will act as a Buying Climax event, and the effect of this
distribution would act as an Automatic Reaction event in some higher time
frame.
Obviously you don’t have to go down to a shorter time frame to identify these events. It all depends on your trading approach. There are experienced traders who use these types of minor structures to trade against the
trend, while aware that they should be treated as short-term movements, in
line with the structure that has been developed.
I am simply trying to illustrate under what conditions it is reasonable
to move to a longer time frame, to help clarify the overall analysis.
In this real example we see the confluence of a failed accumulation
structure that turns into a larger accumulation structure.
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This concept was initially explained as a smaller structure that is fully
developed and is, in turn, part of a larger structure. In this example we see
another way in which this concept can appear on the market.
In this case, the development of all the events of a minor accumulation structure have been observed. But at the moment of truth, in a potential
BUEC position, a failure of continuity of the uptrend occurs. It is at exactly
this point that the trader may decide it is more logical to consider looking at
all that price action as a whole, as if it were part of a larger structure. In this
way, the Automatic Rally in the longer time frame would start from the low
of the Selling Climax to the high of the Upthrust Action of the minor structure. Likewise, the JAC will now be seen as a simple test that denotes
strength (UA) and from there on the rest of the accumulation events appear.
It is worth highlighting the underlying strength that existed from the
very beginning, evidenced by the inability of the price to visit the lower part of
both structures. Another interesting detail is that the BUEC in the higher
time frame occurs just above the High Volume Node, which also coincides
with the VPOC of the entire structure.
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W HAT SHOULD WE DO WHEN THE CONTEXT IS
UNCLEAR ?
There will be times when we open a chart and do not have a clue what we’re
looking at. Not one trend, nor a sideways movement preceded by a stop
phase. In this situation we have two options:
1. Increase the time frame
As we know, the shorter the time frame, the more noise we will observe. It’s a
good idea in these moments to move to a higher time frame to see the overall picture.
What looks like total chaos on an intraday chart might suddenly become clear at higher time frames.
If, as we suggested earlier, you’ve performed your analysis from
scratch properly, you will have gone from a higher to a lower time frame. In
that case, just stay in the timeframe in which you had the clearest picture of
the price action and don't go further down.
So if, for example, you’re happy analyzing the context in H1, and you go
down to M15 but don't feel comfortable there, go back up to H1 and forget
about analyzing the charts with lower time frames.
2. Change the asset
You might find you can’t make head nor tail in any time frame. At this point,
and taking into account the amount of tradable assets that there are today,
why bother trading something which is so unclear? It doesn’t make sense.
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Whether you trade in stocks, indices, currencies, commodities or cryptocurrencies, there are enough tradable assets for you to not have to force
your analysis, so if you have doubts, move on to the next asset.
The Controller
This issue is helpful in highlighting one of the biggest mistakes that traders
make in deciding to trade only one asset. They are driven to try to control
every single price movement, which can be disastrous for the account. That
word, control, may be one of the most damaging in the world of trading. You
cannot control absolutely anything. Our focus should be on trading only the
clearest situations and those that offer the best possible risk/reward ratio.
Curiously, traders that trade only one asset tend to do so in shorter
time frames. It's the perfect combination to lead to ruin. And because this
type of trader almost certainly loves to label things (due to the fact that they
want to control every movement), they most likely waste their time trying to
decipher each one of the movements. They can’t even see what the price is
doing because they’re looking at a 1 or 2 minute chart full of labels.
We need to distance ourselves from this, because it's impossible for
someone to carry on like this for long. An awful amount of energy is wasted
and the level of concentration required to maintain the right judgment is extremely high. Very few people are capable of trading in this way. The vast majority of us are doomed to suffer major distress.
Better to move up the time frame and cover more assets. There is no
doubt that specializing in a particular market is a good idea (since each one
has its own peculiarities in terms of better time zones, volatility, etc.), but
don’t focus exclusively on one. Keep a list with a few (even if it’s just 3 or 4)
that you keep track of, and specialize in these.
Finally, we shouldn’t forget that, in addition to all the above, the vast
majority of market movements are random. This simply means that there is
no directional bias behind them. As we saw at the beginning of the book,
some ranges fluctuate up and down without any underlying intent, without
constructing any kind of cause. It’s completely random. These ranges emit no
clear signals and it’s impossible to make an objective analysis on who is in
control of the market. It is important to be aware of this as well.
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PART 8 - TRADING APPROACH
O
ur trading and investment decisions will be based on the three most
important elements in the discretionary interpretation of charts: the
context, the structures and the trading zones, in that order.
1. The Context
The context is the combination and succession of the events and phases of
the methodology, and it offers two main advantages when trading:
• It tells us what to do, what to prioritize (buying or selling).
• It offers us a clear roadmap which tells us at all times what to expect the price to do next.
It is mainly to do with what is to the left of the chart, both in the time
frame that you decide to trade in and in other higher time frames.
The key rule regarding context is clear: trade in line with the larger
structure. This means that, due to fractality, markets develop multiple structures at the same time but in different time frames. But we must always prioritize the development of the longer-term structure over any other structures that may develop in shorter time frames. This is the most logical way to
determine the directional bias of our trading approach. We have just looked
at this concept of context in the previous section on moving from a higher to
a lower structure.
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For example, if, after a bullish breakout, we find ourselves in a potential accumulation structure of a higher time frame, we will expect the development of a smaller re-accumulation structure in this zone, which will act
like the BUEC of the larger structure.
In this example we see how our analysis has been influenced in a certain direction (predicting the development of a re-accumulation) based on
what the price had been doing up to that point (the potential main accumulation structure). This is the importance of context.
As well as offering us more solid trading opportunities, identifying the
context ensures we don’t go looking for trades on the wrong side of the market. In other words, if our structural analysis tells us that the market could be
accumulating, from that moment on we will only try to look for long trades;
while discarding any opportunities we might have identified to go short, at
least while we're taking our first steps and don't have enough experience.
This is very important because although we may not ultimately find a
way to join the ongoing bullish movement, at least we will avoid being positioned on the wrong side of the market, which in this example would be the
short side. We won't be able to win, but at least we won't lose either.
2. The Structures
This is the cornerstone of the Wyckoff Method. Our task is to try to understand what is happening within the structures, and who is gaining control
between buyers and sellers.
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This is where the importance of having thoroughly studied all the theory comes into play. Structures provide us with a clear roadmap that will
guide our scenario predictions. For example:
• If we are in Phase B, where the cause is being constructed, we will
wait for the price at the ends of the structure to look for a breakout/false
breakout.
• If we are in a position to confirm a false breakout, we will expect the
price to reach the opposite extreme with some momentum.
• If we are in a potential real breakout situation, we will expect some
sort of test on the broken structure before the price continues its development out of the range.
Many traders underestimate the approach of the Wyckoff Method,
alluding to the fact that it was developed under market conditions that are
very different to conditions today. This is absolutely true. The technology
available at the end of the 20th century, as well as the market structure itself, has evolved into something very different in modern times.
What has not changed is the fact that it is ultimately all about the
interaction between supply and demand. Regardless of how the participants'
orders are executed, this interaction leaves its mark on the price, in the form
of continuously repeating structures.
The logic behind the structures is based on the fact that, for the price
to pivot, it needs to accumulate or distribute following a protocol that takes
time and develops in a systematic way. Although markets sometimes generate fast reversal patterns, this is not the norm. We should, therefore, focus on
looking for the full development of the structure in question.
This protocol roughly follows a series of steps (phases and events)
that allow us to predict when the price is going to pivot. If we don’t really
know how the market moves in terms of developing structures, it is impossible for us to predict accurate scenarios. For this reason we must first assimilate how these accumulation and distribution processes generally develop:
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1. Stopping the previous trend
2. Constructing the cause
3. Assessing the opposition
4. Starting the trend movement
5. Confirming the direction
What the Wyckoff Method has achieved is to focus in detail on each of
these steps and create a discipline which attempts to evaluate the signs left
by the interaction of supply and demand on price and volume, to discern in
which direction the balance of the market is being tipped. This is the job of
the Wyckoff trader.
3. Trading Zones and Levels
The underlying principle is auction theory and the market's need to facilitate
negotiation. We have already talked about this previously. Large traders need
to find other traders with whom they can place orders when opening and
closing trades (counterparty). This is why they take advantage of false breakouts to open positions, and hold them until the price reaches those levels
where they will again find sufficient liquidity to close those positions.
The thing to bear in mind is that these trading zones act as price magnets, because they generate enough interest to make different traders want
to place their pending orders at these levels (attracting liquidity). And this
liquidity is what drives the price towards them.
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For example, large traders who have bought heavily on a bearish false
breakout (Spring), will need to keep their position open at least until the price
hits another important liquidity zone, allowing them to close those long positions. Since what they want now is to take profits (close buy = sell positions),
they need buying volume; traders willing to buy their sell orders.
That is why they almost necessarily need to visit these zones/levels
where there are a large number of orders pending execution (liquidity), zones
such as the edges of the range and levels such as those offered by the Volume Profile tool.
Volume Profile levels
Volume Profile is a discipline based on a sophisticated tool that analyses the
volume traded at different price levels and identifies those that have generated the greatest and least interest.
It is used to identify trading levels based on volume. This can be very
useful for different aims, including the search for trading opportunities. There
are different types of profiles (session, range and composite) as well as different levels, the most significant being:
VPOC. Volume Point Of Control. This defines the most traded level of
the profile and therefore identifies the most agreed upon price between buyers and sellers. What this volume level suggests is that because it is a level
at which previously both buyers and sellers were comfortable matching their
contracts, there is a good possibility that in future it will continue to be perceived in this way by the participants, so they will be drawn back towards it.
Therefore it’s a good idea to make sure you have identified the VPOCs
of the previous sessions, of the current session, as well as the Naked VPOCs
(old VPOCs that have not been tested again).
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VWAP. Volume Weighted Average Price. This defines the volume
weighted average price at which a security has traded during the selected
period. Because it is used as a reference by institutional traders, there are
always a large number of pending orders waiting to be executed at this price,
and we already know that these orders act like a magnet for the price.
You can select the VWAP of the time period that best suits your trading approach. In general, the session VWAP will be more useful for intraday
traders; while the weekly and monthly VWAP are more widely used in general.
The are other levels in the Volume Profile approach that we could use
for our analysis, such as the volume nodes (High and Low Volume Node) and
the value areas (Value Area High and Low); but those mentioned above are
undoubtedly the most useful for trading purposes.
A confluence of levels that would add reliability to the prediction
would be if, for example, we went short in a potential LPSY (after the bearish
breakout of the structure) and saw our trigger candlestick (SOWbar) develop
on the appropriate zone (context) with a range reaching a certain level of
volume (VPOC/VWAP) in its upper part, denoting a backlash against the price
continuing to rise. We could enter at the end of the development of that candlestick showing bearish intent and place a Stop Loss above the SOWbar,
above the broken Ice and above the rejected volume level.
This tool adds objectivity to our analyses, and in conjunction with the
reading of the market provided by the Wyckoff Method it can help us to better determine who is likely to be in control of the market. It is also important
to note that these trading zones with volume are not useful just for locating
our entry trigger, but also for placing our Stop Loss and to take profits. To
better understand how to combine Wyckoff and Volume Profile I encourage
you to study my latest book “Wyckoff 2.0”.
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P RIMARY POSITIONS
The Wyckoff Method very clearly defines the only zones in which we should
consider trading.
• In Phase C, in a potential false breakout zone.
• In Phase D, during the development of the trend movement within
the range and at the break and retest
• In Phase E, looking for tests in the trend or minor structures in favor
of the major structure.
Let’s look in detail at the different zones in which we should look to
trade, as well as the different actions that we can use as triggers to enter the
market.
In terms of the advantages and disadvantages of each of the different
trading positions with respect to the Risk/Reward ratio, the key is to be
aware that the more developed the structure, the more confidence we will
have in any trades we make, but the lower the potential profit will be for that
very reason. In other words, the sooner we obtain the signals, the greater the
potential for a longer movement but the less reliable these signals will be.
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In Phase C
This is the position that offers the best Risk/Reward ratio since we are at
one extreme of the structure and the potential movement is relatively
broad.
The downside of entering at this location is that it is less precise because the range has not had much time to develop in comparison to the other two trading positions.
Entry in the false breakout
Only recommended if the false breakout occurs with a relatively low volume.
As we know, high volumes tend to be tested to verify the commitment of
these traders, therefore the most sensible thing to do is to wait for a new
visit to that zone.
With this in mind it doesn’t make sense to enter directly in a false
breakout that has developed with a lot of volume, when it is likely to be tested. And normally this test can offer us an even better Risk/ Reward ratio.
False breakouts are easily identifiable as they occur at the ends of the
structure. You don’t even need to monitor the development of the range
minute by minute; you just need to place an alert at the ends of the structures and, if they are reached, you’ll be ready to assess the trading opportunity
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Entry in the false breakout test
This is one of the entry points most favored by Wyckoff traders. After the
false breakout, wait for a new visit to the zone with a narrowing of the ranges
and decrease in volume (see Event No. 4: Test).
One of the important aspects of this test is that it should hold out and
not create a new extreme. In other words:
• In the example of a Spring, the price should stay above the low set
by the Spring.
• In the example of an Upthrust, the price should stay below the high
set by the Upthrust.
Entry in the last point of support/supply
This type of entry is much more difficult to see, since we only know that it is
the last point of support/supply (LPS/LPSY) after the real breakout of the
structure has occurred (Basic structures no. 2).
Phase C can be generated either with a false breakout or with this last
point of support/supply. Thanks to the very action of the false breakout
(cleaning up of a zone of previous liquidity at the end of the structure) we
know when it is developing. A very different thing happens with the last point
of support/supply, since we cannot know at any time when this event is actually taking place, in many cases making it untradable.
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In Phase D
If the false breakout + test are successful, we should now see a show of
intent that will take the price in the opposite direction. This is the context
with which we will work and look for trades in that direction.
There are different ways we can enter the market to take advantage
of this approach:
Entry in the trend movement within the range
There are several entry opportunities during the movement of the price from
one extreme to another:
With a candlestick showing intent
One of these would be to wait for the appearance of new candlesticks showing intent (SOS/SOW bars). This is the definitive sign of professional interest.
If during the development of the trend movement within the range we see
good trend candlesticks, these still offer interesting opportunities for entering the market.
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With a minor structure
Another way to enter would be to look for some minor structure in favor of
the direction of the false breakout. For example:
• If we have just identified a Spring and its test, we may be able to go
down to a lower time frame to look for a smaller re-accumulation structure that would give us the trigger to buy.
• If we identify an Upthrust plus its test, we could go down to a lower
time frame from there and look for minor redistribution structures to tag
along to the bearish trend movement.
With a minor false breakout
Finally, in this area of the structure we could also look for minor false breakouts. They are called minor because they break local highs or lows located
within the structure but not those at the extremes of the structure.
This is another very good way of entering the market if you prefer not
to go down a time frame and look for a smaller structure. In reality, the pattern of the minor false breakout and the minor structure is the same, although the minor structure would offer a better Risk/Reward ratio since you
would be looking at a shorter time frame.
Both minor structures and the minor false breakouts should be labeled as the last point of supply/support (LPS / LPSY) since they are reversals in favor of the trend movement that occurs within the structure.
Entry in the break and retest (Event no.7, Confirmation)
As we discussed in the chapter dealing with this event, it was Richard Wyckoff's favorite trading position, because of everything the chart was able to
tell him up to that point.
The potential distance the price can travel before taking profits is less
However, on the upside we can see the entire development of the structure
to the left, which increases the probability that we have positioned ourselves
alongside the large traders and in the direction of least resistance.
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In Phase E
After confirming that we are looking at a real breakout and the imminent
start of a trend movement outside of the range, we must now focus on
looking for trading opportunities in favor of the preceding accumulation/
distribution.
These types of trades are the "safest" since we are positioned in line
with the latest accumulation or distribution. However, the disadvantage is
that the potential duration of the movement is lower although everything will
depend on the volume of the cause that has been built during the structure.
Entry in the trend movement outside the range
Just as with trading in the trend of Phase D, this location offers us different
options for entering the market:
With a candlestick showing intent
At times the market will move in a very volatile environment and this speed
may mean the market passes us by as we wait for the perfect entry.
To try to mitigate this, we could enter in the direction of the movement simply after the appearance of new candlestick showing intent (SOS/
SOW bar).
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At this point we should have enough signs to indicate that the price
will move in this direction, so the appearance, once again, of this type of candlestick that denotes professional intervention might be the perfect excuse
to launch our orders on the market.
With a minor structure
If the main structure that we have previously identified is based on a 4 hour
or 1 day time frame, we might want to go down to a time frame of 1 hour or
less to look there for the development of a smaller structure, which allows
us to enter the market in the direction of the trend movement.
If, for example, we see a macro accumulation structure at the bottom
of the chart, the best option to join in on the bullish movement would be to
go down to a shorter time frame and look for a smaller re-accumulation
structure.
Similarly, if what the market shows is a main distribution structure
above the current price, the most advisable thing to do would be to go down
a time frame and look for a minor redistribution structure.
With a false breakout
This should be treated in exactly the same way as an entry in a Phase C false
breakout. It is the same event, the only difference is the location where it
takes place.
The methodology distinguishes between these false breakout events
depending on the location. When it occurs in the middle of the trend, in the
direction of the movement, it is known as an Ordinary Shakeout or an Ordinary Upthrust.
As well as this difference in location, this type of false breakout may
appear with less preparation than in the continuation structure (re-accumulation or redistribution) because the price is already moving.
As we have mentioned, trading in Phase E would be the “safest” option
because we are positioning ourselves in favor of the latest accumulation or
distribution that has already been confirmed. And we know that until we see
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at least the first events of Phase A that ends the previous trend, the most
logical outcome is the continuity of the current movement.
Table of Trading Opportunities
This table provides a summary of the trading positions as well as the different actions that we can use as triggers to enter the market.
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P OSITION MANAGEMENT
Everything we have studied so far has been geared towards preparing us in
the best way possible for that critical moment that every trader faces: taking
the final decision.
Having identified the zones where we should wait for the price and
established the possible scenarios that we would want to see before taking
any action, let’s now look in more detail at certain concepts related to the
trading process itself.
The importance of position management increases as the time frame
of the trade is reduced. While it is true that getting the moment of entry right
(timing) is key to improving the performance of any trade, when it comes to
shorter-term operations, this timing becomes critical. As traders, our objective is to enter the market at the precise moment in which an imbalance is
about to be generated that will push the price in the direction of our position.
Entry
Calculating the position size
Since we do not know what the result of the next trade will be, and with the
basic premise of preserving capital in mind, we must calculate the optimal
size of each position so we risk just the right amount, to maximize the potential profit while keeping the risk under control.
A very useful way of properly managing the risk is to calculate the
size of the position based on the distance between the entry level and the
stop loss level. This is known as fixed risk management. This means, for each
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position, risking a percentage of the total amount deposited with the Broker. I
recommend not risking more than 2%.
The fundamental elements for determining how much we are going to
risk per trade are:
• Knowing the value of the fluctuation units of that market.
• The distance at which we will position our Entry and Stop Loss levels.
• The percentage of the account that we are going to risk.
Using this information we can then calculate the position size. There
are a multitude of tools available on the internet that facilitate the task of
calculating the position size. These are some of the easiest to use for both
forex and futures and stocks:
https://www.dailyforex.com/forex-widget/position-size-calculator
https://evilspeculator.com/futuresRcalc
https://chartyourtrade.com/position-size-calculator
The distance between the entry level and the stop loss level will determine the percentage we will risk in the trade (for example, 1%). After that,
the distance at which we place the take profit will determine the R/R ratio
(Risk/Reward) that the trade in question will offer us.
• 1% of a €5,000 account is €50. If our trade offers us a ratio of 1:3, following this type of management we will either win €150 or lose €50.
The issue of position management is only one part of risk management. In my first book "Trading and Investing for Beginners" I dedicate a larger section to describing this task, addressing the relevant concepts including
capital management, money management, managing the trade and even
portfolio management; so I highly recommend reading it.
Entry trigger
It is difficult to determine when there will be a price reversal in the short
term. The easiest way to determine this is through confirmation: the confirmation that a movement has ended.
For our entry trigger, what we want to do is identify the appearance of
institutions in the short term who have entered in order to reverse the price.
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And the tool that we will use for this purpose will be candlesticks showing
intent.
These candlesticks represent a movement in one direction or the other. Buyers or sellers have gained control by trading more aggressively than
the other side, causing a significant price reversal.
Candlesticks showing intent have a large body and a wide range with
a closing price in the final third of that range. They are also accompanied by
relatively higher volume than previously seen. Examples of this type of candlestick includes the previously described SOSbar (Sign of Strength Bar) and
SOWbar (Sign of Weakness Bar):
• Sign of Strength Bar (SOSbar). Clear conviction on the part of the
buyers. This is generally represented by a bullish candlestick with a wide
body and range, a closing price in the upper third and moderately high volume.
• Sign of Weakness Bar (SOWbar). Aggressive sellers. Depicted by a
bearish candlestick, with a wide body and range, a closing price in the lower third and moderately high volume.
The more powerful these types of candlesticks are and the more levels they are able to break where there is supposedly resistance in that direction, the better. This is a good way to also evaluate the commitment of the
large traders to push the price in the direction of the current movement:
• Highs and lows of candlesticks.
• Local highs and lows of the price.
• Trend lines.
• Minor structures in the opposite direction.
• Some Volume Profile trading level.
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A bar with these characteristics denotes intent and will generally be
associated with the appearance of institutional traders. Based on this assumption of institutional presence, we would expect the price to continue
moving in that direction.
Entry orders
The only thing left to do when our entry trigger appears is launch our orders
and enter the market. There are different types of order we can use. The main
ones are listed below:
Market Order
This allows us to enter the market aggressively at the last matched price.
This order is executed immediately at the best purchase and sale price available (Best BID/ASK). This guarantees the execution of the order but not the
specific price at which it has been executed, due to the constant change in
price and the application of the Spread. Once the order is launched it cannot
be canceled, since it is executed automatically.
• If we want to buy we place a Buy Market order which will be executed at the current price.
• If we want to sell we place a Sell Market order which will be executed at the current price.
Stop Order
This allows us to enter the market passively in favor of the current movement. It is executed at a specific price. When this price is reached, it becomes a market order and is therefore executed at the best available price
(Best BID/ASK).
• If we want to buy we place a Buy Stop order at a price higher than
the current price.
• If we want to sell we place a Sell Stop order at a price lower than
the current price.
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Limit Order
This allows us to enter the market passively against the current movement. It
is executed at a specific price. Entry or exit at that particular price is guaranteed but execution is not guaranteed. In other words, the price might never
reach the desired level and therefore the order might not be executed, or
might only be partially executed. It can be canceled at any time, as long it
hasn’t been executed.
• If we want to buy we place a Buy Limit order at a price lower than
the current price.
• If we want to sell we place a Sell Limit order at a price higher than
the current price.
Stop Loss
This tool is used to accept a loss and exit when the market is going against
us.
The nature of this type of order will always be the reverse of the order
previously used to open the position: if we have a long position, the Stop Loss
will be a sale; and if we have a short position the Stop Loss will be a purchase.
In terms of location, the idea is to place our Stop Loss at that point
which, if reached, invalidates the scenario we have set out. To do this, we
must take into account what type of entry we have used based on the
methodology.
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As a general rule, we should place the stop loss on the other side of
the direction in which the candlestick showing intent has developed (SOS/
SOWbar), and on the other side of the entire scenario. With these types of
signals, what we are identifying is an imbalance in the shortest term and
therefore, if we are correct in our analysis, the impulse movement that we
are hoping for should begin. If anything else occurs, we are no longer interested in staying in the market, because the message we receive is that the
market is not yet ready to move in that direction; and therefore, the market
may need to move in some other way before going in the direction we were
initially looking for. In this case, we are no longer interested in staying in.
Entries in the false breakout
For entries directly in the false breakout, the stop loss should be placed on
the opposite extreme:
• In a Spring the stop level should be below the low.
• In an Upthrust the stop level should be above the high.
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Entries in the false breakout test
The false breakout test offers us two possible entry points. One is on the other side of the candlestick showing intent and the other is at the extreme for
the entire scenario:
• In the Spring test the stop could be placed either below the SOSbar
or below the low of the Spring.
• In the Upthrust test the stop could be placed either above the SOWbar or above the high of the Upthrust.
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Entries with minor structures
For entries with a minor structure, it is best to place the stop loss at the extreme for the entire scenario:
• In minor re-accumulation structures, below the low of the structure.
• In minor redistribution structures, above the high of the structure.
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Entries in the breakout test
For entries at the breakout test, the stop loss should be some distance from
the broken level and from the candlestick showing intent if we have used it
as an entry trigger:
• In the test after a bullish break (BUEC/LPS) the stop should be below the SOSbar and below the broken Creek.
• In the test after a bearish break (FTI/LPSY) the stop should be above
the SOWbar and above the broken Ice.
If you aren’t confident with this location because it seems too close,
another idea could be to place it in the middle part of the structure, assuming that if the price reaches that level there is more likelihood of a false
breakout than a real one.
Take Profit
In terms of where to take profits, the Wyckoff Method originally used point
and figure charts to determine what potential targets the price might reach.
It is clear that the structure of the market today has changed too much for
us to continue for using this tool so we need to use other options in our trading process.
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Below is a description of the possible actions we can use to take profits based on pure Wyckoff Method forms of analysis:
Based on evidence of a climax
Climax candlestick (Buying Climax/Selling Climax) which will have a high
range, speed and volume. The idea would be to anticipate the end of the previous trend, but this could be a sufficient signal to close the position or at
least to reduce it.
It is a great way of assessing whether to take profits when we don’t
see any price action to our left, that is, at the extremes of the range. This lack
of reference leaves us a little "blind" and diminishes our trading capability.
Here more than ever we need to be able to interpret what the price and the
volume are telling us.
While it is true that we should always wait for the market to develop a
slow accumulation or distribution pattern that causes the reversal of the
current trend, it is also possible that the market will develop said reversal
through a fast pattern, and the potential climax event is a very decisive factor.
Because a potential Climax pattern could reverse the entire previous
trend movement, this is reason enough to perform some kind of active position management.
My recommendation is that you analyze the nature and anatomy of
this possible climax to decide what type of management to carry out:
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• If there is ultra-high volume, more than has been seen up to now,
close the position immediately without waiting for any more price action to
develop.
• If on the contrary it is a potential climax with a relatively high but
not climatic volume, perhaps a better option would be to close only part of
the position and leave the rest in case it is a simple consolidation that will
then continue in the direction of the trend.
After the development of Phase A that stops the previous
trend
The development of the first four events that define the appearance of Phase
A offer sufficient evidence that the previous trend has ended and we must
close our position. It is important to note that the new structure should develop in the same time frame in which we identified the previous structure.
The trend may subsequently start again in the same direction, but we
cannot know this at that time so the most sensible thing to do would be to
take profits.
The only thing we can be sure of after the development of Phase A is
that the market will probably move from a trend to a sideways environment,
and that in this sideways market the cause of the subsequent movement will
be constructed without yet knowing in which direction the effect will go.
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Given this context, these signs provide enough of an indication that we
should close the position or at least a large percentage of it. As with the evidence of a possible climax, here too we will have to weigh up other elements
before making the best decision. For example, we could analyze how far the
trend has traveled to see if it may already be in an over-extended and exhausted position. The more trend movement there is, the more likely the future structure is to be reversal rather than a continuation.
After the development of a potential Phase C of the new structure
This should be the definitive signal to abandon the position completely. If you
have not done it at the climax or after the development of Phase A signaling
the end of the trend, a potential false breakout of that new structure should
provide unquestionable proof.
The logic behind closing the position at this point lies in the context
that the methodology offers us. Thanks to the roadmap that we now understand, if we are really facing a Phase C test in the form of a false breakout,
the price action that follows will be an intentional movement to the opposite
end of the structure, and if confirmed, even beyond.
It doesn’t make any sense to hold a position in the opposite direction
primarily because there is no need to lose all that percentage that we already have earned just because we hope the price will continue in our direction. If there really are interests in pushing it back in the direction of our position, we can look always for a new trading opportunity during the subsequent development of that new structure.
Liquidity zones
In addition to the above options that are part of the purest form of analysis
under the Wyckoff Method, we may want to use trading zones where there is
high volume to place our take profit orders.
These are areas of price reversals; of previous highs and lows. We
know that in these zones there are always a large number of orders waiting
to be executed and that is why they are very interesting areas in which to
wait for the price to arrive.
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Examples of these include the zones found in the structures we have
studied: the lows of the Selling Climax (in accumulation structures) and the
Automatic Reaction (in distribution structures); and the highs of the Buying
Climax and the Automatic Rally.
We should also consider previous liquidity zones (which are independent of the structures), both in our trading time frame and in higher ones, as
trading opportunities.
The best way to take advantage of this interpretation is to identify the
liquidity zones in the higher time frames and set them as targets. From there,
use the structures that the price develops to enter the market while keeping
in mind a visit to those price levels.
We need to bear in mind that the market is constantly changing and
that it will continue to generate new price reversals (new liquidity areas), so
our targets need to be adapted to this new market information. In other
words, say we had originally established a take profit level in a distant liquidity zone, but while developing a movement the price generates a new, closer
liquidity zone; we should also now take this one into account.
Active Management
This type of management is mainly related to the way in which we take
profits.
Many traders (myself included) feel comfortable taking partial profits.
This simply means, once the market has advanced in our position and we
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have obtained certain latent profits, closing part of the position and securing
these profits.
As well as taking a partial profit, the trader in this case will protect the
position at the Breakeven level. Psychologically it is very reassuring to know
that for the rest of the position you will no longer be able to incur any losses
and that also, whatever happens, you will close the position in the black,
thanks to the profits that you have already secured.
As we can see, and this is another example highlighting how diverse
the possibilities are, you can include the Breakeven or not. Nothing is written
in stone in this regard. But if you are in front of a screen and you are able to
more actively manage your trading, I highly recommend you do so.
The market is an environment full of uncertainty and it is constantly
changing in its very nature, so we need to be able to analyze and interpret the
information offered to us very quickly in order to make decisions that improve our risk management.
Taking partial profits is usually referred to as making a TP1 (Take Profit
1). How should you distribute the TP1/TP2? Well again there is no absolute
truth here. I usually set up a TP1 with half the position. In other words, I close
50% of the position size when the market reaches a liquidity zone, leaving
the remaining 50% to run until another profit-taking point (or Stop Loss) is
reached.
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The chart above shows how we have set up the first TP in the most
immediate liquidity zone which also coincides with the upper part of the accumulation structure; and we have set up the second take profit when the
price reaches that old high volume trading area that corresponds to the distribution structure. Specifically we have established it in the VPOC (Volume
Point of Control), which is the level with the highest volume of trading of the
entire profile. We could even retain a final marginal part of the position until
we see a climax action or Phase A of the Wyckoff Method, denoting that the
movement has stopped. The possibilities are endless.
You can decide how you to distribute the percentage of your position
to close at each Take Profit point. First, you must decide if you will establish
two or more take profits, and secondly, the percentage you want to assign to
each of them.
The nature of the trade also influences how you will manage this distribution. If, for example, you are involved in a trend-following trade which
you hope will go on a long run, you may want to set a TP1 and a TP2 but also
let a final part continue to run using a small amount (5 or 10%) in case the
market surprises you and reaches levels that you did not expect, generating a
greater profit.
The main advantage of this approach is that it ensures that a winning
position doesn’t turn into a losing position. It also provides peace of mind.
The disadvantage is that you will obtain less profit if the trade reaches
the final target. It is not the same thing to set a Take Profit with the entire
position than to reach the same end point with a smaller amount, having previously closed a part of that position.
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Averaging
This involves entering the market at different prices, each better than the
previous one. In other words, if for example we want to buy, we will do so
at a lower price each time, thus obtaining a better average price. In the
event that we want to build a short position, it means selling at a higher
price each time.
This management model is generally misunderstood and there are
many who approach it badly, using it without any method. They get trapped in
a position (because they didn’t use a Stop Loss) and guided by the hope that
sooner or later the market will recover. They decide to enter again to improve
their average price. But why should it recover? What if it keeps going against
you? At what point will you stop averaging? It is a practice that does not
seem to make much sense unless the working hypothesis, the investment
idea, is maintained.
A much more effective way to use this management method is to divide the entire position into different packages, by making different entries
until it is complete, but always subject to the context and the strategy of the
trade.
Let’s say you want to buy an asset but that it isn’t at the optimal point
for you to enter; that even though it is in a trading zone, it is feasible that it
may go down even further, given the proportionality of its movements or for
some other reason. But of course, at the same time you are afraid that the
market will leave you behind, that it will initiate the movement you have
forecast and that it will not visit that trading zone which offers you the best
chance of entry. Well, one way to solve this would be to enter at that first
trading level, assuming it offers the entry trigger with a part of your position;
and leave another part aside in case the scenario in which it reaches the
trading zone at the lower prices finally comes to pass, re-entering there
when it offers us a new entry signal.
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This chart shows an example of this. Let’s say we find ourselves in the
first trading zone, in a pivot generated after an accumulation structure. In
that position we know that it could provide an entry into a long position and
go higher continuing with the uptrend; but it could also visit the second trading zone, the Creek zone, the zone of resistance of the structure that would
now become the support level. Since we have two possible trading zones,
we could assign 50% of the position size to each of them. Our biggest problem would be if our entry trigger doesn’t appear in the second trading zone,
and instead the price re-enters the range again, meaning all that movement
was just a false breakout. In that case, we should have previously established
the maximum zone or level where we would allow the price to re-enter. At
that point we would close the position without hesitation.
My opinion here is that averaging for the sake of averaging is not very
sensible. However, if we follow a method and if it is part of our trading plan,
well that’s another story.
Pyramiding
In contrast to what the averaging method proposes, the pyramid approach implies initially entering with part of the position and subsequently re-entering at worse prices than before. In other words, if we are looking to buy, we would open a first position with part of the total size and
later we would complete the position by entering again at higher prices,
worsening the average price initially obtained.
This approach turns the previous one on its head. Let's suppose that
we are in the reverse situation; that we are in the final possible trading zone
waiting for the entry trigger indicated by our trading approach, but for whatever reason we are not as filled with confidence as we would like. If the signal finally appears, we could enter the market with part of the total position
and, unless the price goes in our favor, not enter it again. To do this, we would
have previously identified the trading zones and planned our possible scenarios. For our second entry we would wait for the price to position itself in
favor of a new trading zone, or one previously identified. At that point, we
would execute our entry signal again. At that moment we would have used
the entire position.
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The main advantage of this approach is that it reduces risk in the
event of a losing trade. If we enter in the last zone and the price reaches our
Stop Loss level, the loss will not be for the entire position. It will only be for
that first part.
However, the main disadvantage is that you will obtain lower profits if
the trade eventually turns out to be a winner.
You should know that if you study other resources they will present
this concept to you in a different way. Normally, pyramiding is often referred
to simply as increasing your position as the price moves in your favor, and
nothing more. That if we are going long, we would continue buying as the
price rises a certain number of points or percentage. This point of view in
particular (buying for the sake of it) doesn’t seem very sound to me, so I have
tried to refine the concept by presenting this position management model in
which, yes, we increase the position, but following a certain logic, as long as
the market keeps offering opportunities in our favor.
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What Should We Do When the Price Moves on
Without Us?
We will sometimes find ourselves in a situation where the price initiates the
movement we were looking for but despite having predicted this scenario we
haven’t been able to enter the market.
If there is something I don’t recommend, it’s entering simply through
inertia, guided by some sort of negative feeling having missed out on the
movement. Entering the market in desperation is generally not a good strategy in the long run. If the price goes moves on without us it really doesn’t
matter, it’s part of the game just like when our stop losses are triggered. If
the underlying idea hasn’t changed, we can continue to look for new trading
zones for entry.
It’s better to put a positive spin on the situation and take heart from
the fact that we were right in our analysis.
Of course our ultimate aim when we enter the market is to make a
profit based on its movements, but the fact that our analysis was correct
should be reason enough to be reasonably satisfied.
Your takeaway should be that your analysis of who was in control of
the market and how it was most likely to move next was spot on and this is
tremendously important as evidence that you have assimilated the knowledge you need and that if you continue along those lines it’s only a matter of
time before results go your way.
The only thing that went wrong was either that the price didn’t quite
visit the precise area you expected it to; or that the price didn’t offer a genuine trigger to execute the orders. In any case, it is worth remembering that
we have absolutely no control over the market and that our task is to predict
the most likely scenarios, knowing that these situations will arise.
Moreover, if you take into account that one of the main rules is about
the conservation of capital, you should take heart from the fact that although
you may not have taken advantage of the movement that you expected, at
least you weren’t positioned on wrong side of the market which would have
resulted in losses.
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PART 9 - CASE STUDIES
H
aving covered all the theoretical aspects of the methodology, we are
now going to look at some real-life examples.
The basic structures we have looked at can be used as a reference to
give us an idea about what to expect from the price; but the market by its
very nature moves freely to a certain extent. This is another of the strengths
of the methodology with respect to other approaches. It combines the rigidity provided by events and phases together with the flexibility required by the
continuous interaction between supply and demand.
The key point here is that although in the real market we will see
many structures that are almost identical to the theoretical examples, this
interaction between buyers and sellers makes each one unique. It is practically impossible for two identical structures to develop because this would
require the same traders involved in both structures to be in the market at
the same time and for them to act in the same way. Mission impossible.
If there are still any doubts about this, remember that the Wyckoff
Method isn’t just about correctly identifying the appearance of events, Studying all the theory provides an essential foundation to be able to perform the
right analyses and forecast scenarios accurately; but the approach goes
much further. In real-life trading we will come across examples of unusual
structures and movements that we must know how to interpret correctly;
and as you gain more and more experience you won’t need to go back and
label each and every one of the actions you see because you’ll be able to
identify them immediately.
If, for example, we see a chart like the one below, where it seems impossible to correctly label the structure, that isn’t what’s important; what is,
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is if we can open this chart at the point which I have marked, have the sufficient capacity to interpret said fluctuation as an accumulation structure and
be in a position to enter the market long.
This is where the true advantage of the Wyckoff Method lies; it teaches us a way to read the market from the most objective point of view possible. It is not, therefore, a question of identifying structures, events and phases to the millimeter as if we were robots.
Below are a series of examples of different assets and time frames.
Note that when analyzing assets it is best to do so in a centralized market so
that the volume data is as genuine as possible. For the analysis below I have
used the TradingView platform.
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S&P500 INDEX ($ES)
On this weekly chart we can see a classic re-accumulation structure with a
false breakout.
It is a very good visual representation of what a Buying Exhaustion
event looks like. We see how the bullish movement comes to an end without
the peak in volume that would identify the climax event. The Automatic Reaction followed by the Secondary Test mark the end of Phase A and the
trend.
During Phase B there is already the suggestion of a certain underlying
strength after the development of a test at the highs (Upthrust Action). An
action that initiates the test event in Phase C (Shakeout) with a relatively
high volume. In this first part of Phase B we can see how the volume in general decreases, a sign that there is an absorption of stock by buyers.
The upward reaction is unmistakable and results in a new test at the
highs that fails to produce the real breakout of the structure (minor Sign of
Strength). A small bearish correction is necessary (Last Point of Support)
before launching a new attempt to breakout at the top. This is achieved at
this second attempt (Major Sign of Strength) and the subsequent test Last
Point of Support) confirms that we are indeed looking at a re-accumulation.
It’s interesting how the price has started the trend movement out of
the range in Phase E with a decrease in volume. This could suggest some
kind of anomaly/divergence, but the logic of supply/demand is clear: due to
the absence of supply (there are few traders willing to sell), with very little
demand, buyers are able to push the price up.
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POUND/DOLLAR ($6B)
Another re-accumulation structure this time on the 8-hour chart and no
false breakout. As we have already mentioned, these are difficult to trade in
because we will almost always expect at least the false breakout of some
low inside the structure.
Here we see another example of Buying Exhaustion after the appearance of high levels of volume at the Preliminary Supply This is one of the reasons why this exhaustion appears; if positions have been aggressively closed
previously, a reversal can occur at the highs even with little volume. From the
peak of the PSY volume we see a decrease until the beginning of the trend
movement within the range after the Last Point of Support, suggesting absorption. We can also very clearly see how the volume traded in bearish
waves decreases, denoting a loss of selling momentum.
Now in Phase D, we can see an increase in volume and again the bullish Weis waves very visually indicating this imbalance in favor of the buyers.
We have gone from a predominance of bearish waves to this appearance of
bullish waves.
An important detail is the inclusion of the volume profile of the structure (horizontal volume that is anchored to the right of the chart) and how its
VPOC (the most traded volume level) acts as the support that leads to the
LPS. After the bullish breakout (Jump Across the Creek), the price develops a
minor re-accumulation pattern that acts as confirmation (Back Up to the
Edge of the Creek) with a clear decrease in volume, suggesting a lack of interest on the part of the sellers.
In this chart we see another very interesting element which is that
those large traders who were buying during the development of this structure took advantage of a fundamental event (in this case the BREXIT negotiations) to develop a huge bullish gap as an effect of the entire cause. This is
not by chance and you will see it on more than one occasion.
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EURO/DOLLAR ($6E)
Basic distribution structure with no false breakout. Here we see a clear example of the importance of context, in which smaller structures fit within
larger ones.
After Phase A that stops the uptrend movement, the price moves into
Phase B during which it develops a minor structure inside the range. The
events of a distribution structure can be clearly identified and how the minor
UTAD (false breakout to relative highs within the range) gives rise to the
downward trend movement of both structures, both the minor and major.
We see how the VPOC of the structure's profile acts as a resistance
level in the development of that minor UTAD, blocking further increases in
price.
After the bearish breakout (Major Sign of Weakness) a brief bullish
correction (Last Point of Supply) acts as a test confirming the distribution
and gives rise to Phase E where the price quickly develops the downward
movement out of range.
During the creation of the structure, the overall volume remains relatively high, a characteristic of distribution ranges. In addition, Weis waves
show the loss of momentum in bullish movements and an increase in bearish movements, in particular the later stages of the structure.
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BITCOIN ($BTCUSDT)
As I have already mentioned, chart reading using the Wyckoff Method can be
applied universally and here we see a clear example on the Bitcoin chart.
Again we see a classic accumulation structure this time with a minor
shakeout as a test event in Phase C. After the four end of trend events, a decrease in the overall volume can be seen as the structure develops. A first
indication of absorption and possible control of the buyers.
Although I have labeled the Phase B test at the lower edge as a simple test as a sign of weakness (ST as SOW), it could have been seen as a
Phase C Spring. The reasoning behind interpreting it this way is that a real
Spring is automatically followed by a breakout movement, and as we see in
this example, after that potential Spring the price continues to move sideways in the middle of the structure developing a minor pattern. But as I say,
these are minor details. The key will always be identifying where the final
imbalance is occurring.
After that test in Phase B, the price begins a minor structure right in
the middle of the range, continuously interacting with the VPOC. It is in this
minor structure where I believe that Phase C occurs with that Shakeout that
hits the local lows (lows within the structure). It's another good example of
the importance of context. A minor re-accumulation structure acting as the
Last Point of Support of the larger structure.
Here we can see how this shakeout does initiate the breakout move
almost immediately with that Major Sign of Strength. Subsequently, the Back
Up to the broken Creek confirms the accumulation structure with the appearance of a good SOSbar and initiates Phase E. Purely analyzing price and
volume, we can see how it indicates harmony in both the breakout movement (increase of price accompanied by increase in volume), and in the correction movement (decrease in price and volume).
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In Phase E we can identify a trend and see a certain loss of momentum evidenced by a new price impulse but with a lower volume. This doesn’t
mean that the price will reverse immediately; it is simply a sign that suggests that there are fewer buyers willing to continue buying.
We could therefore expect some type of correction that travels further, but we must bear in mind that the general context is of an accumulation
below and that until the price develops a similar distribution structure, we
should continue to favor buying.
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INDITEX ($ITX)
Inditex is a Spanish textile company. In this example we see a classic distribution structure with a false breakout on the 2-hour chart.
After the appearance of the climatic volume at the Buying Climax, the
price develops an Automatic Reaction that is very visually represented by the
Weis Waves indicator producing a very clear change of character (CHoCH).
Although it is true that in the overall volume there are certain moments of low activity, peaks can be seen throughout the development, mainly
in the Sign of Weakness and after the Upthrust After Distribution.
It is worth highlighting how the bullish false breakout (UTAD) occurs
with a relatively low volume, indicating the absence of interest in those price
levels. The price produces an aggressive re-entry into the range that is held
back at the VPOC of the structure’s profile. A new bullish attempt is blocked
by sellers right in the upper zone set by the high of the BC. This is the Last
Point of Supply. A subsequent downward gap announces the aggressiveness
of the sellers. The imbalance in favor of the bears has already taken place
and the urgency to exit is evident.
In the major bearish movement that causes the breakout (Major Sign
of Weakness) a new change of character can be seen but this time suggesting an imbalance in favor of the sellers. As always, the Weis waves vey visually depict this.
The subsequent bullish correction with a decrease in volume marks
the last point of supply (LPSY) before the price develops a trend movement
out of range in Phase E.
It seems mere chance that this LPSY has occurred in the lower part of
the structure, in the broken Ice established by the low of the Automatic Reaction but this is not the case. Markets generally have very identifiable trading zones and sometimes they produce very genuine structures such as this
example.
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GOOGLE ($GOOGL)
This Google chart allows us to see how the complete development of a price
cycle is represented with a distribution phase, a downtrend, an accumulation
phase and an uptrend.
It is a more complex chart to analyze but you can clearly see how the
market moves; how it develops a distribution scheme as a cause of the subsequent downtrend; and how an accumulation campaign is required before
starting the uptrend phase.
One thing worth noting in the distribution structure is that test in
Phase B that denotes weakness (minor Sign of Weakness), suggesting a possible imbalance in favor of sellers, and how the Phase C event is a local false
breakout at a relative high within the range. The reading here is that buyers
are so absent that they don't even have the ability to drive the price to the top
of that range. After the real bearish breakout (Major Sign of Weakness) the
generation of a new minor redistribution scheme can be seen whose shakeout will test the Ice level of the broken major structure. Another example of
the importance of context, in which smaller structures fit into larger ones.
At the bottom of the chart we can see an accumulation pattern and
again it seems to have been taken straight out of a textbook because its
movements seem so archetypal. After the Spring in Phase C, the price fails to
break the upper level on the first attempt, resulting in a movement that can
be labeled as minor Sign of Strength. A correction movement is needed in
which the price "takes a run up" to jump across the creek, using Evan’s analogy of the Boy Scout. After the real breakout at the top (Jump Across the
Creek), the price pivots back to the zone and its re-entry is repulsed on two
occasions before it initiates the trend movement out of range. A very good
example of the importance of a no-entry back into the range Buyers appear
right in the critical zone to keep pushing the price up.
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AUSTRALIAN DOLLAR ($6A)
This last example offers us the chance to analyze a chart with a 15-minute
time frame. As already mentioned, this type of analysis can apply to any time
frame. It is a universal approach as it is based on the universal law of supply
and demand. This screenshot is a perfect example of what we understand by
market fractality, in which price develops the same structures, though in
different ways, in every time frame.
On the left we see that the accumulation campaign is born with a
smaller redistribution structure acting as a Preliminary Support. In this case,
said pattern develops with a slight upward slope. Although they are not easy
to see, these types of structures are also tradeable because, as you can see,
the events appear in the same way. The only thing to keep in mind is that the
slope of the structure will tell us if there is greater underlying strength or
weakness in the market. In this example we can see how that upward slope
suggested that a certain strength already existed.
After the end of the bearish movement, we see a reduction in volume
during Phase B and a real Spring+ test as Phase C. The classic development
of an accumulation pattern.
Once the range is broken, the price manages to stay above it and creates a minor re-accumulation structure with a false breakout that reaches
the broken level, acting as the BUEC of the larger structure. The volume very
visually suggests a certain harmony at all times, increasing during the impulses and decreasing on the corrections. Moving into Phase E the market
generates a new re-accumulation structure with another false breakout (Ordinary Shakeout) that then ensures the price continues to rise.
Correctly interpreting the chart in real time is complicated but we
have to rely on all these signs to try to determine as objectively as possible
who is in control. Context, structures and trading zones.
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ACKNOWLEDGEMENTS
Congratulations. After reading this book you have now taken the first
step. I sincerely hope that it has been of value to you and helped you build
the foundations that will allow you to reach higher levels of performance
as a trader or investor.
The content is dense and nuanced. It is very difficult to acquire all the
knowledge after a single reading, so I recommend that you review it again
and take personal notes for a better understanding.
As you know, I continually carry out research and share additional information, so please write to me at info@tradingwyckoff.com so that I can
include you in a new list and send you future updates of the content totally
free of charge.
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Your feedback will help me to keep writing the kind of books that will
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you.
256
ABOUT THE AUTHOR
Rubén Villahermosa Chaves has been an independent analyst and trader
in the financial markets since 2016.
He has extensive knowledge of technical analysis in general and has
specialized in methodologies that analyze the interaction between supply
and demand, reaching a high degree of training in this area. In addition, he is
passionate about automated trading and has dedicated part of his training to
how to develop trading strategies based on quantitative analysis.
He tries to bring value to the trading community by disseminating the
knowledge acquired from principles of honesty, transparency and responsibility.
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BOOKS BY THE AUTHOR
Trading and Investing for beginners
The financial markets are controlled by large financial institutions which
allocate enormous resources and hire the best engineers, physicists and
mathematicians to appropriate the money belonging to the other participants. And you're going to have to fight them.
Your only chance is to somehow level the playing field. Instead of
fighting them you need to try to trade alongside them. To do this, you need to
become the complete trader and develop and follow the 3 main principles
that will largely determine whether you are successful or not:
258
WHAT WILL YOU LEARN?
• Basic and advanced concepts on Financial Education.
• Theoretical fundamentals on Financial Markets.
• 3 high level Technical Analysis methodologies:
• Price Action.
• Volume Spread Analysis.
• Wyckoff Methodology.
• Advanced Risk Management Techniques.
• Principles of Emotional Management applied to trading.
• How to make a professional Business Management.
• How to start from scratch, from Theory to Practice.
All this knowledge will allow you to:
• Improve the health of your economy.
• Understand how the stock markets work.
• Learn 4 winning trading strategies.
• Implement solid money management methods.
• Develop a statistical and objective mindset.
• Make step by step your own trading plan.
• Implement trade record and periodic evaluation.
• Discover resources for obtaining investment ideas.
• Manage the organization of assets through watch lists.
259
The Wyckoff Methodology in Depth
How to trade financial markets logically
The Wyckoff method is a technical analysis approach to trading in financial markets based on the study of the relationship between the forces of
supply and demand.
The premise is simple: When large operators want to buy or sell, they
execute processes that leave their mark that can be seen on the charts
through price and volume.
The Wyckoff method is based on identifying this intervention by professionals to try to elucidate who has control of the market in order to trade
alongside them.
260
WHAT WILL YOU LEARN?
• Theoretical principles of how markets work:
• How price moves.
• The 3 fundamental laws.
• The processes of accumulation and distribution.
• Exclusive trading elements of the Wyckoff methodology:
• Events.
• Phases.
• Structures.
• Advanced concepts for experienced Wyckoff traders.
• Resolution of frequent doubts.
• Trading and position management.
All this knowledge will allow you to:
• Identify institutional money participation.
• Determine market context and sentiment.
• Knowing the high probability trading zones.
• To propose scenarios on the basis of a defined roadmap.
• Manage risk and trade appropriately.
261
Wyckoff 2.0: Structures, Volume Profile and Order Flow
Combining the logic of the Wyckoff Methodology and the objectivity of the
Volume Profile
Wyckoff 2.0 is the natural evolution of the Wyckoff Methodology. It is
about bringing together two of the most powerful concepts of Technical
Analysis: the best price analysis together with the best volume analysis.
This book has been written for experienced and demanding traders
who want to make a quality leap in their trading through the study of advanced tools for volume analysis such as Volume Profile and Order Flow.
The universality of this method allows its implementation to all types
of traders, both short, medium and long term; although daytraders may obtain a greater benefit.
262
WHAT WILL YOU LEARN?
• Advanced knowledge of how financial markets work: the current
trading ecosystem.
• Tools created by and for professional traders.
• Essential and complex concepts of Volume Profile.
• Fundamentals and objective analysis of Order Flow.
• Evolved concepts of Position Management.
All this knowledge will allow you to:
• Discovering the B side of the financial market:
• The different participants and their interests.
• The nature of decentralized markets (OTC).
• What are Dark Pools and how they affect the market.
• How the matching of orders takes place and the problems of their
analysis.
• Knowing the Trading principles with Value Areas.
• How to implement Order Flow patterns in intraday Trading.
• Build step by step your own trading strategy:
• Context analysis.
• Identification of Trading areas.
• Scenario planning.
• Position management.
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BIBLIOGRAPHY
Al Brooks. (2012). Trading Price Action Trends. Canada: John Wiley & Sons, Inc.
Al Brooks. (2012). Trading Price Action Trading Ranges. Canada: John Wiley &
Sons, Inc.
Al Brooks. (2012). Trading Price Action Reversals. Canada: John Wiley & Sons,
Inc.
Anna Coulling. (2013). A Complete Guide To Volume Price Analysis: Marinablu
International Ltd.
Bruce Fraser. Wyckoff Power Charting. www.stockcharts.com
David H. Weis. (2013). Trades about to happen. Canada: John Wiley & Sons, Inc.
Enrique Díaz Valdecantos. (2016). El método Wyckoff. Barcelona: Profit Editorial.
Gavin Holmes. (2011). Trading in the Shadow of the Smart Money.
Hank Pruden. (2007). The Three Skills of Top Trading. Canada: John Wiley &
Sons, Inc.
Hank Pruden. (2000). Trading the Wyckoff way: Buying springs and selling
upthrusts. Active Trader. Páginas 40 a 44.
Hank Pruden. (2011). The Wyckoff Method Applied in 2009: A Case Study of the
US Stock Market. IFTA Journal. Páginas 29 a 34.
Hank Pruden y Max von Lichtenstein. (2006). Wyckoff Schematics: Visual
templates for market timing decisions. STA Market Technician. Páginas 6 a 11.
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Jack. Hutson. (1991). Charting the Stock Market: The Wyckoff Method. United
States of America: Technical Analysis, Inc.
James E. O´Brien. (2016). Wyckoff Strategies & Techniques. United States of
America: The Jamison Group, Inc.
Jim Forte. (1994). Anatomy of a Trading Range. MTA Journal / Summer-Fall.
Páginas 47 a 58.
Lance Beggs. Your Traing Coach. Price Action Trader.
Readtheticker.com
Rubén Villahermosa. (2018). Wyckoff Basics: "Profundizando en los Springs".
The Ticker, 1. Páginas 14 a 16.
Tom Williams. (2005). Master the Markets. United States of America: TradeGuider Systems.
Wyckoff Analytics. (2016) Advanced Wyckoff Trading Course: Wyckoff Associates, LLC. www.wyckoffanalytics.com
Wyckoff Stock Market Institute. (1968). The Richard D. Wyckoff Course in
Stock Market Science and Technique. United States of America
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