The Wyckoff Method Explained
Source: Cryptolounge blog on Medium.com
The Wyckoff Method (often called the “Wyckoff Cycle”) is a technical analysis technique to navigating the foreign markets with the use of the economic cycle. It was developed by Richard D. Wyckoff, a successful market analyst and forecaster who began in the investing business at age fifteen as a penny stock runner.
He eventually went on to become one of the world’s leading investment bankers. His expertise is in analyzing complex financial data such as graphs, charts, and algorithms in order to provide quantitative proof of a business idea’s viability and future potential.
How does the Wyckoff method work
The Wyckoff Method concentrates on studying the relationship between the volume of a particular security and its price movements over time. Volume is used as an indicator of market sentiment which is also known as “the talking time”.
The Wyckoff method believes that when a volume of stocks is consistent with the trends of the market, this is good news for new, high quality trading ideas. The low volume of the bears in 2021 resulted in new, lower quality stocks being created as shorts.
The Wyckoff method has also been used in ranging cryptocurrency markets.
How to trade the Wyckoff chart
There are three parts to the Wyckoff method of technical analysis.
· Trading the Price Action
· Scalping a range
· Trend Trading
Each of these parts requires specific training in order to effectively understand and apply it. The core elements of the method are Price Action itself, the ability to determine profitable points by identifying support and resistance levels, and knowing when to execute a short selling or buying action.
Most trading platforms and software offer an extensive library of programmable technical indicators which can be used to analyze price action.
Trend trading with Wyckoff
Trend trading is the second major component of the method of technical analysis. The trend of the market is an essential part of interpreting its patterns and applying the same to a set of rules which then predict price directions for future trades.
Most of the trend indicators within the Wyckoff system utilize a volume indicator such as the moving average line or moving average convergence divergence. These indicators are used to evaluate price action and provide traders with a sense of when to enter into a trade based on the direction of a trend.
One of the most important rules of Wyckoffian trading is the use of support level patterns. Support level patterns are formed by the market range following a set of rules within its daily ranges. These patterns are a useful guide for market direction and are essential to the functioning of the market. The support level patterns outlined in the system are referred to as support levels.
Supply and demand underpins the Wyckoff method
The final area of consideration within the methodology of analysis is the impact that variations in supply and demand have on price movement.
Supply chain analysis has been a valuable tool for many traders in the legacy markets. Its elements are trend, market cycles, key indicators, supply and demand. The trend and the market cycles are both utilized to determine if there is consistent support or resistance in the underlying asset.
Many traders have experienced success utilizing the strategy of distribution instead of breakouts in order to generate long term profits. Most of these same traders also utilize a wide range of technical indicators in order to determine the health or value of an investment.
The Wyckoff Method has been shown to greatly assist in generating low risk high return strategies that have been utilized by professional Forex traders for years.