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How To Trade Like Banks Using Accumulation & Distribution | WYCKOFF Trading Course For Beginners - YouTube
Channel: The Secret Mindset
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As a trader, you are probably familiar with
several theories concerning market structure
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and cycles.
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Some of the more popular ones include the
Elliott Wave Principle and the Dow Theory.
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In todayâs video, I plan to add one more
important type of market analysis to your
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trading arsenal, namely a price action based
approach known as the Wyckoff trading method.
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The Wyckoff Method consists of a series of
principles and strategies which can be applied
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to all sorts of financial markets.
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I will break Wyckoffâs method into 4 parts:
⢠The three laws of Wyckoff
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⢠The Composite Man
⢠Wyckoff Price Cycle
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⢠Wyckoff Volume Spread Analysis
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The three laws of Wyckoff
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Wyckoff's method rests on three fundamental
âlawsâ.
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1.
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The law of supply and demand
When demand is greater than supply, prices
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rise, and when supply is greater than demand,
prices fall.
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The trader can study the balance between supply
and demand by comparing price and volume bars
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over time, as a way to better visualize the
relation between supply and demand.
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This often provides insights into the next
market movements.
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2.
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The Law of Cause and Effect
The second law states that the differences
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between supply and demand are not random.
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Instead, they come after periods of preparation,
as a result of specific events.
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In Wyckoff's terms, a period of accumulation
(cause) eventually leads to an uptrend (effect).
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In contrast, a period of distribution (cause)
eventually results in a downtrend (effect).
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3.
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The Law of Effort vs. Result
The third Wyckoff law states that the changes
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in an assetâs price are a result of an effort,
which is represented by the trading volume.
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If the price action is in harmony with the
volume, there is a good chance the trend will
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continue.
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But, if the volume and price diverge, the
market trend is likely to stop or change direction.
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For instance, imagine that a market starts
to consolidate with a very high volume after
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a long bearish trend.
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The high volume indicates a big effort, but
the sideways movement suggests a small result.
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So, there is a lot of activity, but no more
significant price drops.
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Such a situation could indicate that the downtrend
may be over, and a reversal is near.
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The Composite Man
Wyckoff created the idea of the Composite
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Man as an imaginary identity of the market.
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He proposed that investors and traders should
study the stock market as if a single entity
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was controlling it.
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It always acts in his own best interest to
ensure he can buy low and sell high.
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Think of composite man as an evil entity,
like the bad guy in a movie, sitting behind
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the scenes controlling markets by pushing
buttons.
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His goal is to move the markets to your disadvantage.
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The composite man is continually seeking to
maximize his profit at âyourâ expense.
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The Composite Manâs behavior is the opposite
of retail traders, but according to Wyckoff,
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the Composite Man uses a somewhat predictable
strategy, from which traders can learn from.
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Here are some main ideas of composite man:
⢠Composite man plans and executes his deception
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well in advance
⢠Composite man is there to fool you to
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buying positions that he has already accumulated
⢠Composite man will tempt you to sell at
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the worst possible time
⢠Composite man leaves subtle evidence of
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his strategy for those who understand him
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Now, letâs use the Composite Man concept
to illustrate a market cycle.
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1.
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Accumulation
The process of accumulation is the first stage
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of the Wyckoff price cycle.
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The Composite Man accumulates assets before
most investors.
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The accumulation is done gradually to avoid
the price from changing significantly.
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Bulls are gaining power slowly and as a result,
they are poised to push prices higher.
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Although the Accumulation stage is related
with the bulls gaining authority, the price
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action on the chart is flat.
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In other words, the process of accumulation
is illustrated by a ranging price structure
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on the chart.
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Higher lows within the range is usually considered
a signal that the price action is currently
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in an Accumulation phase.
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2.
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Markup Phase (Uptrend)
The Markup is the second stage of the Wyckoff
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trading cycle.
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When the Composite Man is holding enough power,
and the selling force is depleted, he starts
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pushing the market up.
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The emerging trend attracts more investors,
causing demand to increase.
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There may be multiple phases of accumulation
during an uptrend.
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We may call them re-accumulation phases, where
the bigger trend stops and consolidates for
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a while, before continuing its upward movement.
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As the market moves up, other traders are
encouraged to buy.
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At this point, demand is higher than supply.
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3.
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Distribution
The Distribution process is the third stage
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of the Wyckoff price cycle.
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Here, the Composite Man starts distributing
his holdings.
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He sells his profitable positions to those
entering the market at a late stage.
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The distribution phase is marked by a sideways
movement that absorbs demand until it gets
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exhausted.
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The price action on the chart at this stage
is flat.
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One indication that the market is in a Distribution
stage will be the sustained failure of price
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to create higher lows on the chart.
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The price action creates lower highs which
is an indication that the market is currently
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experiencing a selloff.
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4.
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Markdown Phase (Downtrend)
The Markdown is the last stage of the Wyckoff
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price cycle.
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Soon after the distribution phase, the market
starts reverting to the downside.
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After the Composite Man is done selling a
good amount of his shares, he starts pushing
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the market down.
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The supply becomes much greater than demand,
and the downtrend is established.
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When the bearish trend is finally over, a
new accumulation phase begins.
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Wyckoff Volume Spread Analysis
Volume is of a great importance for the Wyckoff
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trader, because it can provide valuable information
into what is really going on âbehind the
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scenesâ.
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Wyckoff Volume Analysis provides confirmation
of progressing events during the Wyckoff Price
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Cycle.
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As I said earlier, high volumes can lead to
sustained price moves on the chart.
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Wyckoff Volume Spread Analysis also helps
you identify periods when the price is transitioning
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between the different stages of the Wyckoff
Price Cycle.
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When the price moves through a key level during
the Wyckoff Price Cycle, you should consider
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the move valid if the trading volumes are
relatively high during the breakout.
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If the volumes are decreasing, then you are
probably looking at a spring (which is a false
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breakout) rather than a real breakout.
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This is an example of an Accumulation stage.
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Notice on the chart that the first two bottoms
are slightly increasing.
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This hints that the market is likely in an
accumulating stage.
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Suddenly, we see a bearish breakdown through
the lower level of the range.
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However, the volume is decreasing during the
breakdown through the level, which suggests
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that this could be a false breakout (Spring)
before the real breakout actually takes place.
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The price reverses after the breakdown and
at the same time, the trading volume is increasing.
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This is a strong indication that the Price
Cycle is likely entering the second stage
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â the Markup.
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How to apply Wyckoff method in your trading
Traders can use the Wyckoff Price Cycle to
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recognize upcoming price moves.
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For example, the end of an Accumulation stage
is the beginning of a Markup, which could
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be traded to the long side.
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At the same time, the end of a Distribution
stage is the beginning of a Markdown, which
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could be traded to the short side.
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Understanding the different stages within
the price cycle will allow you to position
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for the next most likely price tendency.
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Ideally, you should enter a trade when the
price action is transiting from Accumulation
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to Markup and from Distribution to Markdown.
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First, you would need to confirm the current
stage when the price is ranging.
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It would help to identify increasing bottoms
for an Accumulation and decreasing tops for
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Distribution.
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In addition, it would be useful to analyze
the previous price moves for additional clues.
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Another way you can attempt to confirm an
Accumulation or Distribution stage is by identifying
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a Spring, which is the transitional price
action behavior that often occurs between
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the cycle stages.
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Chart patterns can also be helpful in identifying
Accumulation and Distribution processes on
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the chart.
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The potential price move out of a pattern
could help you identify the transition to
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a Markup or a Markdown.
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The actual trade comes when the price action
breaks the range in the direction of the expected
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move.
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For example, you could buy when the price
breaks the flat range through the upper level.
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Contrary, you could sell when the price action
breaks the lower support level of the Distribution
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area.
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And, you must keep an eye on volume to confirm
that your decision is correct.
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If you are trading a Markup, your stop loss
should be located below the lowest point of
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the Accumulation stage.
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If you are trading a Markdown, then your stop
loss order should be positioned above the
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highest point during the Distribution stage.
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Here, the cycle begins with the Distribution
phase.
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At this point, the price action breaks the
upper level of the range.
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However, the trading volumes at that time
are decreasing, Therefore, we can reason that
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a Spring pattern on the chart may be forming.
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The price action reverses afterwards and breaks
the lower level of the Distribution channel
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on increasing volume.
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This was the ideal moment to enter a short
position, placing a stop loss above the highest
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point of the Distribution range.
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See that the Markdown begins right after the
selloff and the price of decreased aggressively.
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Then we see a sideways movement, which hints
that the Markdown phase is probably completed.
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If you havenât reached your profit target,
you would close your trade when the price
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action begins to create increasing tops on
the chart.
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When price finishes a Markdown stage, it starts
an Accumulation.
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During the Accumulation, we see that the price
drops on decreasing volumes and breaks the
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channel downwards
Here, we see a breakout through the upper
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level of the Accumulation channel.
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This is a strong buy signal, which you could
use to go long.
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The stop loss order goes below the lowest
point of the Accumulation phase.
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The price action enters a Markup stage afterwards,
as the price rises creating higher highs.
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After a strong increase the price action starts
to range, suggesting the Markup stage is probably
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completed and the new Distribution stage is
on its way.
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This video was basically an introduction to
Wyckoff trading and I tried to keep things
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as simple as possible.
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If you enjoyed this type of content and want
more Wyckoff strategies, leave us a like to
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show your support and in future videos weâll
go deeper with some advanced Wyckoff concepts
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that can be applied to day trading and swing
trading.
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Until next time.
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