It's been a long time since I haven't write about crypto topics or based on research that got my interest to learn. Recently I've been reading a lot of tweets about this “Wyckoff Method” in analyzing the market.
Asset price moves up and down, that is volatility due to some minor and large forces in the market. These forces stimulate the continued up and down of the price. If a trader can identify these forces and understand it's the influence they will have the ability to predict the price movements of the market, and some traders use this “Wyckoff method” to determine the market price movements.
Since the market crash in May 19, 2021 the crypto market was struggling to climb up and bring back the bullish momentum, some even claim that we are now in the bearish market. Many have been flaunting their analysis with Bitcoin may it be technical or fundamental analysis. Then I read tweets predicting BTC based on the Wyckoff method. I haven't heard about this technical analysis so I dug up to know more about it.
What is the Wyckoff method?
The Wyckoff method is technical analysis, that was developed by Richard D. Wyckoff. He is a trader and market forecaster and started his business in 1888 as a 15 years old stock runner. This method is used to navigate the financial markets based on the study of the demand and supply forces connection.
This Wyckoff has integrated his original ideas with best practices and articulated the chart-based method by several factors such as principles, techniques, and laws to track these factors harmoniously.
Wyckoff's method becomes a darling of Wall Street as it was successfully applied in his newsletter known as The Magazine of Wall Street.
A group of highly and experienced traders/investors such as James Keene, Jesse Livermore, Andrew Carnegie, J.P. Morgan, Jay Gould, and more are being observed by Wyckoff during market activities.
They are the “super” traders who analyzed the market and know better how it moves and made profits from it, they can even influence the price trends and directions. If they are in crypto, they are called whales.
Wyckoff methods and rules
Super traders in the market were referred to him as composite operators, this method motivates to disclosed them by analyzing the trading volume and price on the tape based on this method.
Wyckoff speculate that volume and price movements behavior was the key in predicting future market movements. His observations, made him believe that the exchange works with a set of three laws.
??Supply and demand law
If the amount of supply of a certain asset is limited the value of the asset will increase due to demand. When there is too much supply the value of the asset will reduce or will not increase as it can cater to all the demands or will create more demand.
?? Cause and Effect Law
To see an effect on the price of an asset, there must be a cause. The effect will be a direct proportion to that cause. When there is enough time to facilitate a period of distribution or accumulation, the possible best price moves will happen as there has been a great cause, enough to show an impact on the price.
?? The Effort Vs The results law
If the volume on move (effort) is present the results (price action) must be proportional to the effort shown and cannot be untangled from it. If it does not show proportion between the two, it may be an indication of other principles in action.
The two (price action and volume) should be in harmony. If there is a lot of volumes, you should see a lot of moves (price moves). If there is no movement of a certain asset despite the volume increases then, you should find out what is happening to the asset you are trading.
This is the time to execute your detective side in finding the correlation of effects and the results.
Applying Wyckoff Method in Trading
Traders may apply this method and observe how the super traders accumulate big positions during the bottom of the dip in the market and sell the asset on top.
Image Source: warriortrading.com
?? Analyzing the current position and future trend of an asset
Understanding the current supply and demand of an asset structure will allow you to predict future price trends. When the demand overlaps the supply, the price asset will rise but when the supply is higher than the demand, the price will go down to create more demand.
With these patterns, traders can opt to decide what type of positions they must take and be able to discern the duration of their trades.
?? Chose an asset that follows the market trend
In choosing an asset to trade you should look for its fundamentals, the volatility of the coin, and if it follows the movements of the market. An asset or coin that is volatile can give you great returns if the asset will rise in value.
If you wish to short an asset then you should follow or wait for some news that is enough to create FUD (fear uncertainty doubt) and short the asset.
The asset selection method will allow traders to book profits in both bull and bear market trading.
?? Chose the correct asset about your price target
Some traders chose an asset that is about the price target they aimed to hit during their trades. Moreover, always consider the law of cause and effect, you must only trade when there is substantial “cause” that will trigger an “effect,” like read some news before you execute the trade. Some traders just based on the chart when they execute a trade without minding some news, ending their trades went wrong if there are strong negative news that is enough to shake the market.
?? Define when an asset is prone to move
This Wyckoff method can also layout important steps that traders should know if the asset is worth buying or selling. If you understand these steps better, with the market supply and demand of the asset, it will help you to know when to use the method whether during market downfall or a strong rally is guaranteed.
?? Placing trades during peaks of the market cycles
When traders know when the asset is going to rise and drops can be very beneficial in making huge returns of their money.
Traders should seek to buy the asset when the market is undervalued during a downfall because it will eventually reverse into a rally afterward.
If you want to short an asset make sure that you see that the bulls are already exhausted to expect a reverse of a trend downward and ride the bear market.
Source: warriortrading.com
Closing Thoughts
In applying the Wyckoff method, you should know when is the accumulation, mark up, distribution, and markdown phase. If you can determine those phases by using the chart, you can have successful trades using this method.
It is also applicable in all time frames, but for a higher probability higher time frameworks better. But if you do short-term trades, 4hr and 1hr are good.
Always remember nobody can predict the market 100%, there is no wrong technical analysis as everything is possible. And the cycles repeat, if ever we are in the Markdown phase probably in the coming months, accumulation will happen and next is the mark-up. So sit tight and enjoy the ride,.. hoooooodddl!
Note: I used “asset” as the source only refers on “stock” but I believe it works the same in crypto as there are crypto traders using it.
Date Publish: July 7, 2021 first Publish at Read.cash
Thank you for reading!
