Wyckoff 101 — Part 3: Accumulation

Time for Part 3 in this series.

If you haven’t checked out Part 1 & 2 they are available here:

Background to Wyckoff:

https://medium.com/@ColdBloodShill/wyckoff-101-part-1-the-background-fa543fc78870

The role of the Composite Operator:

https://medium.com/@ColdBloodShill/wyckoff-101-part-2-the-composite-operator-4e80d3862682

In this post we’re going to look at Accumulation.

Accumulation is a process, it’s a process that in recent months more and more people have been placing on a range or an asset. I wanted to debunk some of the myths around accumulation and provide you with an overview of what to look out for.

What is Accumulation?

Accumulation is a very specific process, simply put it is the process of accumulating an asset at the desired (usually cheapest) price over a time period.

An accumulation typically stops a downtrend as the Composite Operator begins the lengthy process of absorbing shares. This begins with the stopping action of a Selling Climax (SC). The idea behind accumulation ranges is that these trendless ranges actually discourage traders who sell in order to move on to more active markets. The CO is using this opportunity to accumulate the relinquished asset.

One objective of the Wyckoff method is to improve market timing when establishing a position in anticipation of a coming move where a favourable reward/risk ratio exists. Trading ranges (TRs) are places where the previous trend (up or down) has been halted and there is relative equilibrium between supply and demand. Institutions and other large professional interests prepare for their next bull (or bear) campaign as they accumulate (or distribute) shares within the TR.

How you would like to trade an accumulation range depends on your trading style. If you are a swing trader you may want to play the moves between the labels, if you are a scalper you have your boundaries established and can play within there, etc.

So let’s clarify a couple of points that are often lost when people discuss accumulation as a process:

• Accumulation happens when an equilibrium has been reached in price, where price stalls and begins to form a range.
• Accumulation can occurs with greater accuracy and credibility on charts over 12h.
• Volume is a key indicator of accumulation (and distribution) if you ever show me a Wyckoffian chart without volume, you’re doing it wrong.
• After a downtrend we’d look for signs of accumulation or redistribution.
• After an uptrend we’d look for signs of distribution or reaccumulation.
• Accumulation has a specific set of criteria that must be matched in order to add credibility to the range.

Accumulation Example and Markup

This is a common accumulation schematic and it offers a great visual cue to analysing any potential ranges. Schematics are not meant as exact replicas to the way that the range will play out. Schematics are used to give a loose structure, it is up to you as the chartist to interpret and analyse the price action. As you may be new to Wyckoff I’ve copied the labels and their relevant information for you underneath:

• PS — preliminary support, where substantial buying begins to provide pronounced support after a prolonged down-move. Volume increases and price spread widens, signalling that the down-move may be approaching its end.
• SC — selling climax, the point at which widening spread and selling pressure usually climaxes and heavy or panicky selling by the public is being absorbed by larger professional interests at or near a bottom. Often price will close well off the low in a SC, reflecting the buying by these large interests.
• AR — automatic rally, which occurs because intense selling pressure has greatly diminished. A wave of buying easily pushes prices up; this is further fueled by short covering. The high of this rally will help define the upper boundary of an accumulation TR.
• ST — secondary test, in which price revisits the area of the SC to test the supply/demand balance at these levels. If a bottom is to be confirmed, volume and price spread should be significantly diminished as the market approaches support in the area of the SC. It is common to have multiple STs after a SC.
• Test — Large operators always test the market for supply throughout a TR (e.g., STs and springs) and at key points during a price advance. If considerable supply emerges on a test, the market is often not ready to be marked up. A spring is often followed by one or more tests; a successful test (indicating that further price increases will follow) typically makes a higher low on lesser volume.
• SOS — sign of strength, a price advance on increasing spread and relatively higher volume. Often a SOS takes place after a spring, validating the analyst’s interpretation of that prior action.
• LPS — last point of support, the low point of a reaction or pullback after a SOS. Backing up to an LPS means a pullback to support that was formerly resistance, on diminished spread and volume. On some charts, there may be more than one LPS, despite the ostensibly singular precision of this term.
• BU — ”back-up”. This term is short-hand for a colorful metaphor coined by Robert Evans, one of the leading teachers of the Wyckoff method from the 1930s to the 1960s. Evans analogized the SOS to a “jump across the creek” of price resistance, and the “back up to the creek” represented both short-term profit-taking and a test for additional supply around the area of resistance. A back-up is a common structural element preceding a more substantial price mark-up, and can take on a variety of forms, including a simple pullback or a new TR at a higher level.

Regardless of schematics working perfectly to a diagram. You are looking for these signs of accumulation. The key areas to be aware of are:

• Volume, does it rise on demand, is there a good response to sell-offs?
• Is there a clear selling climax to begin your trading range.
• Is there an automatic reaction to that?
• Have their been any springs (movements below the SC or TR) — how were these responded to?
• This should be conducted on a minimum of a 12h chart.

I’ve marked up this BTC accumulation range so that you can see the labels on an example. Notice how this doesn’t mirror the schematic but it gives you a strong enough structure to work from.

You can see the interplay between the PSY (not marked but represented by the horizontal line) and the AR/test reactions on this chart. Also, note the demand volume. After the selling climax buying volume is largely in control with sell-offs managing the range and allowing the CO to accumulate more BTC at lower price levels as people leave the market.

There are a range of accumulation schematics, some follow very well, other times you have to use your understanding of Wyckoff and signals in order to form your own TR.

Misconceptions

There are a lot of misconceptions around accumulation. Let’s discuss some of the more common ones:

“The downtrend has stopped, the sideways action means we must be accumulating.”

Incorrect. In a downtrend the first thing that must be assessed is the possibility for re-distribution. Just because an asset has stopped a downwards move does not mean that it automatically becomes a case for accumulation.

I can demonstrate that by showing you BTC just prior to the accumulation range that we identified. You may believe that because the downtrend was broken and re-test that it becomes an accumulation process. Not true, the time was simply spent re-distributing BTC at a higher price before moving down to our SC level which began the true accumulation process. Don’t be fooled by the simplicity of believing all downtrends automatically become accumulation.

“This alt coin has bottomed out, it must be accumulation.”

Incorrect. Just because something has “bottomed out” does not mean it has entered accumulation. How do you know that price increases are not being used as a means to re-distribute leftover coins?

Remember, accumulation is a specific set of criteria that needs to be matched. Just because a chart looks as though it has bottomed out means very little in isolation.

Shows 1h chart* “Look, it’s accumulation”

Incorrect. But there is a caveat to this. Accumulation does not happen over hours or minutes, it happens over days and weeks. The process of reaccumulation can happen over hours and minutes. I’ve been quite strong in my message on BTC that if you review the signals correctly you will not miss out on an excellent long position when the market flips cycles again. This is true because accumulation takes time, all the examples you will find online and here take time to play out. I’ll show this example that I posted on Twitter earlier today. Note the near 8-month period for accumulation and subsequent 3–6 month periods of reaccumulation. Play the original range right and you just sit there in your long position till you retire.

I’m going to close this out now as there is already a lot of information to go through. In Part 4 I’ll take a look at reaccumulation ranges to see how we can combine that with the knowledge you have picked up here.

If you’d like to ask me any questions you can reach me on Twitter:

Cold Blooded Shiller (@ColdBloodShill) | Twitter

Thanks for taking the time to read this, I hope you got some value from it.