Wyckoff method and trading ranging markets

Wyckoff method in cryptocurrency trading has been made popular among serious traders mainly thanks to John Bollinger who is such a great help to the trading community. In his twitter feed, he regularly explains how to combine the Wyckoff method with the Bollinger bands, which are his invention.

Wyckoff and BBands in crypto is not an arbitrary T1ts&A55 magic combo: cryptocurrencies trade in pairs and show the typical pair behavior. Trading pairs with Bollinger bands give you an edge.

This is not an arbitrary TA magic combo: cryptocurrencies trade in pairs and show the typical pair behavior. Trading pairs with bbands give you an edge, which is something to consider now that the time of capitalizing on “omg it’s going to zero” panic drops might be coming to its close. The market is maturing, some say it’s too big for a 2 year near-zero bear market to be likely. If the bull mood doesn’t fail to continue the irrational volatility might dampen and traders might actually need to develop a skill.

Taken from the Meb Faber podcast:

Meb: So what this is, tell me. Is it one we ever owned or traded Bitcoin? Do you think it’s actually, you know, the same rules apply? Do you think the Bollinger Band has been worked on Bitcoin?

John: Bollinger Bands work fantastic on Bitcoin. And they work fantastic on all forex.

Meb: Yeah. As you did say, currency traders in general ones tend towards lean towards technical analysis in general but often you hear in the circles in the vernacular love using Bollinger Bands.

John: So, there is a reason for that, currency trading is pairs trading, you’re long one and short the other essentially. So, sometimes you’re, you know, you find a stock you like enough stock you hate, you pair them together and that’s a pair. Their portfolios are full of pairs trading. The ideas to earn a return at reduced volatility over time take out the market factor and just capture the sweetness of your ideas. So, forex is pairs trading and pairs have a statistical property, they’re stationary or they exhibit in the statistical parlance, stationarity. And it just turns out that Bollinger Bands in any approach like Bollinger Bands work just a little bit better with series that exhibit stationarity. So, there is sort of a built-in edge to using Bollinger Bands on anything that’s a pair.

Recognizing the nature of the range

One of the most notable things the very old Wyckoff method left us are the so called phases. Ranges are market structures when the market is not trending, it is testing support and resistance levels to decide the next move and start the next markup or markdown.

The two most prominent ranges in cryptocurrency markets are the reacummulation phase and the start of the distribution phase: that is, the breather pause in a bull run and a trend reversal. These two are also the two that look very much alike.

And picture of accumulation and distribution from another great source on readticker.com:

Taken from readtheticker.com

The re-acummulation looks very much like the distribution, from the high-level point of view only with the difference that the market continues to rise rather than proceeding to markdown. You will need to go deeper to see how the distribution and re-accumulation differ.

Let’s look into the ways you can tell one from another.

Differences between Wyckoff distribution and reaccumulation

Richard Wyckoff considered the basic principles of supply and demand and applied them to the markets.

Excess supply leads to decrease in price, excess demand leads to price increase — plus, if there is effort, in the markets the result must be proportional to it. The volume and the price change must be in harmony.

This supply vs demand logic is particularly useful at the ends of ranges.

This is a thing that will be most helpful for more macro-oriented traders. In the final stages of the range the market either keeps pressing down to support levels, getting bought up short term but not in a way that would gain following and become long-lived. Or the market keeps rallying up and pushing up towards resistance, getting shorted back down for the stort term gains but not in a way that would gain longer term following. In a way, traders are making the market and in this way they agree on the next direction.

Look at the BTCUSD market — Primer

As they say, hindsight is 20/20. Here are two different kinds of BTCUSD price action.

A/ Weekly BTCUSD chart with the infamous 2-year bear market: there was an accumulation structure at the bottom.

B/ Daily BTCUSD chart of recent BTCUSD action that ended up corrective continuation.

The structure A/ formed obviously after a long downtrend. The fundamentals were shaken by MtGox bankruptcy, the prevailing opinion was that bitcoin was going to bleed out into death and that the whole cryptocurrency experiment failed.

From the fundamental point of view, at this stage savvy traders are have the option to literally buy wholesale: Buying the capitulation, provided the trader sees an opportunity in the asset. (“It will not really fail, there are industries that need payments resistant to censorship and regulations, people who just went in during the hype to make a quick buck are just capitulating irrationally.”)

Ranges within ranges

Considering B/ is a range on the 1D BTCUSD chart, for a deeper analysis you can scale in to shorter timeframes and look for ranges within the range.

In every range, there will be part of a price action that will trade closer to the upper boundary of the range. That can be identified as the micro-distribution. From there, the price might drop to the middle of the range or deeper and consolidate there for a bit. In crypto, it typically results in a deeper drop: the accumulation. From there, the price gets bought up towards the middle of the range again. The future direction depends among other things on the strength of the bounce.

Finding the inner ranges

You get your inner ranges simply by checking lower timeframes, which you do anyway when you are looking for entries. The only change here is you are looking for ranging structures that stay within the bbands.

Let’s take the daily range in BTCUSD from above — that’s a 1D chart with the original range:

Now let’s switch to 4H:

Here you can easily spot the first inner reaccumulation range:

  • Market reaches a resistance, tests it several times. In this case there were some long-term Fibonacci retracement lines.
  • Relevant bband basis starts curling down.
  • Price-wise, higher highs form but are already further from the upper bband, indicating weakness.
  • Eventually, the market drops below the bband basis and fails to return up over it.
  • Panic drop occurs but is bought up with force.
  • Market continues upwards.

The second inner range was a distribution:

  • Market hits an important fib line and makes a sharp top.
  • Negative volume keeps picking up.
  • Drop to median of the outer range (red dashed line) gets bought up but this rally crashes and fails to push through resistance.
  • Market continues downwards.

Following the fast markdown the market tests previous breakout point and gets quickly bought up, consolidates a little on diminishing volume (sign of ranging coming to close) and continues upward. Looking back to the 1D chart you see the market formed a strong w-bottom with good higher low (both price-wise and relatively to the bband) and pushed through a resistance line.

All in all, on the 1D this was reaccumulation: a normal continuation corrective structure in a bull trend.

Assessing the shorter timeframe movements of the range should help you get the idea about the health of the trend and the next direction of the market.

Using Bollinger Bands in Ranging Markets

John Bollinger got recently asked on Twitter what TA he uses for crypto trading. As always, this time too he explained he goes with his own BBands and the basic supply/demand logic outlined in the previous paragraph.

Mostly just Bollinger Bands, %b and BandWidth. Logical levels and pivots are helpful too, along with basic supply/demand and Wyckoff stuff.
— John Bollinger (@bbands) 18 October 2017

In ranging markets, Bollinger bands provide this kind of balance boundaries. The center line, which is a moving average, forms the mean price around which the ranging occurs. The upper and lower bands work with standard deviations so with StdDev of 3, overshooting the bands will likely lead to a retracement back inside of the bands in ranging markets. There is one more important thing to watch though: double bottoms and tripple tops — relatively to the bbands.

This is where bbands get to be really helpful: Traders often look for lower highs when they are looking for a top formation and higher lows when they are looking for a bottom formation. Because of the fear and greed psychology, cryptocurrency markets typically do three pushes when forming a top but only two drops when forming a bottom — also known as three pushes to a high and W-bottom. While most traders look for these, they often do so in relation to the chart vertical axis only: If the price of a bottom 2 is higher than the price of bottom 1, it’s a higher low and a convincing bounce. If the prices are the same, it’s still a W-bottom but somewhat weaker. If the bottom 2 is lower, itmight not be the final bottom yet.

However, with bbands you can look for the 3-push and W-bottom structures relative to the bbands, which works very well: If the bottom 2 has lower price than bottom 1 but is farther up from the lower bband than bottom 1, it’s still a very convincing bounce. That’s a higher low relatively to the bbands, a bullish structure that a lot of traders will miss.

Reading Volume and Volume-based Indicators

The simplest and perhaps the most effective approach is simply to look at volume. Like candles, on shorter timeframes traders with high net worths will always be able to paint the volume just as they can paint the candles — but sometimes the market gains following nonetheless.

There are pumpers’ groups in XRPUSD and generally in cryptocurrencies with shallow liquidity — for obvious reasons. In developed crypto markets (BTC, ETH, LTC…And whatever is being popular at present) you won’t come across these things every day anymore. It doesn’t pay off for most people.

With basic volume, you get to use the basic supply/demand logic:

  • If there is a drop, the volume is rising but price gradually drops less and less — that’s a price vs volume divergence. It means there is significant demand and the drop is not expected to continue for much longer.
  • If there is a drop, the volume is rising and the price keeps sliding down — there is not enough demand and plenty of supply. The price is bound to drop some more.
  • If there is a rally, the volume is rising but price starts topping — again, that’s a divergence. Local top there.
  • If there is a rally, the volume is rising and price is still pumping — it will keep going.

By this logic, when there the market starts ranging, flagging and correcting healthily, the volume will diminish through the range too.

There are volume-based indicators like on-balance volume and others but what’s perhaps most helpful for traders are colored candles. There are several scripts for TradingView available that will color your chart’s candles according to the changing trading volume flow. Volume flow colored candles will give you a quick single-look idea about the state of the market, no need to overcomplicate it.

One of the best ones is a free one, was made by spacetrader and you can get it from the strategy library if you search for [ST] Volume Flow v6. The code and some how-to is available here, it is well possible to reuse it for a script in another language.

Legend for the colors of the candles on Imgur

Of course, simpler and more basic TA will also be helpful:

  • Do the rises form nice bull flags?
  • Does the range have M/W patterns?
  • Do the candles at the bottoms of the retracements have long wicks, indicating strong BTFD?

Also look for rare formations provided they are reliable — like widening formations that resemble bull flag which is rare but it indicates good bullish momentum:

Basic Fundamental Reasons

Last but not least, fundamental reasons and events cannot be discounted. Cryptocurrencies are mostly correlated with each other — the money flows easily from one crypto to another — and uncorrelated with traditional markets. Because for most altcoins, and some say for bitcoin too, the valuation is based mostly on future expectation rather than present utility, big fundamental events could influence the market as a whole. However, over time cryptocurrencies exhibit more and more resilience against bans, slurs and other events that should be damaging them.

To this, seekingalpha once commented the real fundamental data for crypto are something else — the network activity data, how much do people transact, number of ATMs, p2p data, for altcoins newly used in the darknet also number of vendors and so on.

What also comes to mind here is how different the typical holders are in crypto when compared to traditional markets: There is still a lot of hodlers of cryptocurrencies who don’t really want to sell, or are willing to sell only some part to cover their initial investment. It is typical that people don’t want to short crypto, they either feel it’s still too cheap for what it can do or they feel like their money is safer in crypto than in a bank. In short, especially in BTC, ETH, XMR and IOTA, a lot of people are in for the long haul and don’t have the aim of filling spreadsheets with USD values of successfully closed trades to please their boss. This is what legacy people call ‘delusion’, at the present moment it forms the cryptocurrency markets though — and makes them better suited for technical analysis.

How to trade a ranging market

  • Short-Term: Look for bounds of the inner ranges and formations and scalp them.
  • Long-Term: Prepare to take substantial position at important points. Determine the “doom” bottom and set buys or the “upthrust” and set sells.

Short Term: Formation targets

If you are trading flags, channels, megafones and triangles, the height of these usually provides a short term target within the range.

Short/Mid Term: SCMR (Blue candle magic)

One of the very popular (paid) technical analysis suites for TradingView has been the SCMR. It provides the elusive colored candles — blue candle signifying a bullish shift in volume, suggesting bottom is near. Another popular feature are the dynamic levels which are basically better pivot lines. Traders use these very successfully.

Mid/Long-Term: Point & Figure

PnF charts are whole another magic. If you trade BTCUSD and don’t know PnF, stop by to the r/bitcoinmarkets Daily to search for posts by u/merlin560 and u/joyrider5 who post PnF summary regularly.

Mid/Long-Term: Fibonacci retracement

It’s anyone’s guess if the Fibonacci retracement stuff fundamentally makes sense but in 2017 most traders still use fibs to determine their targets, especially in a bull run that keeps reaching new ATHs where there is no previous data to draw resistance lines from. Some people do use simple pivots, but it seems that Fibs are still the most prevalent — which, if nothing else, makes them valid.

How to draw fibs from a correction/markdown

The correct way to draw Fibonacci retracement lines for a currection or a markdown is to start from the swing high and drag the fib all the way to the swing low. This way you get to where to the north the market can reach in recovery from the correction.

You can get a fib retracement from a corrective range too — drag from its high to its low on the timeframe where you see the range. It’s far from a bad idea to have several fib structures one over another to see which fib levels coincide.

Cryptocurrencies seem to be particularly fond of the following fib extension levels: 1, 1.618, 2.618, 4.236. These are the ones that you need to have ticked in your TradingView settings as a minimum.

How to draw fibs from a runup

If you want to see how far the market will correct from a runup, you do the opposite: start drawing the fib from the bottom to the high.

Fibonacci levels can provide longer term and swing targets if you use them on higher timeframes, even targets that will contain multiple ranges.

That’s all. Give it a thumb up if you find it useful!


Originally published at www.altcointrading.net on October 21, 2017.