Trading is not just ungrounded guessing the correct movement of the price; it’s a science that is based on specific methods, tools, and strategies. A technical analysis is the fundamental tool of any trader that helps define trends, outline the most likely changes, and predict price movements. The Wyckoff accumulation method was based on this analysis. Below, we’re going to discuss the method more precisely.
Being a talented and successful trader, Richard Wyckoff introduced his own method in the 1900s. We grounded a new concept of market analysis on his knowledge, skills, and experiences. Nowadays, the method is still widely used by modern traders as an effective tool for trend identification.
The Essence of Wyckoff Accumulation Theory
First of all, let’s define the answer to the main question “what is a Wyckoff accumulation”. By its nature, the method comes as a combination of diverse strategies and theories. Each component is designed to explain another approach to market analysis and define the best moment to accumulate or distribute funds. According to R. Wyckoff, trading is divided into 2 phases, namely:
- Wyckoff accumulation cycle
This pattern features the domination of large traders over retail ones to get their shares. - Wyckoff distribution cycle
Passing this phase, large dominating traders got these positions and started selling them.
Note that the Wyckoff theory is applicable to both classic and crypto trading. When it comes to crypto trading, high-volatility coins are perfect for this analysis. However, when trying to analyze coins with low volatility or short history, the theory may be not suitable due to the lack of information. Thus, the method stands as an effective tool for crypto market cycle analysis.
Wyckoff Analysis Basics
Although having been developed several decades ago, the method hasn’t lost its relevance in today’s trading landscape. It’s still popular and widely used.
3 Laws of Wyckoff Method
Wyckoff defined 3 laws that influence the price movement. It’s important to keep them in mind when analyzing the price chart:
- The law of demand and offer — a common economic pattern for the trade market analysis, based on defining the ratio of demand and offer.
- The law of cause and effect — the essence implies that any price movement is the consequence of any change and trader behavior.
- The law of effort and result — the pattern is used to clarify whether the market trend is going to continue movement in the same direction. Here, the trade volume is compared to the price action.
These laws define a better understanding of the trade market and a deeper analysis of the situation, which helps make more grounded conclusions.
“Composite Human” in the Wyckoff Theory
This notion contributes to a more proficient handling of trading tools and the analysis of the market as a whole. According to the Wyckoff theory, traders should perceive the market as an experienced human who is trying to beat them. If the market — a complex of measures, tools, and mechanics — is perceived as one human, it becomes easier to analyze him and develop correct strategies. It’s a common belief that the “composite human” is a large industrial-scale trader (like banks or other financial institutions) who affects the market significantly.
Wyckoff Price Cycles
This aspect of the Wyckoff theory is probably the most important. Before traders proceed to the following steps, they need to define at what stage the market is. Identifying the stage allows for choosing the best strategy for opening trades. The following stages of the Wyckoff market cycle are distinguished:
- Wyckoff accumulation.
- Rising trend.
- Wyckoff distribution.
- Descending trend.
Note that when speaking about the Wyckoff accumulation pattern, the phase implies that stronger traders try to displace weaker market participants and occupy their places, establishing a strong base for further growth. The accumulation phase of the Wyckoff theory starts after the descending trend, when the price reaches its lowest value. The phase itself is further divided into 6 small sub-types.
The Wyckoff distribution pattern is the phase when dominant traders sold their assets after continuous accumulation. The price chart enters this phase after the rising trend. Once the maximum price is achieved, traders sell their assets, stabilizing the chart, and turning it to the opposite direction.
5 Steps of Wyckoff Method
If you want to use the method for your trading career, sticking to the following algorithm helps avoid mistakes and make profitable deals. Pass the next sequence of steps before you open a trade:
- Determine at what phase the market is. Thus, you’ll likely understand the most evident direction of price movement. At this stage, the technical analysis application is required to define the best time to enter the market.
- Use harmonious assets for trading. Make sure to open the deal when an asset follows a common trend, i.e. the trader’s task is to find the asset, the value of which gets ahead the market. It means that its value rises more during rising trends and falls less during descending phases.
- Give preference to assets, the potential value of which exceeds your expectations. This analysis is carried out during accumulation patterns.
- Determine the type of bet to open. Will you trade short or long? Depending on your strategy, the risk and amount are selected. To determine the best types of deal (short or long), traders should define causes preceding each type.
- Be in harmony with the market. Wyckoff believed that it’s possible to develop a successful career only if you act in harmony with the market, i.e. change your strategy and accept chart twists. Thus, learn to foresee likely twists and minimize risks by adjusting trades.
Benefits of Wyckoff Strategy for Crypto Trading
Although the method was developed for the classic trading market, nowadays, its concepts are applicable to the crypto cycle as well due to high similarity. Though the crypto trading market features specifics, the fundamental points are common, which allows for applying the theory, gaining the following advantages:
- A high probability of successful trades for high-volatility coins.
- A comprehensible analysis for assets with a long trading history.
- Deep understanding of market mechanisms.
Although some skeptics do not apply the method to crypto trading, it comes as an excellent tool. The crypto market with its high volatility stands as the best field to use and test the Wyckoff method. Price movements are easily observed for Bitcoin Ethereum, and other popular tokens. The main thing is to apply it correctly, so the trader’s experience and skills are important.
