Explained: The Wyckoff Method

One of the most helpful tools I’ve discovered for trading is The Wyckoff Method, created by Richard Demille Wyckoff, a pioneer in the studies of technical analysis, and one of the five “titans” of TA, along-side Gann (Gann Fans/Squares), Dow (Dow Theory), Merrill, and Elliot (Elliott Wave Theory). Below is a summation of what I’ve gathered and factored into my trading.

The Wyckoff avoidance method means to trade only the best assets in the leading market sectors.

Crypto is an emerging asset class, but there are already ways of determining which cryptocurrency has fundamental value. Focusing on the opportunities in those markets makes your decisions process much clearer:

• You want to buy/hold a fundamentally valuable asset when its price is not reflecting its value yet.
• You want to take profits and abandon an asset that is appreciating in the short term because of things like tiny market inefficiency or news hype.

FINDING THE MARKET WEAKNESS

You can use any of your favourite technical analysis tools that are good for spotting the weakness of a market — divergences would be a very early sign (and possibly a misleading one) but combined with a three-push formation and lower highs when seen relative to the Bollinger bands would be more reliable.

The general technical gist is that this transition is a substantial one, you should be looking for it on longer timeframes (daily, 3D or weekly charts). The market structure will be similar in all assets in the group you are looking at, but the weakening leader would display the crumbling more strongly.

Another important point in Wyckoff avoidance is to select assets that move in harmony with the market. The bigger picture and relations between different assets of the same class is often overlooked, but it is incredibly useful for market timing.

Assuming we are in a broad crypto bull market, if you can find cryptocurrencies that are performing consistently strong and if you can also find their counterparts, you have your best candidates for your long and short positions:

• Strong crypto assets rally quite easily. After the rally comes a retrace, but some of the gains remain.
• Weak crypto assets don’t rally consistently. If they do, the retrace kills all the gains.

On legacy markets, it is easy to compare an asset against a composite index: In a bull market, if an asset trades still well below a known resistance line and gains more than the index, it’s typically the strong performer.

The play there is to buy this particular asset, avoiding all the rest of the assets in its group.

The technically suggested time to sell comes when the price approaches a resistance area. Then you can look which stock was performing poorly in the rally: It’s is going to be the one that should drop the most in the coming retrace and therefore it is technically the best candidate for a short.

We now also have composite indexes in cryptocurrency markets, but the information you can get from them is still fairly questionable. Remember, the crypto markets are still very new.

Wyckoff’s insights are keenly relevant right now, and used well will help you make a good entry point as the bear market plays out its final stages. Add it to your toolbox