Discover the Wyckoff Trading Method and Use it in Your Daily Trading
The Wyckoff Trading Method is a logical approach to long-term investing and intraday trading used by many successful and knowledgeable traders.
This method involves reading price bars and volume to deduce the purpose of institutional traders, referred to as “smart money.” By anticipating future price movements, you can profit from them.
This article was published first at CryptoDROI.com
The crypto space is full of opportunities for investors and traders. Sometimes it can be challenging to figure out how to proceed without guidance.
The Wyckoff trading method is an emotional-free approach to trading and investing. The Wyckoff investor’s toolbox includes systematic techniques that help traders and investors reduce risk and increase their chances of success.
Applying the Wyckoff approach can be difficult due to the many variations in how the market action can play out. However, the foundation on which the method is based is quite simple.
In simple words, Wyckoff is a technical trading strategy that combines trading principles and simplified charts to identify market patterns.
The basis of the Wyckoff trading method consists of two goals, three laws, and five steps, all of which can be stated in relatively few words. Anyone who builds their understanding of the Wyckoff approach on this foundation can always be successful, no matter how complex the market curves are.
One of the goals of Wyckoff’s approach is to generate profits on a sufficiently consistent basis, that they exceed the available rewards of fixed trade where the return is guaranteed, and those returns exceed the guaranteed returns of a margin wide enough to make an effort worth it.
Generating profits is not the most crucial goal of the Wyckoff trading method. The most important objective is the preservation of capital. Every time you enter a market, you are putting your money at risk. There is no way around it. However, you can still manage the risk.
Wyckoff teaches that you should take no position unless you have a predetermined exit strategy. Markets offer tips as stops and options that help manage risk. One or more of these tools must always be in place when taking a position.
Protecting capital should never be an afterthought. Having something in mind to do later if developments warrant it often does nothing until the pain of loss becomes excruciating.
Is it possible to apply the Wyckoff trading method to Gunbot? Absolutely! After reading this simple crypto trading article, you will learn how to implement Wyckoff’s logic in your automated trading activities.
The Three Laws of Wyckoff
The three laws underlying the Wyckoff trading method are the law of supply and demand, the law of cause and effect, and the law of effort vs. results. Let’s see how we can apply these laws to the cryptocurrency markets.
- The Law of Supply and Demand Applied to the Crypto Market
The price of each trade rises or falls due to an excess of demand over supply or supply over “wants” expressed in the form of urgency to exchange dollars for assets or exchange assets for dollars.
The law of demand says that at higher prices, buyers will demand fewer crypto assets. In comparison, the law of supply states that sellers will supply more crypto assets at higher prices. These two laws interact to determine the actual market prices and volume of assets traded on the crypto market.
2. The Law of Cause and Effect Applied to the Crypto Market
The law of cause and effect establishes that the excesses that develop in supply and demand are not random but result from key market action events or preparation periods. The Wyckoff trading method teaches what these developments are and how to judge when they occur to take advantage of the excess supply or demand that will follow.
In other words, when accumulation is the cause, an impending uptrend will be the effect. By contrast, when the distribution is the cause, an impending downtrend will be the effect.
3. The Law of Effort vs. Results Applied to the Crypto Market
This law indicates that the evolution of the price of a coin is the result of an effort expressed by the volume level, and the harmony between action and outcome favors a more significant growth of prices. In contrast, the lack of balance promotes a change of address.
When the price action and volume are in tune, it means that the trend is already confirmed. It is most likely that the trend will continue on its course. However, when the price action and volume are not in tune, it is more likely that the trend will consolidate or even reverse.
The Wyckoff Composite Man Logic
Richard Demille Wyckoff (1873-1934) was an early 20th-century pioneer of the technical approach to studying the asset markets. He is considered one of the five titans of technical analysis, next to Charles Dow, W.D. Gann, R.N. Elliott, and Arthur. A. Merrill.
Wyckoff was an avid student of the markets and an active reader and trader of duct tape. Wyckoff proposed a method to help understand the price movements of assets and the market as a whole: The Composite Man.
“… ALL THE FLUCTUATIONS IN THE MARKET AND ALL THE DIFFERENT ASSETS MUST BE STUDIED AS IF THEY WERE THE RESULT OF ONE-PERSON OPERATIONS. LET’S CALL HIM THE COMPOSITE MAN, WHO IN THEORY SITS BEHIND THE SCENES. AND MANIPULATES ACTIONS TO YOUR DISADVANTAGE IF YOU DON’T UNDERSTAND THE GAME WHILE PLAYING IT; TO YOUR GREAT ADVANTAGE IF YOU UNDERSTAND IT. “- WYCKOFF
He advised traders to understand and play the market game, as the Composite Man was an actual entity playing him with a know-it-all formula. The composite man plans, execute, and carefully concludes his campaigns.
The Composite Man prompts the public to buy an asset in which he has already accumulated a considerable baseline by doing many transactions involving many assets and advertising their capital to create the appearance.
The Composite Operator has a lot of money and wants to enter the market. One way to do this is to move the market, which will help it penetrate.
Financial trading is a zero-sum game: As some people win, other people lose. If one entity controls the market, it has a strong incentive to move the market against the herd, so other people fail, making a profit.
It would help if you studied the charts to judge the behavior of the asset and the motives of the prominent traders who dominate it.
With study and practice, you can acquire the ability to interpret the patterns behind the action that a graphic depicts. Wyckoff and his associates believed that if you could understand the behavior of the composite human market, you could identify many business and investment opportunities early enough to take advantage of them.
Below are Wyckoff’s ideals:
- Buy in Accumulation
- Sell in Distribution
It’s pretty straightforward to put that in perspective and analyze which cycle most coins are in, just by looking at any old coin chart.
Wyckoff’s Five-step Approach
There are general procedures that the Wyckoff trading method implements. These are the five steps.
- Determine the trend and position of the market in which you are trading:
The most important thing you can distinguish about an individual marketplace or topic is its movement and which way is going because the trend is the path of least resistance. The trend indicates the direction in which the price wants to move.
Profits are more likely to be made when established positions align with the direction the price has already indicated it wants to move.
Once a trend has been established, the future trend is likely to be the same as the current trend until the price reaches a position in that trend or exhibits price and volume action, indicating that you must anticipate a change in direction.
To keep it simple. Look at the charts and answer these questions. Is the market consolidating (indecisive) or trending? By analyzing the market structure, can you tell the direction likely to go soon?
2. Determine the relative strength or weakness of the asset you’re studying:
This method is straightforward but very important to achieve consistent crypto trading success. It’s always important to trade in line with the market.
In a bullish market, pick coins that are performing better than the market. For example, look for coins with higher percentage increases during rallies and smaller drops during reactions.
In a bearish market, do the opposite. If you are unsure about a specific coin, skip it and move on to the next one.
Traders who take positions consistent with the line of least resistance are more likely to get positive results than traders who try to fight the trend. It is always better if the market is working for you than against you.
Trading in line with the market means going long when the Wyckoff wave measures the market is in a defined uptrend channel and taking short positions when the market is in a defined downtrend channel.
When the defined trend is neutral or within a trading range, trading in line with the market may mean standing on the sidelines and letting the bulls and bears fight for control of the crypto or considering opportunities from both sides of the market.
3. Select the coins whose cause is likely to produce an acceptable effect: Determine how prepared you consider tackling its cause.
This method was intended to help you avoid marginal trades. Wyckoff teaches us to select only the coins that have built a cause. A cause can be defined in several ways.
In step three, Wyckoff uses a number chart to indicate how far a show’s price is likely to be from its current level. You can obtain this indication by counting on a graph of numbers.
To measure the number, you select the appropriate price level in the horizontal formation and count the number of horizontal divisions on the chart, starting on the right side and ending on the left side.
You count all horizontal splits, both those with post and those without it. The total number of horizontal divisions is the count. Indicates how far the price is likely to move from the level at which you made the count.
THE KEY TO SUCCESSFUL CRYPTO TRADING IS TO FIND COINS THAT ARE ACCUMULATING OR RE-ACCUMULATING.
These are coins that have enough reasons for the investor to take long positions on them.
Therefore, before selecting coins, you must first assess whether they are exhibiting signs of worthiness. Only then should you decide whether to take long positions (buy) or not.
4. Determine the availability of cryptocurrency to move:
Here, Wyckoff tells us to determine the availability of inventory to proceed. Wyckoff identifies a potential spring position as price penetration of a previously defined support level.
For a potential spring position to be worth considering as an entry point to the long side, price spreads should be narrowing day by day as price approaches and penetrates the support level. Usually, this type of price action in combination with decreasing volumes results in the highest quality springs.
Suppose the price reacts to a spring position as it should with a rally. The answer, in the vast majority of cases, will be followed by a spring test.
Here’s a breakdown of what happens when a Wyckoff Spring takes place: A coin falls below its trading range and makes a new low sell frenzy, then “springs” back into its previous range, and usually occurs when there is a sell-off event.
5. Establishing a position:
The last step in the Wyckoff trading method is the one that results in establishing a position. Wyckoff tells us that we need to synchronize individual issue transactions with anticipated trends in the overall market.
While it is true that there are always individual issues that make substantial movements in the opposite direction of the general market, most move with the crypto market to some extent.
Identifying a point in general market action from which it is likely to change in the direction of an established trend or initiate the development of a new movement and take a stand on an individual issue at a time.
As a Wyckoff trader, you have a better chance of profiting from that spot and making a better profit than if the position is randomly established. Time passes from individual issues to projects anticipated in the market in which they’re traded.
Learning how to properly apply each of these five steps is what makes a trader or investor successful. Most of what the Wyckoff trading method teaches are the finer details of using these steps.
The Accumulation of Wyckoff
Accumulation is the process of holding a particular asset over some time. The accumulation phase is a period of range and side limit that occurs after a prolonged downtrend.
The accumulation stage is where the more prominent players try to build positions and get rid of the smaller fish without causing a more considerable price drop or starting the new trend. Your goal is to maintain this phase until you fill all your positions, hence the name “accumulation.”
The sole purpose of accumulation is to maintain and improve trade timing. It helps in establishing a position in the market that makes it possible to profit.
According to Wyckoff, there are six different parts of the build-up phase, all with one important function.
Here are all phases available in the Wyckoff trading method.
(PS) – We have “Preliminary Support.”
The PS happens when a long-overdue bearish move and we start seeing signs of high volume and widening spreads. Also, here we see the first indication that the sale may end as soon as buyers start showing up.
(SC) – Known as the “Sales Climax.”
The SC is where PS breaks out, and the price begins to sell off violently. The sales climax refers to as the panic selling phase. At this point, costs can jump well above their norms, and spreads can reach extremes.
Often, the price will close far from the low, and a candlestick chart view will show a colossal wick.
(AR) – The Automatic Rally
The AR is where late sellers get punished. Once the price has sold off violently and the selling pressure is no longer dominant, buyers reverse the price with almost the same level of intensity as the selling peak but in the opposite direction.
The automatic rally is the result of short sellers’ hedging positions. The top of this point will often define the upper end of the range for subsequent consolidation.
(ST) – The Secondary Test
Here, the price revisits the bottom of the structure but in a much more controlled way. The sellers mustn’t increase the volume. It is prevalent to have many secondary tests.
Spring: With cryptocurrency, this pattern is quite usual with Altcoins, which have hit rock bottom for quite some time. The spring happens when a challenging test of the low occurs again to track participants into believing the trend is starting to fall again.
The spring is almost the equivalent of “swing failure pattern” behavior. You should note that this displacement is not always necessary. From there, the price should react by quickly regaining the previously lost structural level.
(LPS, BU, SOS): The Last Fulcrum, Save and Signal Strength.
The following behavior patterns should be evident changes in the price action of the previous activity at the start of the range. The last fulcrum is where the price begins to regain the microstructural pivot points that you previously established.
Often, the sign of strength can take place immediately after spring. Frequently, this will be a rapid, one-sided move, meaning buyers are in total control. The volume towards the end of the range should be high and result in significant cover.
What follows this range is known as the margin. At that point, the write is complete, and the market will often be left to continue the upward movement resulting in a prolonged positive response.
Ultimately, the purpose of this whole structure was to cause turmoil and confusion so that the more prominent players could source their supplies from the smaller ones.
One of the essential details of this activity is the observed volume. We want to see the following return to low volume at the beginning of the range following massive sales.
More importantly, after the spring and finally, we should see that the purchase volume significantly impacts the price movement through the SOS and profit margin.
Wyckoff was a firm believer in the idea that traders must understand the “Real Rules of the Game” of speculation.
Still, in a time where automated trading systems rule. How can we take advantage of these powerful tools and use a trading software like Gunbot to profit?
How to Implement the Wyckoff Trading Method in Gunbot
One of the critical things in investments is discipline. Without it, human nature will often work against you. For this reason, professional developers created crypto trading algorithms to help individuals like you become successful traders.
Gunbot is a community-made crypto trading bot that trades cryptocurrencies with great frequency. It uses a precise analytical approach to trading strategy development.
The key to trading with Gunbot lies in learning how to follow the small price swings and understand their volume relationship. This information helps you prepare for future price movements in either direction.
Successful Gunbot traders combine that basic understanding with the bot’s included strategies.
Then, they fine-tune these crypto trading methods to match their trading style. Gaining and reinforcing your trading knowledge is the best way to understand how the markets and their assets are performing and, more importantly, how you can expect they will act in the future.
So, how can you apply the Wyckoff trading method to Gunbot?
You can use Wyckoff’s method to analyze the coins you want to choose for trading. That extra knowledge will give you a head start, and you can use it as your “edge.”
Always select coins that are growing and ready to move with the market and ready to jump from fear into new or continued up trends. Ideally, you want to find those coins that are ready to lead the market upward so you can trade them.
Then you can trade those “well researched” coins with a Gunbot strategy like the “StepGrid,” which is an excellent choice for accumulation.
Other methods like Support and Resistance and risk management techniques like DCA, or even Reversal Trading, a Gunbot unique feature, can help you apply the Wyckoff trading method to your overall strategy.
You can switch your timeframes from scalping to longer-term swing positions if you want to boost risk to reward ratios. Many successful traders use this approach because it provides a means to anticipate the future market direction reliably.
You can also use the Wyckoff trading method with the Gunbot Bollinger Bands strategy. All you need to do is treat the lines in the Bollinger Bands as your guidelines, and instead of looking for new lows or new highs in terms of price, you look at their distance from the bands.
Regardless of your strategy choice, you will trade more efficiently and get faster results using the ultimate crypto trading bot!
I can agree if you say that the Wyckoff trading method is old. Still, it’s an excellent trading method that works because it is supported by a profound understanding of how we as human beings behave. All you have to do is apply the context to the crypto market.
The accumulation of Wyckoff is one of the most critical technical analysis methods. It would help if you did not understand altcoin trading as an automatic buying or selling point only. While most offer the opportunity to profit, some are likely to be more profitable than others.
The Wyckoff trading method is a set of tools traders and investors use to reduce risks and increase their chances of success. An extensive study offers a logical approach to decision-making rather than letting emotions lead the way.
One point to consider in determining which prominent trading positions are better than the others is the signals provided by the indicators in the charts. Those that indicate the highest potential are likely to provide the highest returns. You can do all this using the Wyckoff trading method.
Understand the Current Position of the Cryptocurrency Market.
The cryptocurrency market is about to make a big move. Are we in an uptrend? Is this an expected reaccumulation that sometimes happens in an ongoing uptrend? Have we reached the final stages of accumulation?
By judging these factors, we can determine what’s coming next.
Having even a basic understanding of this model and dynamics is invaluable knowledge that you can use to improve any trading system.
However, you must always be cautious of the risks, especially when dealing with cryptocurrency. Remember that investing in the crypto market is a long-term strategy, and patience is critical to seeing your return.
“Successful Crypto Trading Relies on Consistency,” and your crypto bot will help you achieve it so if you don’t want to stay glued to the screen 24/7. Don’t Delay, and Get Gunbot Today.