Wyckoff Accumulation Theory – All You Need To Know

Traders usually use different analytical techniques to analyze market performance. They study the supply and demand patterns to assess the market index. One of the commonly used technical analysis techniques is The Wyckoff Method. Investors use this method in traditional financial markets to make decisions during indecisive conditions.

Wyckoff Accumulation is an essential technique used in the markets and got its name from one of the pioneer technical analysts of the 20th century, Richard Wyckoff. He classified the patterns in the market into four distinct phases.

As far as cryptocurrencies, especially Bitcoin, is concerned, not every Wyckoff accumulation phenomenon leads to the recovery of market prices under challenging conditions.

This guide article will elaborate if implementing Wyckoff accumulation as a trustworthy option while trading crypto assets. Moreover, the events and phases during the cycle will also be explained.

What is Wyckoff Method?

In the financial sector, the Wyckoff method refers to studying the accumulation phase of the trading cycle. This method is helpful for new traders in the market, where they can explore the past patterns of prominent market participants to invest their assets properly. Current traders consider it a reliable method to read market prices and make sound decisions.

According to this method, before any price movement, these ranges are ascribed by the major players in the market. The primary aim of this method is to figure out the correct direction of price movement.

What are the Three Wyckoff Laws?

Traders must have a proper understanding of Wyckoff laws before properly implementing the Wyckoff method on the market mechanism. The three fundamental Wyckoff laws are explained below.

  • The Law of Supply and Demand

This is the basic fundamental law that operates all kinds of markets. The change in supply and demand phenomenon moves the market prices. The prices in the market move up when the supply of any commodity is more than its demand in the market and vice versa. However, if the supply and demand of an item equalize each other, the price does not change.

After implementing this law in the crypto market, it was observed that traders might see a bull market if the demand for any asset is more than its supply. Similarly, if the market supply is higher, a bear market will result in a downtrend of prices. One should remember that one cannot only use a price chart to determine the exact supply and demand phenomenon.

However, the relationship between the supply and demand phenomenon and price movement can also be predicted by comparing trading volumes with price actions.

  • The Law of Cause and Effect

According to this law, the difference between the demand and supply of any asset has an underlying logic, and it is not random. This law is explained correctly by the two terms accumulation and distribution.

In the economic sector, the initial preparation period is followed by the accumulation phase. An uptrend in the prices can be observed after the accumulation of assets. On the other hand, prices might follow a downward trend after distribution events.

  • The Law of Effort and Reason

This law states that price movement in the market is due to an effort exerted by a particular entity. The existing trend in the market may increase for longer when the same behaviour is shown by the trading price volume. However, a divergence might be created in the market if the price action is not affected by trading volume.

In the case of Bitcoin, where the price may be following an upward trend, there might occur a situation where the price may not be high enough, but the trading volume is relatively much more elevated. In this condition, the cost and volume do not follow the same trend in the market. Therefore, there is a possibility that the trend might reverse soon.

What is a Wyckoff Price Cycle?

Wyckoff analyzed the trading practices of all the successful traders in the market and recorded their behaviours during the trade activity in graphs and charts. Moreover, he also noticed how the significant participants in the market reacted to the bull and bear markets during the price cycle. He analyzed the price fluctuation based on different factors in the market, explained below.

  • Demand and Supply Phenomenon

The fluctuation in the supply and demand phenomenon in the market decides the direction of market movement in the Wyckoff price cycle. All the trade and investment in the Wyckoff method is carried out on this fundamental rule.

Once the demand for an asset overpasses the supply, the prices will hike automatically. On the other hand, prices may face a downfall if the opposite process happens.

To earn maximum profit, traders should study the supply and demand phenomenon keenly and contrast it with other factors. However, it requires a lot of practice and patience to determine it correctly from the price charts.

  • Price Action

By observing the price of any asset in the market, the direction of its price can be anticipated. It helps yeh traders to correctly determine the price fluctuations in the crypto market. However, there are several other indicators, such as order flow, support resistance, candlestick, etc., used by the investors and price action to ensure correct directions.

Bull pressure may be expected in the market if the price hits above resistance levels. The accumulation phase is the range in the Wyckoff price cycle, and a robust bullish character can be expected if any price action crosses it.

  • Trading Volume

Trading volume is used in integration with the price action to determine bear or bull markets. When the trading volume reaches a specific range, one might expect a bear market from the accumulation area or a bull market from the distribution range.

  • Time Frame

The most important feature of the Wyckoff price cycle is the time frame. As the market keeps on fluctuating between the markup and markdown, therefore if the timing of the market is correct, only then can one expect the accurate position to sell or buy assets.

Traders can shift to a lower time frame if the prices stay within the trading range given. This marks an appropriate opportunity to enter a trade. Once the accumulation phase is over, the main aim is to open a buy position in the market and a sell position after the distribution phase ends.

What is Wyckoff Accumulation?

The Wyckoff market cycle theory consists of four phases: accumulation, markup, distribution, and markdown. Each of these phases describes the way more significant participants of the market drive it in a particular direction.

Wyckoff accumulation is the very first step of this market cycle, and it is created when prominent market entities trigger the demand and supply phenomenon. This results in higher lows in the market, making further highs because of greater interest. During this, the price pushes the markup phase of the Wyckoff market cycle as it crosses the upper line of the trading range.

Events and Phases of Wyckoff Accumulation

During the accumulation phase of the Wyckoff market cycle, the prominent participants in the market accumulate assets while preparing for the next bull market to occur within the trading range (TR) provided.

This creates a situation where the assets being bought increase in ratio to those sold. This causes a significant drop in the supply of assets that ultimately recovers the price ratio above the TR mark.

Therefore, to move out of the TR range, it is necessary for small-scale traders to identify the speed and direction of the price before adopting the Wyckoff accumulation strategy. They can also seek help from the pattern created by Wyckoff accumulation in the past.

In the first phase of Wyckoff accumulation, traders can see the exhaustion of the previous downward trend. In the beginning, trading volumes increase, that in turn, increases the buying pressure. This period is termed Preliminary support (PS). It is an indicator that the bear market is about to end soon.

Next, when the price decreases to reach the selling climax (SC), the downward trend finally ends. It is the point where the prominent participants in the market absorb the selling pressure in the financial market; thus, the short positions are taken by the traders. This results in rebounding the price back to the higher boundary of the Wyckoff trading range, known as the AR level.

Then a secondary test (ST) is carried out, and the price may fall below it after returning the prices around the selling climax. In Wyckoff accumulation, there is possibly more than one secondary test that may lead to the next phase of price consolidation. This means that assets have already been accumulated by the traders in the prediction of this markup phase.

This brings higher trading volumes that result from the reunion of SC and ST levels. On the other hand, one might face decreasing volumes from the retreatment of the AR levels that indicate that during the decline periods, liquidity may be tiring. This means that the asset is ready to move to the next phase.

The next phase begins with a testing phase where the prominent market participants look for supply resonance. Moreover, the entire logic of the Wyckoff market cycle may be proved invalid if there is a sudden increase in the number of sellers in the market. Therefore, during the test period, it may cause a sudden price rise.

However, when the price increases above the AR level, the test period ends. This is an indication of a so-called sign of strength (SOS). This then leads to another position known as the last point of support (LPS).

It is the second last phase where the complete price action of the Wyckoff accumulation theory takes place. This shows that the market demand is more than the market supply.

Therefore, the last point of support (LPS) is an excellent point for investors to make their place in the financial market. In the final phase, the asset enters the markup phase of the Wyckoff market cycle by leaving the trading range entirely.

Trading Crypto By Using Wyckoff Accumulation

As far as the crypto market is concerned, it is not necessary that Wyckoff accumulation will lead to enormous price rebounds. Traders can profit from the issues and problems that might occur during the Wyckoff accumulation by employing a range-bound strategy.

While looking at the automatic rally level as the primary target, they can open a long position on the secondary test range.

During any false breakout event in the market, traders can place a stop-loss lower than the secondary test (ST) level to decrease the possibility of any further loss. Moreover, the traders who aim for long positions in the market might need another confirmation in addition to the primary catalysts related to the crypto asset.

However, the traders might take some precautionary measures before entering the Wyckoff cycle and wait for it to reach the second last phase. After the price has broken the SOS point, this is an appropriate position for traders to enter the market. Moreover, the traders should leave a margin for exiting the trade with more minor losses by placing a stop-loss position below the SOS.

What Happens at the End of Wyckoff Accumulation?

After the completion of Wyckoff accumulation, the demand for assets sharply increases than their supply in the financial market, resulting in a sudden price hike. An impulsive bullish pressure will strike the market, and the traders will get the opportunity to earn profit via the buying positions created by the bull market.

Different Wyckoff Approaches to Trade Crypto Assets

Here are some methods to explain the practical implementation of Wyckoff accumulation in the crypto market.

  • Aggressive Entry

Traders must find three critical points of the accumulation phase after keenly studying the price before aggressive entry. The prices are ready for movement once the spring phase ends. However, to return to the bull market, traders must focus on the critical events occurring in the financial market along with the prices and trading volumes.

  • Range-Bound Strategy

After a prolonged bearish environment that may last for a few months, look for a 200-day moving average. Using this, mark the low and high of the market range. After the price reaches the lower range and gets rejected, make a buy trade. Similarly, when a higher range is denied, it marks a sell trade.

However, the traders must use a correct tight loss along with a buffer, as the range may be crossed by the market price at any time.

  • Conservative Entry

Followed by a strong breakout, the traders might join a bull market using a conservative approach. The price would not directly hit the target level after crossing the spring but create some fluctuations to allow the traders to earn some profit without any risk.

  • Reaccumulation Strategy

Following the accumulation phase, where the prices follow the upward trend, if it tends to move further, they will start accumulating orders.

However, the price will move within a given range in this phase and then concentrate to a support level known as creek before the breakout event. The resistance located just after the creek is the entry point in the cycle, and the stop loss can be found below the support level.

Is the Wyckoff Theory Reliable?

Traders looking for the fundamental core of any trend might find the Wyckoff accumulation theory beneficial. However, one cannot guarantee its efficiency every time. In certain situations, traders might buy an asset because of support, and any resistance in the market may cause them to sell it.

The higher probability trades become pretty easy if the trader understands the basic concept of price markup and the accumulation phase. The price movements in the market and future prices can be predicted in the crypto market by using this technical analysis. The Wyckoff accumulation theory assists investors in predicting price directions and targets correctly.

However, there are always certain limitations attached to trading techniques. There is no technical tool in the financial sector that may guarantee 100% profit to traders.

It is not necessary that every step of the Wyckoff accumulation theory will be followed by the market movement. In addition, even if all the stages of this theory are followed, this does not ensure that it will lead to profit.

Therefore, implementing and utilizing all the steps and guidelines of the Wyckoff accumulation theory ensure its reliability and usefulness.

Conclusion

Although it was developed a hundred years ago, the Wyckoff accumulation theory still proves relevant in the current crypto market. Market experts believe that this theory is a lot more than just a technical indicator.

It helps the investors to understand the market cycles, future market trends, and price fluctuations, in addition to assisting them in providing a barrier to all these market swings.

Successful trading in the crypto market can only be carried out by thoroughly and keenly monitoring all the phenomena taking place. Therefore, traders are always advised to seek professional help and take preventive measures to avoid any losses and scams to earn a good profit.