The Wyckoff Trading Cycle, also known as the Wyckoff Method, is a trading strategy that was developed by Richard D. Wyckoff, a stock market trader and analyst in the early 20th century. The Wyckoff Method is based on the concept that market prices move in predictable patterns, and that these patterns can be identified and used to make informed trading decisions.
According to the Wyckoff Method, the market moves through four distinct phases:
During the accumulation phase, large institutional investors, such as mutual funds and pension funds, are buying shares of a particular stock. This is typically a bullish sign, as it indicates that these professional investors have confidence in the stock’s future performance.
The markup phase is when the stock price begins to rise as a result of the increased demand from the accumulation phase. This is a good time for traders to consider buying the stock, as it is likely to continue to rise in price.
The distribution phase is when the large institutional investors begin to sell their shares of the stock. This is typically a bearish sign, as it indicates that these professional investors no longer have confidence in the stock’s future performance.
The markdown phase is when the stock price begins to decline as a result of the increased supply from the distribution phase. This is a good time for traders to consider selling the stock, as it is likely to continue to decline in price.
Three Laws of Wyckoff
The Wyckoff Method is based on three laws: the Law of Supply and Demand, the Law of Cause and Effect, and the Law of Effort vs. Result.
- The Law of Supply and Demand: This law states that the price of a stock is determined by the balance between the supply of shares available for purchase and the demand for those shares. When demand for a stock is high, the price will rise, and when supply is high and demand is low, the price will fall.
- The Law of Cause and Effect: This law states that every price move has a cause, whether it is a fundamental development or market speculation. By identifying the cause of a price move, traders can better understand the likely direction of future price movements.
- The Law of Effort vs. Result: This law states that the market moves in trends, and that these trends are characterized by periods of accumulation, markup, distribution, and markdown. The effort, or the amount of buying or selling pressure, and the result, or the price movement, can be used to identify the stage of the trend and make informed trading decisions.
By following these laws, traders can use the Wyckoff Method to identify trends and make informed trading decisions based on market patterns and trends.