Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in)

Understanding Wyckoff Accumulation and Distribution Schematic – A Study of Stock Market Behavior

2 min read

Wyckoff Distribution schematic represents one of the methodologies traders and investors might use to understand the stages of a market top where security is distributed from professionals to the public before a downward trend begins.

Richard Wyckoff noted that small investors often found themselves at a disadvantage and were frequently outmaneuvered in the markets. To address this, he committed himself to educating the average investor about the inner workings of the markets, as exploited by influential players, or the “smart money.” In the 1930s, he established an educational institution, which evolved into the Stock Market Institute. The cornerstone of the curriculum was a course that encapsulated Wyckoff’s strategies for recognizing the patterns of large operators as they accumulated and distributed shares, along with techniques for aligning individual trading strategies with the actions of these market movers. His strategies have stood the test of time, remaining as relevant now as they were when initially formulated.

Here’s a brief explanation of each phase and element in the schematic:

Wyckoff Accumulation Schematic

This schematic is part of the Wyckoff Method, a technical analysis approach that aims to identify whether large traders (often referred to as “smart money”) are accumulating (buying) or distributing (selling) their positions. Here’s a breakdown of each phase and element:

Phase A: Marks the stopping of the prior downtrend. “SC” stands for Selling Climax, where the market experiences a wide spread of prices and heavy volume. This is often the result of panic selling. The “AR” (Automatic Rally) follows, which is a rebound in price from the selling climax. This establishes a range for the market.

Phase B: Is characterized by a trading range established by the SC and AR, where the stock is being accumulated by large interests. It’s where the market builds a cause to support a new uptrend. The price swings, like the “ST” (Secondary Test), test the supply/demand balance at the edges of the range.

Phase C: In this phase, the market tests the supply/demand balance for the last time before a new uptrend begins. The “Spring” (or shakeout) is a below-support price movement that is quickly reversed and can be accompanied by a test of this low.

Phase D: Is where the demand has overcome supply and the price begins to move out of the range. “SOS” (Sign of Strength) is the initial price movement that signals that the stock is likely to move higher. “BU” (Back-Up) or “LPS” (Last Point of Support) is a higher low test that confirms the presence of demand after a SOS.

Phase E: Marks the emergence of a new uptrend as the price exits the trading range, presumably leading to higher prices.

The schematic also features “Resistance Lines” and “Support Lines.” These lines are determined by the price points established in Phases A and B and typically represent areas where buying (support) or selling (resistance) is significant.

Wyckoff Distribution Schematic

Phase A: The market stops trending upwards, and the initial signs of a distribution phase begin to emerge. This is where the demand from the previous uptrend is drying up (PSY: Preliminary Supply), and a significant supply entering the market is indicated by a buying climax (BC).

Phase B: This phase is marked by a trading range where supply and demand are in relative equilibrium, with neither side in full control. You’ll see tests for both supply and demand in this range. “SOW” stands for Sign of Weakness, indicating that the market may be starting to show signs of distribution and supply is starting to overwhelm demand.

Phase C: A key turning point where the market tests the remaining demand. “UTAD” stands for Upthrust After Distribution, which is a false breakout to the upside that traps buyers before the market begins its downward trend. The “Test” following the UTAD checks the demand at the higher price level and often occurs on lower volume, suggesting the absence of strong demand.

Phase D: This phase confirms the distribution hypothesis. The price fails to reach the previous highs set in Phase B and Phase C, indicating that supply is in control. “LPSY” stands for Last Point of Supply, offering the last opportunity for professional interests to sell their remaining long positions.

Phase E: This is where the markdown phase begins, and the price starts to trend downward as the distribution phase is complete and the supply has taken over demand.

The schematic also shows “Resistance Lines” at the upper boundary and “Support Lines” at the lower boundary of the trading range. These lines represent price levels where selling pressure tends to overcome buying pressure (resistance) and where buying pressure tends to overcome selling pressure (support), respectively.

Richard D. Wyckoff, a pioneer in the technical approach to studying the stock market, developed these schematics. His theories are still studied and applied by modern traders and technical analysts to understand the intentions of larger traders and anticipate potential market moves.

Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in)

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