The Wyckoff Method - Making Money The Wyckoff Way

The Wyckoff Method: Making Money the
Wyckoff Way
By
ALAN FARLEY
Legendary technician Richard Wyckoff wrote about financial markets in the

early decades of the 20th century at the same time as did Charles Dow,
Jesse Livermore, and other iconic market analysis figures. His pioneering
approach to technical analysis known as the Wyckoff Method has survived
into the modern era. It continues to guide traders and investors in the best
ways to pick winning stocks, the most advantageous times to buy them, and
the most effective risk management techniques to use.
Wyckoff’s observations on price action coalesced into what’s known as the

Wyckoff market cycle. It’s a theory that outlines key elements in price trend
development that are marked by periods of accumulation and distribution.
Four distinct phases comprise the cycle: accumulation, markup, distribution,
and markdown. Wykoff also defined rules to use in conjunction with these
phases. These rules can further help to identify the location and significance
of price within the broad spectrum of uptrends, downtrends, and sideways
markets.
KEY TAKEAWAYS
• The Wyckoff Method is a technical analysis approach that can help

investors decide what stocks to buy and when to buy them.
• The Wyckoff market cycle reflects Wyckoff’s theory of what drives a
stock’s price movement.
• The four phases of the market cycle are accumulation, markup,
distribution, and markdown.
• According to Wyckoff’s rules, a price trend never repeats itself exactly
and trends must be studied in context with past behavior.
• The Wyckoff Method can help investors make less emotional, better-
informed decisions about when to buy and sell stocks.
Wyckoff Rules
These rules are derived from Wyckoff’s studies and experience charting the
stock market.
Rule 1: The market and individual securities never behave in the same
way twice.1 Rather, trends unfold through a broad array of similar price
patterns that show infinite variations in size, detail, and extension. Each
incarnation changes just enough from prior patterns to surprise and confuse
market participants. Many modern traders might call this a shapeshifting
phenomenon that always stays one step ahead of profit-seeking.
Rule 2: The significance of price movements reveals itself only when

compared to past price behavior.1 In other words, context is everything in
the financial markets. The best way to evaluate today’s price action is to
compare it to what happened yesterday, last week, last month, and last year.
A corollary to this rule states that analyzing a single day’s price action in a
vacuum will elicit incorrect conclusions.
Additional rules:
Wyckoff established simple but powerful observational rules for trend

recognition. He determined that there were just three types of trends: up,
down, and flat. In addition, there were three-time frames: short-term,
intermediate-term, and long-term. He observed that trends varied significantly
in different time frames.
This set the stage for future technicians to create powerful trading strategies
based on their interplay. Alexander Elder’s Triple Screen method, outlined in
his book, Trading for a Living, offers an excellent example of this follow-up
work.2
Wyckoff Market Cycle

The Wyckoff market cycle theory supports the Wyckoff method. It defines
how and why stocks and other securities move. It’s based on Wyckoff’s
observations of supply and demand, and that the prices of securities move in
a cyclical pattern of four distinct phases. Investors and traders use Wyckoff’s
market cycle to identify a market’s direction, the likelihood of a reversal, and
when large investors are accumulating and selling positions.
The Wyckoff market cycle phases are accumulation, markup, distribution, and
markdown. Essentially, the phases represent the behavior of traders and can
reveal the direction of a stock’s future price movement.
Generally speaking, the accumulation phase forms as institutional investors

increase their buying and drive demand. As more interest develops, the
trading range displays higher lows as prices position themselves to move
higher. With buyers gaining power, prices push through the upper level of the
trading range. At this Markup phase, a chart will show a consistent upward
trend.
In the distribution phase, sellers are trying to gain the upper hand. The
horizontal trading range in this phase will display lower price tops and a lack
of higher bottoms. The markdown phase is a time of greater selling. It’s
confirmed when prices break below the established lows of the trading range.
Once this fourth and final phase of the Wyckoff market cycle finishes, the
entire cycle will repeat itself.1
Wyckoff Accumulation
A new cycle begins with an accumulation phase that generates a trading

range. The pattern often yields a failure point or spring that marks a selling
climax, ahead of a strong trend that eventually exits the opposite side of the
range. The last decline matches algo-driven stop hunting often observed near
downtrend lows, where price undercuts key support and triggers a sell-off.
This is followed by a recovery wave that lifts the price back above support.
Markup
The markup phase then follows, measured by the slope of the new uptrend.
Pullbacks to new support offer buying opportunities that Wyckoff calls
throwbacks, similar to buy-the-dip patterns popular in modern markets. Re-
accumulation phases interrupt markup with small consolidation patterns,
There are also steeper pullbacks which Wyckoff calls corrections. Markup
and accumulation continue until these corrective phases fail to generate new
highs.
Wyckoff Distribution
The failure to generate new highs signals the start of the distribution phase.
This phase displays rangebound price action similar to the accumulation
phase but marked by smart money taking profits and heading to the sidelines.
In turn, this leaves the security in weak hands that are forced to sell when the
range fails in a breakdown and new markdown phase. This bearish period
generates throwbacks to new resistance that can be used to establish
timely short sales.
Markdown
The slope of the new downtrend measures the markdown phase. This
generates its own redistribution segments, where the trend pauses while the
security attracts a new set of positions that will eventually get sold. Wyckoff
calls steeper bounces within this structure corrections, using the same
terminology as the uptrend phase. Markdown finally ends when a broad
trading range or base signals the start of a new accumulation phase.
Apply the Wyckoff Method to Your Trading
• Familiarize yourself with the five steps of the Wyckoff method as well
as the Wyckoff cycle.
• As you track your target stocks, note the Wyckoff accumulation and
distribution phases.
• Place your trade when a stock's price moves from accumulation to
markup or distribution to markdown.
• In addition, place a stop-loss order at the opposite side of the trading
range.
• Keep tracking your stock and exit your trade when either price or
volume, or both, indicate a phase is changing.1
Wyckoff Method
The Wyckoff method is underpinned by Wyckoff’s theories, strategies, and
rules for trading. Here’s a summary of the principles of this step-by-step
approach to selecting stocks and timing your trades.
1. Establish the overall market’s current trend and most likely future direction.
Assess whether supply and demand indicate that the market is positioning
itself to move up or down.
2. Select stocks that follow the same trend. Especially those that show
greater strength than the market during upswings and less weakness during
downturns.
3. Select stocks that are under accumulation (or in distribution if you're

selling). These stocks have the potential to increase in price to meet and
possibly exceed your price objective.
4. Decide whether a stock is ready to move. Examine the price and volume of
your stock and the behavior of the overall market. Be sure that your
conclusions are valid and the stock is a good choice before taking a position.
5. Time your trade to take advantage of the larger market’s turns. In general,
buy a stock you’ve selected if you determine that the market will reverse and
rally. Sell a stock if your analysis indicates that the market will fall.
Is the Wyckoff Method Effective?

Wyckoff’s work provides a variety of reliable tools and techniques with which
to assess markets and time trades. His method is studied and used by large
institutional investors, traders, and analysts throughout the world who
comprehend its value.
What Is the Wyckoff Method Used for?

The Wyckoff Method is used by investors and traders to determine market
trends, select investments, and time the placement of trades. It can help them
identify the times at which big players are accumulating (or distributing)
positions in a security. It can help users to find trades with high-profit
potential. What's more, its straightforward analytical approach means
investors can enter and exit the market without emotion that can cloud
judgment.
What Are the 4 Phases of the Wyckoff Cycle?

The four phases of the Wyckoff cycle are accumulation, markup, distribution,
and markdown. They represent trading behavior and price action. Once the
final markdown phase of the Wyckoff cycle is complete, a new accumulation
phase will kick off a new cycle.
The Bottom Line

Richard Wyckoff established key principles on tops, bottoms, trends, and
tape reading in the early decades of the 20th century. His concepts, including
the Wyckoff method, market cycle, and rules, continue to educate traders and
investors in the 21st century.
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What are the four phases of the Wyckoff market cycle?

What are some of Wyckoff's rules for trend recognition?

The Wyckoff Method: Making Money the

Legendary technician Richard Wyckoff wrote about financial markets in the

Wyckoff’s observations on price action coalesced into what’s known as the

• The Wyckoff Method is a technical analysis approach that can help

Rule 2: The significance of price movements reveals itself only when

Wyckoff established simple but powerful observational rules for trend

Wyckoff Market Cycle

Generally speaking, the accumulation phase forms as institutional investors

A new cycle begins with an accumulation phase that generates a trading

Apply the Wyckoff Method to Your Trading

3. Select stocks that are under accumulation (or in distribution if you're

Is the Wyckoff Method Effective?

What Is the Wyckoff Method Used for?

What Are the 4 Phases of the Wyckoff Cycle?

The Bottom Line

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