I start a series of posts to guide you on how to boos profits following the Wyckoff method. For those, who don’t know, Richard Demille Wyckoff (1873–1934) is considered to be one of five ‘fathers’ of technical analysis. I am not going to stop on his biography – if you want, you can find it on the internet. I want to explain the basics of his approach.
The market changes all the time. As from my experience best of all Wyckoff method works for metals and some other commodities. At least in the modern market and in conditions, we have last few years and despite his main focus was the stock market. Wyckoff’s approach is based on the idea, that traders can understand the market through a detailed analysis of supply and demand.
That can be ascertained from studying price action, volume, and time. You can see below the scheme of his concept to get it better.
As you see, the best time for going long is an accumulation area, while the ideal time for shorts is at the end of the preparation for price markdown.
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Wyckoff Method – Laws
1. The law of supply and demand determines the price direction.
This principle is central to Wyckoff’s method of trading and investing. When demand is greater than supply, prices rise, and when supply is greater than demand, prices fall. How to identify it? Well – check the volumes in the real market (I mean futures or stocks, not CFDs). This way you can study the balance between supply and demand by comparing price and volume bars over time.
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2. The law of cause and effect helps the trader and investor set price objectives by gauging the potential extent of a trend emerging from a trading range.
Wyckoff’s “cause” can be measured by the horizontal point count in a point-and-figure chart, while the “effect” is the distance price moves corresponding to the point count. In other words, it can be seen as the force of accumulation or distribution within a trading range—and how this force works itself out in a subsequent trend or movement up or down.
3. The law of effort vs result provides an early warning of a possible coming trend reversal.
Divergences between volume and price often alert about it. For example, when there are several high-volume (large effort) but narrow-range price bars after a substantial rally, with the price failing to make a new high (little or no result), this suggests that big interests are unloading shares in anticipation of a change in trend.
Wishing you a great week!
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