Understanding Wyckoff distribution helps traders like me and you to cash out longs before the market reverses and get the most profits from shorting. In this post, I share the three best strategies to trade Wyckoff distribution. First, I have to say distribution is a particular process. In short, it is the process of distributing (selling) an asset at the best price over some time. This is the opposite of accumulation, where the market participants are looking to buy an asset at the lowest possible cost.
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Contents hide
1 What is Wyckoff distribution?
1.1 How to identify distribution on the chart?
2 Best strategies to trade distribution
2.1 Range-bound strategy
2.2 Aggressive entry
2.3 Conservative entry
3 Wyckoff Distribution Patterns
4 Wyckoff Distribution Schematic – Phases and Events

What is Wyckoff distribution?

The distribution is sideways, range-bound trading period. It usually occurs after a prolonged uptrend. This is the trading zone where big players build short positions, distribute long positions, and wash out retail traders. They distribute positions gradually to prevent the price from changing significantly.

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How to identify distribution on the chart?

  • The ratio of up days to down days is pretty much equal.
  • Price tends to whip back and forth around the 200-day moving average.
  • The activity becomes bearish (volume decreases on rallies and increases on reactions).
  • The stock should be weaker than the market (that is, more responsive than the market on reactions and sluggish on rallies).
  • Look for candles with long wick (to indicate counter-pressure) or blow-off top candles that differ from the previous uptrend.
  • Wash-out candles (or so-called ‘UT’) with fast coming back to the main consolidation range is one of the best signs.
  • The best time frame to look for distribution signs is daily.
  • Distribution can have different forms, but it looks like a crown in most cases.
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Best strategies to trade distribution

Range-bound strategy

First, pay attention to 200 EMA; if it is flattening out and the price has rallied over the last 3 – 6 months, then identify the highs/lows of the consolidation. If the price reaches the high of the range and gets rejected, consider shorts with tight stops and take profit near the nearest swing low—the opposite works for longs. But keep in mind sooner or later, the price will break out. So tights stop loss is a must. The following two techniques are valid only for shorts.

GC distribution

Aggressive entry

If the market has a fundamental setup for the decline, there is a significant chance distribution will play very well. So, first, make sure there is a fundamental cause for the sell-off. If yes, aggressive traders can short after successful UT (upthrust). In other words, a swing failure with significant volume is a signal to short. The stop loss, in this case, is a bit above upthrust.

GC aggressive entry distribution

Conservative entry

Again make sure there is a fundamental setup for the decline. Then wait till phase D. We need a clear LPSY and SOW (explained below). Then, consider shorts at LPSY with tight stop loss a bit above it. I like this approach, as it gives the best risk/reward. Moreover, the next phase (E) brings the major sell-off. So, you get profit fast enough compared to the aggressive entry we discussed above.

gc conservative entry distribution

Wyckoff Distribution Patterns

Distribution can take a long time, sometimes months and even years. In most cases, we see the following patterns:

  • Double top cup and handle
  • Ascending channel
  • Ascending wedge
  • Rounded bottom

All of these are valid Wyckoff patterns. The critical point is to identify the start of phase B and determine the whereabouts of the lower support and the upper resistance that forms the price trading range.

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Wyckoff Distribution Schematic – Phases and Events

Phase A:

This phase marks the stopping of the uptrend. Till that time, demand has been dominant, and the first significant evidence of supply entering the market is provided by preliminary supply (PSY) and the buying climax (BC). Usually, next what we see is a sharp but limited move down – so-called automatic reaction (AR) and then a small leg up, known as a secondary test (ST) of the BC. Volume in this phase is usually diminished. That classic scenario by Wyckoff Method. But as can say from my experience, the uptrend may also terminate without climactic action, instead of demonstrating exhaustion of demand with decreasing spread and volume and with less upward progress made on each rally before significant supply emerges.

Phase B:

This phase can be marked as building a cause in preparation for a downtrend. That is the time when big players review their portfolios and initiate short positions in anticipation of the next markdown. As you already know, you can find information about their positions in commodities and open interest in COT reports.
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Wyckoff Distribution Phases and Events. Explained
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Phase C:

That is the most interesting phase of distribution. The main events are upthrust (UT) – move of price above TR and sharp reversal down and closing in TR. That is the time when all beginners go long. Yup, the worst time to go long – one of the most popular traps all get into. In a few words, phase C – is the phase of misleading retail traders – bulls and bears as well. Aggressive traders open shorts after UT, as they have a very good risk/reward ratio. But big players are not ready to allow retailers to make money so easily. That is the reason why, very often, you can see a few UT one after the other. It’s a stop-hunting in action. Conservative traders wait to open shorts until phase D and an LPSY

Phase D:

So, all tests are done, and here you go – Phase D in a play. It shows us the last gasps of demand. Nothing special – the price goes to or through TR  support. The evidence that supply is clearly dominant increases either with a clear break of support or with a decline below the mid-point of the TR after a UT or UTAD. In the chart, it looks like multiple weak rallies and moves down. The best trading strategy in phase D is to go short at LPSY. Besides, it’s the last opportunity for those who hold long positions to close it with a small loss and go short.

Phase E:

And finally, in phase E of Wyckoff, the distribution price leaves the TR, and supply is in control. Once TR support is broken on a major SOW, this breakdown is often tested with a rally that fails at or near support. This also represents a high-probability opportunity to sell short. Add trailing, replace sl to the entry point and relax till climactic action takes place. As it may signal the beginning of a re-distribution TR or of accumulation. Anyway, the best you can do for yourself is to protect profits and look for the next opportunity.
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