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.
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
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.
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.
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.
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.
Wyckoff Distribution Schematic – Phases and Events
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