How to Use the Wyckoff Trading Method For Price Action Analysis
A good trader should be familiar with the different theories and methods that are always cropping up in the trading scene. There are some theories that are revolutionizing market structures and cycles as we know it. Some of the most popular theories include the Dow Theory and the Wave Principle. These theories could be integrated with other trading systems for better returns when trading. In this piece, we are going to be analyzing price action based technique known as the Wyckoff trading system.
Where Did Wyckoff Trading Come From?
Richard Wyckoff was one of the most successful stock traders from the 19th century. His fascination with the stock market started at an early age and was able to open his first stock brokerage firm by the time he was in his mid-20’S. He went to author some popular stock books which are still being used today by brokers for reference and strategy.
Two Rules of Richard Wyckoff Trading
The Wyckoff principle is based primarily on price action and the numerous cycles the market can be categorized into. In order to fully understand the principle, two fundamental ideas stated in his book “Charting the Stock Market” needs to be discussed.
The first rule is the market will never behave the same ways at different times. Essentially what this means is that it is almost improbable for price auction to create the same move it did in the past. The market is always going to be unique.
The second rule is closely related to the first one. It borrows on the premise that since each and every price auction is unique, it is important from an analytical point of view to compare present price behavior with that of the past.
Market Cycle Theory
Based on these two ideas, Wyckoff developed a price market auction theory that is still being used today by the discerning traders. The theory states that the price cycle generally consists of four stages, Accumulation, Markup, Distribution, and MarkDown.
This is the first phase of the market/price cycle. Accumulation comes as a result of increased institutional demand. As a result, bulls gain slowly gain power and push the prices even higher. The price auction on the chat is usually flat even though the stage is usually associated with bull gaining authority in the long run.
This the second staged in the price cycle. The bulls gains just enough power for pushing the price levels to the upper range level. This is in most cases a signal that the price is entering the second phase.
It is during this stage when the bears try to regain authority over the market. The price at this point is usually flat on the chart. A clear indication that the market is on the distribution stage is when the price isn’t able to create a higher bottom line on the charts.
This phase begins immediately after the distribution phase. It is an indication that the bears have accumulated the power to push the market in a bearish direction. For more information on Wyckoff Trading, you can check out https://mboxwave.com/
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