What is the Wyckoff Logic about?
The Wyckoff Logic is a theory utilized to analyze markets, much like the Dow Theory, which identifies various market projections that could lead to continuous cycles.
The Three Laws of Wyckoff
1. The Law of Supply and Demand
It is stated that: If demand is higher than supply, the price of assets would increase.
If demand is lower than supply, the price of assets would decrease. If demand is equal to supply, the price of assets would remain relatively the same with little to now volatility.
2. The Law of Cause and Effect
Accumulation leads to a potential uptrend market.
Distribution leads to a potential downtrend market.
3. The Law of Effort vs. Result
Effort refers to the trading volume, wherein if the price trend is in relation to the trading volume, it is possible that the movement would continuously travel in that direction. However, if they are not, it may be a signal of the price movement’s halt.
A Five-Step Approach to the Market
1. Market trend indication
The analysis of market movements, supply and demand can help predict and indicate the future market trends.
2. Trend reliance
Looking out for upcoming market trends and projections can be beneficial, however, other factors are also needed to be taken into account before investment, not only percentage increase.
3. Being reasonable
It can be quite helpful if investments are kept reasonable, while also keeping in mind that consequences can take place.
4. Examine movements
There are often hidden messages in signals that can indicate reversals or changes in the market. Investors are advised to take note of such movements and keep up with the market’s current state, prior to upcoming trend changes.
Prices always have a reversal point. Investors are advised to be vigilant of such points in order to be decisive when buying or selling.
The Wyckoff Price Cycle
The Wyckoff Price Cycle is akin to the Dow Theory Price Cycle, but can be more complicated analysis methods.
Consisting of 5 phases as following:
The last period of a downtrend market.
Preliminary Support (PS) - displays buy orders due to the belief that the price won’t dip any further.
Selling Climax (SC) - another point wherein the price dips even lower, resulting in high buying demand.
Automatic Rally (AR) - after a large dumping period, buying demand returns, possibly pushing the price upwards.
Secondary Test (ST) - after continuous increases, the price falls to the SC point. However, if lower, this period can be extended further due to constant sales of assets.
Note that the price movements between the AR to SC or ST points are referred to as Trading Ranges.
A phase in which buying orders are piled in, resulting in a short, but volatile, sideways uptrend market with large asset-buying quantities caused by a stated large buying force from main market contributors that aim to drive the market in a favorable direction.
A phase indicated to represent a plausible lower dip in prices that can be made even lower if investors decide to sell, potentially making the price drop below resistance lines and bouncing back into the TR point, indicating a “Spring.”
With immense buying volume, a large green candlestick is created in indication of this phase, further pushing upwards, despite occasional selling volume for profitable gains.
The Back-up (BU) point is crucial in terms of how a price needs to bypass it into the Trading Range area with increased buying-selling volume as well. Though prices are highly bullish, investors can be frightened, but fear not, such occurrences are quite regular to the market’s cycle. Prices can be affected by the buy-sell volumes heavily.
The Last point of support (LPS) is a signal in the market for upcoming skyrocketing movement of prices up until its peak, creating a SOS point.
The Sign of Strength (SOS) takes place when a price reaches its highest point and falls in accordance with selling volume, but if it can still maintain its stance above the support line, an imminent bullish market may be approaching.
After a breakout from the support line of the Trading Range, a rally can appear afterwards, despite constant selling volumes. This could potentially lead to a new high.
2. Mark Up / Uptrend
In this period, an uptrend market is strongly displayed through the rally and sales for profit. However, if the price starts travelling sideways in a considerably large period of time, the uptrend market can possibly revert to a downtrend one in the future, especially after its new high.
This portion can be divided into 5 phases as follows:
Regarded as the last phase of the ongoing uptrend market.
The Preliminary Supply (PSY) indicates strong pushes of a price upwards from consistently buying volumes of investors and the past rally.
A Buying Climax (BC) is then caused, which is the highest point of the rally wherein large market contributors and several experts tend to sell their assets for profit.
An Automatic Reaction (AR) then follows. After the strong rally beforehand, prices begin to dip after investors have been signalled to sell their assets, representing a support line for future trades.
Secondary Tests (ST) are points wherein prices fall heavily with occasional buying volumes to test the SC point.
This phase in the Distribution aspect is much like that found in Accumulation, but in contrast, large investors would start selling their assets, but not in high quantities. This would cause the market to travel sideways afterwards.
If the selling volume is higher than that of the buying, a new low would be created, exceeding the previous support line, becoming the Sign of Weakness (SOW), indicating a downtrend market.
From henceforth onwards, the Upthrust (UT) point would be created, signalling the dip of a price, being the result of selling orders, further leading to a spring in the Accumulation phase of the cycle and falling once more.
After the previous price downfall, the theory states that investors would start buying, but not in large quantities, pushing the price to a higher point. This would cause an Upthrust after Distribution (UTAD), which is the event wherein a price reaches its peaks high, making the buying demand fall, leading to new asset purchases for profit.
The Last Point of Supply (LPSY) is found in this phase, which is the occurence of the slight recovery of prices, indicating a true signal in the market.
This phase signals the complete entrance into a bearish or downtrend market, which may be saturated with occasionally small recoveries. Investors may need to wait for the downtrend period to end before entering the first phase of the cycle once more.
4. Mark Down / Downtrend
After the Distribution episode, the market would now be in a downtrend stage that can show signs of Springs or Rebounds, providing small windows of profiting opportunities, but are ridden with risks. Afterwards, the stage would end and the market would re-enter its first stages once again.
Evidently, the Wyckoff Logic’s theory exemplifies the general overview of the market and its trends throughout the varying cycles it may experience. If utilized correctly, investors can find an opportunistic window for beneficial gain and for future preparation.
Most importantly, it can also be employed to find out the current stage the market is going through as a factor in one’s decision-making process.