BITCOIN, Analysis According to Wyckoff Method, Must Read!
Updated
The purpose of technical analysis using the Wyckoff method is to improve the timing of market operations when a speculative position is formed in anticipation of an upcoming move, where there is a favorable profit/risk ratio to justify opening this position. Trading Ranges (TRs) are the points where previous movement will be stopped and there will be a balance between supply and demand.
Here, within the Trading Range, accumulation or distribution develops and prepares for the further movement. These accumulation/distribution forces "create a cause" that transforms into subsequent movement. Creating the necessary strenght takes time and, since during this period price action is understandable, Trading Ranges represent really nice trading opportunities with potentially very favourable risk/reward ratio. However, to become a successful trader, you must be able to determine correctly the direction and size of the upcoming movement from the Trading Range. Fortunately, Wyckoff method offers us some useful guidelines and models which will help us to explore the Trading Range.
In our case we observe the Wyckoff ICE scheme - to fall under the ice.
The fall is a relatively wide-spread price movement, at quite high volume, which breaks through external resistance or support. The return is a test that immediately follows the jump, it is characterized by a relatevely narrow spread or rally on a lower volume, which checks and confirms the validity of the previous action of a jump.
The Wyckoff method tells us to buy on a return after an upward jump (sign of strength), or to open shorts on a downward jump (sign of weakness). Also according to the Wyckoff method, you shouldn't buy exactly during the breakout, because that can put you in an vulnerable position for quick movements in the opposite direction if the breakout is false one.
Thus, the Wyckoff method offers us to buy on the correction of the downward movement and sell on the correction of upward.
Here, within the Trading Range, accumulation or distribution develops and prepares for the further movement. These accumulation/distribution forces "create a cause" that transforms into subsequent movement. Creating the necessary strenght takes time and, since during this period price action is understandable, Trading Ranges represent really nice trading opportunities with potentially very favourable risk/reward ratio. However, to become a successful trader, you must be able to determine correctly the direction and size of the upcoming movement from the Trading Range. Fortunately, Wyckoff method offers us some useful guidelines and models which will help us to explore the Trading Range.
In our case we observe the Wyckoff ICE scheme - to fall under the ice.
The fall is a relatively wide-spread price movement, at quite high volume, which breaks through external resistance or support. The return is a test that immediately follows the jump, it is characterized by a relatevely narrow spread or rally on a lower volume, which checks and confirms the validity of the previous action of a jump.
The Wyckoff method tells us to buy on a return after an upward jump (sign of strength), or to open shorts on a downward jump (sign of weakness). Also according to the Wyckoff method, you shouldn't buy exactly during the breakout, because that can put you in an vulnerable position for quick movements in the opposite direction if the breakout is false one.
Thus, the Wyckoff method offers us to buy on the correction of the downward movement and sell on the correction of upward.
Note
Let's proceed to the analysis of the phases of the fromed Wyckoff scheme - ICE on the BTC/USD chart. In our case, this is distribution, i.e. downward trend reversal.DISTRIBUTION
This scheme represents a variant of the Wyckoff model for distribution. While this model only represents one of the many possible options in the patterns of the Trading Distribution Range, it shows us the important principles of Wyckoff, often evident in the distribution and phases of the trading range, which can lead us to the position opening.
A large part of the analysis of the principles and phases of the Trading Range (TD) preceding the distribution is the inversion of the Trading Range of accumulation. It is useful to remember that distribution usually takes a shorter period of time than accumulation.
Note
PHASE AIn Phase A demand is predominant, and the first obvious evidence of demand that becomes depleted appears at point 1 on the Preliminary Proposal (PSY) and at point 2 on the Culmination of the purchase (VS).
It often occurs during a strong spread. It is also usually accompanied by an Automatic Reaction (AR), and then the Secondary Test (ST) of the climax of purchases, usually at a reduced volume. This is essentially the inversion of Phase A in the accumulation.
As in accumulation, Phase A can also end without a climax, and then the only evidence of a depletion of demand will be a decrease in spread and volume.
Note
PHASE BIn Phase B, supply and demand are, usually, balanced and there is no defining trend. Clues to the future direction of the market are vague and there are no clear ways to tell whether to buy or sell. However, there are some useful "generalizations". In the early stages of Phase B, the price fluctuates massively and the volume is larger and less stable. As the Trading Range develops, demand becomes weaker and supply grows stronger, due to MM absorbing demand. As the end of the TR approaches, the volume has a tendency to decrease. The lines of support and resistance usually constrain price action in Phase B and help define the testing process that should occur in Phase C.
Note
PHASE CAfter Phase C transitions into Phase B it manifests a sign of weakness(SOW), shown as point 10 on the Scheme. This SOW is accompanied by a significant increase in the spread and volume to the lower support, which, as it may seem, breaks through at the end of Phase B. SOW cannot punch through Ice (ICE),” and then what follows is an upward movement directed towards point 11 (the last point of the supply (LPSY) ) usually at this point are the strongest purchases and even stronger sales, also it is accompanied by a reduced spread and/or volume.
Point 11 on the diagram gives us the last opportunity to close all saved longs and the first attractive opportunity to open a short position. A better point would be on the rally, which is testing point 11, because it can give us more obviousness (the reduction of spread and volume) and/or a closer approximation to the dangerous point.
Top springing (UTAD) is a price movement above the resistance level of the trading range, which quickly turns around and moves back into the trading range. The top springing is a “bull trap”, it indicates the beginning of the bull run tendency, but in reality it marks the end of the upward movement. The magnitude of the discharge can determine the ability of the price to set new maximums and the relative level of volume in this movement.
Note
PHASE DPhase D occurs and manifests itself after tests in phase C show us the last gaps or “the last hurray of demand”. In Phase D, the evidence of the supply becomes the dominant increase in both volume and spread, with a break through the “ice” or with further SOW's (sign of weakness) after the top springing.
In phase D, we are to receive more evidence of the likely direction the market will take and the opportunity to open our first or additional short position. Our best opportunities are at points 13, 15, and 17 as shown in the Scheme. These rallies are the “Last Points of Supply” (LPSY) before the start of the decline cycle. Our “build-up” of positions opened during Phases C and D as described above represents a rational approach to protect capital and maximize profit. It is important that additional short positions are added or “pyramidized” only if our initial positions are in profit.
Note
Phase EIn Phase E, the assets leave the Trading Range, and the offer prevails. Rally here is usually weak. Having opened our positions, we must control the price movement and the distribution force.
Successful understanding and analysis of the trading range allows traders to identify unique trading opportunities with a potentially very favorable reward to risk ratio. While analyzing TR, we first look for what is held secret, that which is to be revealed by the law of supply and demand. However, when individual movements, rallies or reactions do not respect the supply and demand, it is important to remember the law of “efforts against results”. By comparing rallies and reactions within the trading range relative to each other in terms of the spread, volume, speed, and price, we can recieve additional clues regarding the strength of the asset, position and likely direction.
It will also be advantageous to use the law of "cause and effect". Within the development of the Trading Range, the power of accumulation or distribution provides us with cases and with the potential opportunity for obtaining substantial profits from trading. The use of point and figure charts allows us to speculate on the amount of possible movement from the TR and helps us to determine whether these trading opportunities correspond to a favorable or to more than a favorable profit/risk ratio.
Note
Interpretation of ice:We represent the market from the perspective of a person walking on the frozen surface of a river in the middle of winter. If the ice supporting your feet is thick, it can easily withstand the weight of a person. This support looks like a undulating line of resistance in the trading range where it is drawn at minimums.
If a person cannot reach the top level of resistance of the Trading Range, this will be a warning sign of potential weakness. Weak ice will break and the person will fall into the cold depths.
A person has two opportunities to get his foot out of a crack in the ice (that is, creating a bullish “Rebound” situation). On the first ascending rally, a person may fail and not find support above the ice. If so, then he will fall even deeper into the river to gather strength for a new attempt to jump out of the cold water again. If a person fails to rise above the ice on this second attempt, he will most likely drown (a Bear Market or a price fall phase is observed).
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