How to apply the Wyckoff Theory to trade crypto

Introduction

Technical analysis, known as the Wyckoff theory Method, aids traders in making informed investment choices in established financial markets. Traders can evaluate the market index by looking at supply and demand trends to determine the market performance.

Wyckoff suggests evaluating the methodology through chart reading (point and figure chart) along with several concepts, procedures, and rules to follow to track market movements.

About the Wyckoff Theory method

The Wyckoff method is used in trading to concentrate on a price chart’s accumulation phase. By leaving clear patterns in their wake, traders and investors can identify big players and smart money using this technique.

The Wyckoff method was created in the 1930s by Richard Wyckoff. He spent his life teaching, and market theories significantly influenced contemporary technical analysis. His approach has inspired many traders over the years, and many of them went on to succeed in the market. Investors now view the Wyckoff approach as a reliable way to read prices that complements the Dow Theory and Elliott Wave research.

Wyckoff believed that the major investors and smart money behind these ranges built orders before making price changes. His approach uses the fractal of the price range to read the footprint of smart money and determine where the price is headed.

Three Wyckoff Laws

The law of supply and demand

The first and most significant of Wyckoff’s laws states that price fluctuates to changes in supply and demand. Three equations are used to illustrate the first law:

Demand > Supply: Price moves up

Demand < Supply: Price moves down

Demand = Supply: No change in price

As a result, the Wyckoff law states that traders will experience a positive movement once supply surpasses demand. On the other hand, when supply exceeds demand, prices will decline.

However, a pricing chart cannot be used to calculate the precise supply and demand. Traders frequently examine volume and price action to determine how supply and demand relate to pricing.

The law of cause and effect

According to Wyckoff’s second law, the discrepancy between supply and demand is not arbitrary. Instead, it is based on reasoning.

Wyckoff uses the terms accumulation and distribution to describe his second law.

Particularly regarding economic events, accumulation happens after a time of preparation. Accumulation (cause) results in an upward trend during this phase (effect). Similarly, pricing drops during the distribution phase (reason), creating a downward trend (development).

The law of effort and result

Wyckoff’s third law states that price changes result from an effort symbolised by trading volume.

The likelihood of the current trend continuing increases when the price action trade volume reflects the same feeling. The price will diverge, which could cause a stop or a change in the book’s direction; on the other hand, it doesn’t support the price movement.

Let’s use the price of Bitcoin as an example, which is rising and consolidating. Volume is higher during the period of consolidation, but the price isn’t rising to a new high. This indicates that the price and volume are not expressing the same attitude. In this situation, the likelihood of the current momentum changing is higher.

Price cycle of Wyckoff

Wyckoff asserts that traders may predict price change by carefully examining supply and demand, which comes from studying price action and volume over time.

Wyckoff studies the behaviour of effective traders and uses vertical (bar) and figure (point and figure) charts to decipher their behaviour. This approach examines how prominent actors organise and carry out the bull and bear markets within a price cycle: markup and markdown phases of Wyckoff accumulation.

Investors should get ready to buy during the markup phase and sell during the markdown phase.

Supply and Demand

In the Wyckoff price cycle, changes in supply and demand determine the market’s direction. The foundation of Wyckoff’s approach to trading and investing is this. When supply meets a need, prices will rise. Similar to how supply exceeding demand may cause prices to decline.

Traders must analyse how supply and demand change over time and compare those changes to pricing and volume. Patience and practice are must for master the skill of precisely predicting supply and need from a chart.

Price action

Price action is a method for predicting the price movement of any trading instrument by keeping an eye on its current price. It is a reliable method for forecasting price movement and is also successful in the bitcoin market.

Among other price action components, most traders use candlesticks, trend lines, support and resistance levels, and order flow. The underlying tenet is that once a price crosses over a resistance level, there is a greater likelihood that positive pressure will continue.

Volume

Price activity alone is insufficient to predict potential price movement from the Wyckoff accumulation area. Once the volume reaches a specific point, the bullish trend from the accumulation region or bearish signal from the distribution area is valid.

To view a price movement as encouraging, traders are recommended to discover a suitable price action with a sizable volume.

Time frame

In the Wyckoff Cycle, timing is the most crucial factor. The market cycle alternates between markups and markdowns regularly, and the ideal purchasing and selling position is only viable when the timing is correct.

Traders can go to the lower time frame to perfect their trading entrance when the price is still within the trading range. Here, the end goal is to initiate a buy position once the accumulation phase is complete and a sell position after the distribution phase is complete.

Five Wyckoff theory approaches to trade crypto

Range-Bound strategy

First, following a prolonged bearish pressure of three to six months, observe the 200 SMA as being flat. Mark the range’s high and low points later. Find a price that has reached the low of the content and been rejected to conduct a purchase trade.

Similarly, make a sell trade as soon as the price rejects the range high. Here, the price could go outside the content at any point, so apply a tight stop-loss with some cushion.

Aggressive Entry

Traders should carefully read the price during the aggressive entry and identify the three-accumulation phase turning points. The price is prepared to change once spring is over. However, investors should pay attention to fundamental developments in addition to cost and volume to determine whether the bullish probability is actual.

Conservative entry

With a cautious strategy, traders jump on the positive trend following a decisive breakout. The price won’t immediately reach the specified level when it rises from the spring. Instead, it will produce occasional fluctuations that allow traders to place trades with less risk.

Reaccumulation strategy

The price will rise as it builds up. If it needs to move more, it will accumulate orders once more (a reaccumulation process).

During the reaccumulation phase, the price will oscillate in a narrow range. Then, just before the breakout, it will compress down to the “creek” support level. The resistance after the creek serves as the entry point, while the support level will serve as the stop loss.

Conclusion

Nearly a century ago, Wyckoff theory developed his accumulation theory, primarily for the stock market. However, the method’s widespread application in freely traded markets demonstrates that it is more than merely a technical analysis indicator.

The idea enables investors to protect themselves from all swings, but it also aids in their understanding of market cycles, price changes, and potential future trends. There are no sure trading strategies, though. Cryptocurrency trading and investing require extensive research and constant attention to market activity. Traders should always be aware of the hazards and seek expert investing advice before trading.