An Overview of the Wyckoff Method: Part 1

An Overview of the Wyckoff Method: Part 1

Richard D. Wyckoff

Richard D. Wyckoff, was born in 1873, and died at the age of 61 in 1934. He is known as one of the five Titans of technical analysis along with Charles Dow, W.D. Gann, R.N. Elliot, and Charles E. Merrill. Wyckoff was successful in the stock market at a young age. He started off as a stock runner when he was fifteen years old and was operating his own firm in his twenties. Wycoff founded The Magazine of Wall Street – a publication boasting 200,000 peak subscribers – which he wrote and edited for two decades.

Wycoff – being a dedicated study of the stock market – was fortunate to regularly observe and interview historical traders such as J.P. Morgan and Jessie Livermore. Wyckoff began collating the best practices he had observed while studying the greats, into a collection of principles, techniques, and laws. He then dedicated the rest of his career to educating and instructing the public on matters of money management, mental discipline, and the principles and techniques of trading. He often referred to these subjects as “the rules of the game.”

The Wyckoff five-step approach

The first step is always to determine the probable future trend of the market as a whole and determining the present position of the market. Is the market either consolidating or trending? In other words, is the market moving in a bullish or bearish direction? This information will help you decide if you should be taking long or short positions, or if its even the right time to enter the market in the first place. This can be achieved by price action charts.

The second step is to select assets and positions which are moving harmoniously with the trend. The ideal assets are ones that demonstrate greater percentage gains than those expressed by the market as a whole during times of rally, as well as smaller decreases during reactions or corrections. You can determine this by comparing charts against the most relevant market index for the situation.

The third step referred to as the fundamental law of “cause and effect” is one of the most critical components to Wyckoff’s unique approach to selecting and managing trades. This is the concept of selecting assets with a “cause” that – at the very least – equals your minimum trade objectives. Wyckoff achieved this using the horizontal point and figure count within the trading range of individual assets as the “cause” and the subsequent price movement being the “effect.” As an example, it is best to take long positions during times of accumulation, or re-accumulation. We will go further into detail regarding accumulation and distribution events in part 2 of Wyckoff Method.

The fourth step is to determine the asset's readiness to move by applying the following tests to the asset in question:

• Is the downside or upside price objective accomplished?
• Is there preliminary supply or demand for the buying/selling climax?
• Is the activity bullish or bearish?
• Has the support or supply line been broken?
• Is the asset expressing higher-highs, or lower-highs?
• Is the asset expressing higher-lows or lower-lows?
• Is there a crown or base horizontal line forming?

Lastly, step five is about picking assets which are synonymous with current market situations. Essentially you will have better odds of a position being successful by picking an asset that has the power of the market behind it.

The Wyckoff method is quite a bit to take in, however its importance within the world of trading is second to none! Thank you for reading along with us!

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