The theory of foreign exchange trading is of great significance for investors to establish their own investment concepts and strategies. The most mainstream theories in the foreign exchange market are: Elliott's Wave Theory, Charles Dow's Dow Theory and William Gann's Gann Theory.
These theories are widely known in China, and the editor also introduced them in previous articles. Today, the editor will take you to understand a market analysis theory that is as famous as the three major theories: the Wyckoff method.
Richard D Wyckoff
The founder of the Wyckoff method, Richard D. Wyckoff, was a pioneer of market technical analysis in the early 20th century and is considered to be one of several giants in the field of technical analysis. Wyckoff has unique and unique research on the relationship between volume and price Deep insights, the same famous technical analysis giants include Charles Dow, William Gann, Elliott and others.
Next, let's learn about the secret technique of this Wall Street master who has successfully controlled the market for more than 95 years-Wyckoff's trading method, and reveal the trading strategies that hedge funds do not want to disclose for you.
01 The basis of the Wyckoff method
Applying Wyckoff's method to market trading can be complicated because of the many ways in which market behavior unfolds, but the basis of the method is quite simple.
The basis of Wyckoff's method includes two goals, two rules and three laws, all of which can be described in a short sentence.
As long as a trader builds his understanding of Wyckoff's method on these foundations, he will be consistently successful no matter how complicated the market throws him.
1 two goals
guaranteed principal
Earn profits from the market on a consistent basis that greatly exceed those of investment products with guaranteed returns.
2 two rules
The Wyckoff method is primarily based on price action and the different cycle phases the market is in. He mentioned two important rules in Zeng.
1. Markets are always changing, and price action is always changing.
2. It is important to analyze price action.
3 three rules
1. The law of supply and demand
When supply exceeds demand, prices fall, and when demand exceeds supply, prices rise.
2. The Law of Effort and Results
All efforts should be guided by financial market outcomes, Wyckoff said.
An example of an "effort and result" relationship is transaction volume data. If the trading volume is unusually high, the price can fluctuate wildly.
In general, a large number of transactions is an effort by market participants to gain market dominance, and market volatility is the result of this effort.
3. The law of cause and effect
Every factor in the market causes a proportionality effect, Wyckoff said. Taking the accumulation and distribution stage as an example, the accumulation leads to an increase in the price, while the distribution leads to a decline. Among them, the accumulation is the reason, and the increase is the result.
02 Wyckoff Market Cycle Theory
Wyckoff developed the price action market theory, which is still the dominant principle in trading today. The Wyckoff method points out that the price cycle of foreign exchange includes 4 stages: accumulation, rise, distribution and fall.
1 Accumulation stage
Accumulation is the first stage of the Wyckoff price cycle. The accumulation phase is caused by increased institutional demand. At this stage, the buyer gradually gains strength and gradually raises the price.
While the accumulation phase is associated with buying power, the price action on the chart is flat, that is, the accumulation process is reflected in the range price structure on the chart.
A higher bottom within this range is often considered a signal that price action is currently accumulating.
2 rising stage
Rising is the second stage. Buyers have absorbed enough chips to push the price to the upper end of the range, which is usually a sign of a bullish trend on the chart as the price action enters a second phase.
3 distribution stages
Distribution is the third stage of the price cycle. The main manifestation of this stage is that the seller tries to occupy the market again.
As with the accumulation process, the price action on the chart is flat during this phase. A sign that the market is in a distribution phase is when price fails to make a higher bottom on the chart.
The price created a lower top, which shows that the market is currently being shorted.
4 stages of decline
The down phase is the last phase of the Wyckoff price cycle, and is characterized by a downtrend following the distribution phase. At this stage, the sellers have gained enough strength to push the market in a bearish trend.
A downside phase of the price cycle can be confirmed when price action breaks out of the lower level of a flat sideways distribution channel. After that the whole process begins to cycle from the first stage, which is the accumulation stage.
Here is a sketch of the Wyckoff price cycle:
The blue line represents the accumulation phase. At this stage, the previous two bottoms are rising, which confirms that the market may be accumulating. Afterwards, the price action breaks out of the upper end of the accumulation range to signal the end of the accumulation and the beginning of the up phase (green).
A subsequent decline at the top of the rising range indicates that the market may be entering a distribution phase (purple). Finally, a breakout of the lower level of the distribution range indicates the start of a down phase (red).
5 price springboard for accumulation/distribution
There is one more thing worth noting in the price cycle sketch above. That is, price action breaks below the accumulation channel and above the distribution channel before forming a true breakout. This condition is known as a Wyckoff springboard and is essentially a false breakout.
At the same time, this confirms that price action follows the Wyckoff market cycle.
The red circles in the chart above represent springboards, or initial breakouts against expected price action, which can serve as a signal for the start of a confirmation cycle.
A springboard usually means liquidating a position, where institutional investors push prices into obvious stop-loss zones to achieve their required liquidity.
03 Wyckoff Volume Price Analysis
Volume is very important to a trader as it can provide valuable information on what is actually going on "behind the scenes".
On the one hand, Wyckoff volume price analysis confirms the price cycle proposed by Wyckoff. On the other hand, volume price analysis can also help traders determine the conversion trend of the price cycle.
When the price crosses an important level of the Wyckoff price cycle:
If the trading volume is relatively high during the breakout, it means that the inflection point of price reversal is approaching;
If the transaction volume is reduced instead, then it is likely that there is only a springboard effect.
The following figure is the manifestation of this phenomenon:
This is an example of the accumulation phase of a Wyckoff price cycle.
According to the above figure, we can see that:
The first two bottoms (based on closing prices) were slightly higher, suggesting that the market may be in an accumulation phase.
Then there was a bearish trend at the lower bottom of the blue range, but volume was down at that point, so it could have been a false breakout before a real breakout.
The price reversed immediately after the breakout, creating several large bullish candlesticks. At the same time, transaction volumes are increasing.
This suggests that the price cycle may enter a second phase - up. Subsequently, the price broke the upper limit of the range and started a sharp increase.
During the bearish period, the bullish movement moderated slightly, suggesting that the price may be undergoing a correction. With increasing volume, the price broke the upper bound of the correction channel, resuming a bullish trend.
04 How to use the Wyckoff method to trade profitably?
After this introduction to Wyckoff's method, you should have a basic understanding of the current market cycle. Therefore, in order to take advantage of the current market cycle, we can create an executable trading plan.
Next, let's understand some rules of Wyckoff's trading strategy.
1
admission
When the accumulation turns into a rise and the distribution turns into a fall, it is your time to enter the market.
First of all, you need to confirm which stage the currency pair you are trading is in, such as whether the bottom of the accumulation is rising and the top of the distribution is falling.
Also, you can analyze previous price action for more clues.
There is another way to determine the stage of the price cycle, and that is to identify the springboard effect. Also, chart patterns can help identify accumulation and distribution. Underlying price action patterns can help you identify rising or falling transitions.
When the price action breaks out of the expected trend range, you can enter the market for real trading.
For example, you can go long when price breaks out of a flat range into an up phase, as opposed to short when price action breaks out of lower support levels during a distribution phase.
At the same time, you should also pay close attention to the trading volume to see if there is a springboard effect.
2
stop loss
As we all know, foreign exchange trading is full of uncertainties, so setting a stop loss is essential.
If you are short during the up phase: then your stop loss order should be below the bottom of the accumulation phase.
If you are short during the down phase: then your stop loss order should be above the highest point of the distribution phase.
3
take profit
You can use price action analysis to set a take profit.
One way to do this: A sign of a price transition from a rise to a distribution is when tops on the chart start to fall. This phenomenon also means that short selling may occur.
Another exit sign: A bearish springboard occurs when price action enters the late stages of distribution.
The third way to set a stop profit is to pay close attention to the development trend of the chart pattern and candle chart. The reversal pattern may be a signal of price adjustment or change.
In foreign exchange trading, Wyckoff price cycle analysis and price action analysis are indispensable. That said, price action analysis is a great tool to help investors initiate and manage trades within Wyckoff price cycles.
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Last updated: 09/10/2023 08:56
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