In the pantheon of legendary technical analysts, perhaps no one stands taller than Richard Wyckoff. His self-devised "Wyckoff Method" is also known as one of the most trustworthy and reliable theories, which is still widely used by traders to this day.

His stock selection and investment methods have stood the test of time, mainly because of his basic, systematic, and logical structure for identifying high-probability, high-profit trades. Wyckoff established some key principles in the early 20th century, such as trends, stop-losses, and taking profits. Even a hundred years later, these timeless concepts continue to educate traders and investors.

Pioneer of market technical analysis, creator of the "Wyckoff Method"

Richard Wyckoff was born at the end of the 19th century (1873-1934). At the age of 15, he became a stockbroker; at the age of 20, he established his own brokerage firm. In 1907, he founded the compass of the market at that time - "The Wall Street Magazine", he was both the founder and the editor-in-chief.

Advertisement

Wyckoff was dedicated to the interpretation of the market and analysis, he interviewed and summarized the trading methods of the legendary masters of stocks at that time, including J.P. Morgan and Jesse Livermore, thus forming a complete set of theories about trading, including technical analysis and trading psychology, which later generations called the "Wyckoff Method". To this day, many professional traders and institutional investors are still applying the Wyckoff Method.

However, as a great man of the same era as Livermore. Even abroad, the "Wyckoff Method" is also deliberately or inadvertently hidden by the vast majority of people who are well-versed in this field, because they all know that in the field of technical analysis, Wyckoff's analysis method is very effective. It is not just a set of theories, but a set of practical methods that have been applied for more than a hundred years, and they are as reluctant as possible to let more people know about this method. Next, the editor will give you a detailed introduction to the "Wyckoff Method".

How does the Wyckoff theory work?

The Wyckoff method or theory divides stock selection and entry into the market into five steps. Any trader who wants to apply this theory to their own market operations needs to follow the following principles:

1. Determine the current position of the market and predict its future trend.2. Choose assets that align with identified trends.

3. The "reason" for selecting an asset must be equal to or exceed your minimum requirements.

4. Identify the types that are prepared to react to the outcomes.

5. Time your actions based on changes in the foreign exchange market index.

Wyckoff's Rules

In his approach, Wyckoff listed several rules that traders should follow and pay attention to. Individual assets will not perform the same way twice. Instead, trends unfold through a variety of similar price patterns, showing infinite differences in size, detail, and extension. Each time they appear, their variations are just enough to surprise traders and confuse the market. This is what many traders are now familiar with as the "morph phenomenon."

In the financial market, the environment is king. This means that the only way to analyze the current price is from a historical perspective. What did it do yesterday, last month, or last year? This means that analyzing today's price out of context will lead to incorrect conclusions.

How to Profit from the Wyckoff Method?

After introducing the Wyckoff method, you should have a basic understanding of the current market cycle. Therefore, to take advantage of the current market cycle, we can develop an executable trading plan. Below, let's explore some rules of the Wyckoff trading strategy.

1. EntryWhen accumulation turns into an uptrend and distribution turns into a downtrend, that's the time for you to enter the market. First, 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 whether the top of the distribution is falling. In addition, you can also analyze the previous price movements to gain more clues.

Another way to determine the stage of the price cycle is to identify the springboard effect. In addition, chart patterns also help to identify accumulation and distribution. Potential price action patterns can help you determine the transition of rising or falling.

When the price action breaks through the expected range, you can enter the real trade. For example, when the price breaks through the flat range and enters the uptrend, you can go long, and on the contrary, when the price action breaks through the lower support of the distribution stage, you can go short. At the same time, you should also pay close attention to the trading volume to observe whether the springboard effect appears.

2. Stop loss

As we all know, foreign exchange trading is full of uncertainty, so setting a stop loss is essential. If you go short in the uptrend: then your stop loss order should be below the lowest point of the accumulation stage. If you go short in the downtrend: then your stop loss order should be above the highest point of the distribution stage.

3. Take profit

You can use price action analysis to set a take profit. One method is: the sign of the price shifting from an uptrend to a distribution is the top of the chart starting to fall. This phenomenon also means that a short sale may be possible.

Another sign of leaving is the appearance of a bearish springboard, at this time, the price action has entered the late stage of distribution. The third way to set a take profit is to closely monitor the development trend of chart patterns and candlestick charts, and a reversal pattern may be a signal of price adjustment or change.

In foreign exchange trading, both Wyckoff price cycle analysis and price action analysis are indispensable. That is to say, price action analysis is a good helper to help investors initiate and manage trades within the Wyckoff price cycle. You should treat price analysis flexibly and be ready to deal with market changes at any time.

The main reason why foreign exchange traders use the Wyckoff method is that it allows traders to identify upcoming price fluctuations. By marking the end of the accumulation stage, traders will feel a clear signal. Then they can go long. On the contrary, the end of the distribution stage marks the beginning of the decline, and traders can short during this period.Once you understand the different phases of the price cycle, you can position yourself for the next anticipated price trend. You can buy in close to the beginning of the rise and hold as close to the end as possible.

Although the Wyckoff method presents a clear concept, the details are much more vague when defining the shapes and patterns. For new traders who are not yet familiar with the market and price movements, this can be a significant obstacle. Mastering this method requires a lot of experience. Another disadvantage of the method is that it is not suitable for high-frequency trading. It works best within smaller time frames.