Wyckoff pattern is a theory that outlines the key elements in a price development trend characterized by periods of accumulation and distribution. Four distinct phases comprise the cycle: accumulation, markup, distribution, and price reduction. Wykoff also defines the rules to be used in conjunction with these phases. These rules can further help identify the location and significance of prices in a broad spectrum of an uptrend, downtrend, and sideways markets.
Markets and individual securities never behave the same way twice.
On the other hand, trends are not revealed through a variety of similar price patterns that exhibit infinite variation in size, detail and. Each incarnation changes enough from the previous pattern to surprise and astonish market participants. Many modern traders may refer to this as a transformational phenomenon that is always one step ahead of the pursuit of profit.
The significance of price movements reveals itself only when compared to past price behavior.
In other words, context is everything in financial markets. The way to compare today’s price action is with what happened yesterday, last week, last month, and last year. This rule implies that analyzing one day’s price action in a vacuum will lead to wrong conclusions.
Wyckoff established simple but powerful observation rules for trend recognition. He determined that there are only three trends: up, down, and flat. In addition, there are three-time frames: short-term, medium-term, and long.
Wyckoff’s market cycle theory supports Wyckoff’s method. It defines how and why stocks and other securities move. This is based on Wyckoff’s observations of supply and demand and that security prices move in distinct, four-phase cyclical patterns. Investors and traders use the Wyckoff market cycle to identify the market direction, possible reversals, and when large investors pool and sell positions.
The phases of the Wyckoff market cycle are accumulation, markup, distribution, and price reduction. Phases represent trader behavior and can reveal the future direction of a stock’s price movement.
The accumulation phase is generally formed when institutional investors increase their purchases and drive demand. As interest develops, the trading range features higher lows as the price positions itself to move higher, with buyers gaining price power that pushes through the upper levels of the trading range. In this Markup phase, the chart will show a consistent uptrend.