Wyckoff Pattern: Definition and How It Works
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Wyckoff Pattern: Definition and How It Works

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Wyckoff Pattern: Definition and How It Works

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In crypto or crypto assets trading, there are some terms that are unique and sound foreign to common people, one of which is the Wyckoff pattern.

This Wyckoff pattern is basically a market analysis method. This method was first introduced by Richard D. Wyckoff, which was later elaborated in the book titled The Three Skills of Top Trading by Hank Pruden.

Although the method is quite simple, it is important in determining market trends. Well, for those who want to know more about this method and how it works, see the full review below.

What is the Wyckoff Pattern?

The Wyckoff pattern is a series of technical analysis methods intended for investors or traders. Initially, this method was developed only for the stock market, but it then continued to be applied in all types of exchanges, including crypto.

The main purpose of technical analysis of the method that has existed since around the 1930s, was to estimate the price direction of an asset. The technique works by utilizing charts and images of trading volume, price movements, and other market information in order to analyze before deciding to buy or sell.

On the other hand, understanding the Wyckoff pattern will enable traders to predict market prices as well as design the right trading strategy to optimize the profits.

Wyckoff Pattern’s Phases

There are 4 major phases in Wyckoff Pattern (4), which will be explained below.

Accumulation Phase

First, there is the accumulation phase. At this stage, the market is usually in its bottom position, a condition when asset prices reverse from a downtrend to an uptrend. During this stage, the market will move sideways, which means that there is no specific or significant trend going on. Usually, price only fluctuates between key support and resistance levels.

Uptrend/Markup Phase

The second is the uptrend phase—also known as the “markup”. In this stage, usually the asset price will continue to break through the key resistance level and reach the peak of trading volume.

Distribution Phase

This is the phase when the market has reached its peak. This makes the asset price in general move horizontally (sideway).

Downtrend Phase

This is the final stage, when the market starts to move down. When this phase is complete, the market cycle will return to the initial phase of a new accumulation phase.

How Wyckoff Pattern Works

There are five (5) stages of analyzing the market through the Wyckoff Pattern, which are as follows:

  1. Determining the current position and future market trends: the goal is that traders can make the best investment strategy and profit opportunities. Traders will usually take advantage of the price history and charts to analyze market indices.
  2. Choose crypto assets that are in line with current market trends: if a trader wants to make a long-term investment plan then they should choose the asset with the strongest fundamentals.
  3. Choose crypto assets that are the same or at least one level above: in this phase, traders are advised to choose projects that are in the accumulation phase.
  4. Determine the assets that are ready to be moved: to make the sorting process easier, the trader can sort the assets according to the ones they are most interested in. They can use bar/dot charts and numbers.
  5. Allow some time for the chosen asset to work in the market until it finally gains a profitable return: the trader must also ensure that they have placed a strategic stop loss position. For more detailed observations, traders can use price charts.

WyckOff Pattern’s Principles

There are (3) major laws/principles in the Wyckoff Pattern, as explained below.

Cause and Effect Law

Usually, this principle is used by traders in determining the buying or selling price in the crypto market. This law states that every change occurs for a reason. That means, certain events will make a difference in the amount of supply and demand which in turn has an impact on the Wyckoff Pattern. For example, the accumulation phase creates an uptrend, while the distribution phase causes a downtrend.

Supply and Demand Law

The supply and demand process in the market also affects the market movements. For example, an increase in price means that the demands are high for certain crypto assets, and vice versa.

Efforts and Results Law 

The following law indicates that the difference between trading volume and price can have an impact on the market trend. When trading volume and prices are in sync, the market trend will continue. However, if there is a gap between them, then the market trend will change direction/even stop.

That’s the review of the Wyckoff Pattern. Come and  check out other  articles about crypto assets, blockchain, and others only at Indodax Academy.

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