Wyckoff analysis is a methodology for analyzing financial markets based on understanding trader behavior, especially the 'composite man' (institutions and banks), to anticipate future price movements. It relies on studying the relationship between price and volume, market structure, and the role of liquidity.
Fundamentals of Wyckoff analysis:
The concept of the 'composite man':
Wyckoff sees that there is a 'composite man' (or 'institution') behind every market movement, controlling and manipulating prices.
Laws of supply and demand:
The analysis is based on the principles of supply and demand, where the price rises with increased demand and falls with increased supply.
Market phases:
Wyckoff sees that the market goes through four main phases: accumulation, uptrend, distribution, and downtrend.
Wyckoff charts:
Traders use special charts to analyze price movement and trading volume to identify these phases.
Using Wyckoff analysis:
1. Defining the trend:
Helps determine the current market direction (upward, downward, or sideways).
2. Assessing the strength of the asset:
Wyckoff analysis allows for the assessment of the strength of the asset by comparing its price movement to market movement.
3. Defining accumulation and distribution areas:
Helps identify accumulation areas (where large investors accumulate stocks) and distribution areas (where they dispose of them).
4. Timing of entry and exit:
Traders can use the analysis to determine the best timing for entering buy or sell trades.
Market phases in Wyckoff analysis:
Accumulation:
A phase where the 'composite man' buys stocks in large quantities, leading to price stabilization and possibly a slight increase.
Uptrend:
The price begins to rise significantly as more traders enter.
Distribution:
A phase where the 'composite man' sells stocks, leading to a slowdown in the uptrend and possibly a decline.
Downtrend:
The price begins to drop sharply as more traders sell.
The importance of Wyckoff analysis:
Understanding market behavior:
Helps to understand market dynamics and the forces driving it.
Making informed decisions:
Enables traders to make more informed decisions based on a comprehensive market analysis.
Risk management:
Provides tools for risk assessment and identifying appropriate entry and exit points.
Modern technical analysis:
Wyckoff analysis is considered one of the foundations upon which many modern technical analysis methods are based.