Distribution by the Wyckoff method: How to exit the market in time?
The Wyckoff method not only helps to determine the beginning of an uptrend (accumulation phase) but also warns of the completion phase of the trend — distribution. This phase signals that large players (smart money) begin to unload the asset, passing it to retail traders.
What is distribution?
Distribution is the process by which an asset is sold by large market participants at the peak of a trend. On the chart, this often looks like a sideways range, but in reality, it is preparation for a decline. After distribution, a downward trend usually begins.
Main stages of distribution:
1. PSY (Preliminary Supply) — Preliminary supply, where the price slows its rise against an increase in selling volume.
2. BC (Buying Climax) — The climax of buying: a sharp spike in volume and price that attracts small traders.
3. AR (Automatic Reaction) — Automatic reaction: a quick price pullback from a local high.
4. ST (Secondary Test) — A retest of the peak level, but with lower volume.
5. UT (Upthrust) — A false breakout of the resistance level that often provokes the last purchases from retail participants.
6. LPSY (Last Point of Supply) — Last sales: the price gradually decreases, and volumes fall.
7. Sign of Weakness (SOW) — A sign of weakness: the asset breaks through key supports, confirming a downward trend.
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Why is it important to recognize distribution?
1. Risk reduction. If you identify the distribution phase in time, you will avoid significant losses by exiting the asset at the peak.
2. False breakouts. At the UT stage (false breakout), many retail traders open purchases, which becomes a trap before the decline begins.
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How to use distribution in trading?
1. Evaluate volumes at highs. In the distribution phase, volumes are usually high, but price growth slows down — this is the first alarming signal.
2. Watch for false breakouts. Local breakouts of the resistance level followed by a return to the range are signs of large players exiting.
3. Pay attention to SOW. A breakout below the range's lower boundary on increased volume is a clear signal to exit a position.
4. Use stops. In the final stages of distribution (LPSY), the price can sharply decline, so protecting capital is extremely important.
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Example on cryptocurrency
Distribution is especially noticeable in tokens with high capitalization or after a strong rise. For example, when an asset is sharply "pumped", followed by sideways movement with high volumes. Here, it is important to observe attempts of false growth and assess the price reaction at key levels.
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Conclusion
The distribution phase is a signal for caution. If you see a slowdown in growth and signs of weakness at resistance levels, do not wait for a reversal. The Wyckoff method helps to exit an asset in time; make use of it.
@LTG_CRYPTO
