Applying the Wyckoff Method to Investing

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Applying the Wyckoff Method to investing is a five-step process that combines technical analysis of price and volume with an understanding of market cycles and the behavior of large institutional players, called the Composite Man. The goal is to identify when smart money is accumulating or distributing an asset and to trade in alignment with their moves.

The Five Steps

* Identify the Market Trend: Determine the current and likely future trend of the overall market. This helps you decide on long (buying) or short (selling) positions.

* Select Stocks in Harmony with the Trend: Choose individual assets that are moving with the market.

* Uptrend: Find stocks stronger than the market (larger rallies, smaller declines).

* Downtrend: Find stocks weaker than the market.

* Identify a Cause for the Move: According to the Law of Cause and Effect, a trading range (sideways movement) is the cause that precedes a price trend (the effect). The longer the range, the greater the potential move.

* Accumulation: After a downtrend, a shift from supply to demand dominance. The Composite Man is buying.

* Distribution: After an uptrend, a shift from demand to supply dominance. The Composite Man is selling.

* Determine Readiness for the Move: Analyze phases within the trading range. For accumulation, a Spring event in Phase C is a final shakeout below support to trap sellers before the main markup begins.

* Time Your Entry and Exit: Use your analysis to time your trade.

* Entry: A classic entry is during Phase C (on a Spring) or Phase D, as the stock breaks out with a sign of strength (SOS).

* Exit: For a long position, exit as the stock enters a distribution phase.
Other Key Wyckoff Laws

* Law of Supply and Demand: The core principle: prices rise when demand exceeds supply and fall when supply exceeds demand.

* Law of Effort vs. Result: This analyzes the relationship between volume (effort) and price movement (result). High volume with a small price change can signal a divergence, suggesting an imminent trend change.