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Richard Wyckoff Trading cycle – A short Guide

Wyckoff proposed a four-stage Market cycle. His idea was that the cycle resulted from the actions of these large players who planned their operations in the market to take advantage of the uneducated public’s inappropriate reactions to price movement, but we also see evidence of this cycle in the price action of medieval commodity prices; stocks in early, unsophisticated markets; or trading on very short time frames. It is irrational to believe, that there is the same manipulation in all of these cases, so the Wyckoff trading cycle may simply be an expression of Market Psychology
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Wyckoff Trading style

1. Accumulation: A sideways range in which institutional smart players buy carefully and skillfully, without moving the price. The small players are unaware of what is going on; the market is out of the public focus while under accumulation. From a technical perspective, prices move sideways in a trading range bounded by rough areas of support and resistance

2. Markup: The classic uptrend. At this point, the small scale traders become aware of the price movement, and their buying fuels price action higher. Smart money players who bought in the accumulation phase may sell some of their holdings into the strength of the uptrend, or they may just hold and wait for higher prices. As the trend grinds higher, the early, aggressive shorts will be forced to cover, and their buying pressure will, in turn, push the market higher.

3. Distribution: Eventually, the uptrend ends and the market enter into a distribution phase in which the smart money players sell the remainder of their holdings to the small retail traders who are still generally anticipating higher prices. Really smart money players might even sell more than they own and go short in this range. From a technical perspective, there are, two ways this can happen. The manic blow-off end-of-trend pattern will be the result. More common is that the uptrend runs out of steam, and the market goes into another sideways trading range

4. Markdown: The downtrend that follows distribution. Smart money players who are short will buy back some of their shorts into this weakness. Eventually, the retail trader realizes that higher prices are not in their future, so they panic and sell their positions. This panic, more often than not, marks the end of the downtrend. Real downtrends begin out of this environment of optimism or complacency. Longs begin to unwind their positions, adding to the selling pressure

Wyckoff trading cycle is a highly idealized view of market action; it lays the foundation for a simple and efficient trading approach. It’s a simplified model focusing on the psychological perspective of two major groups: the smart money players who are assumed to be driving the market, and the general, uninformed public. Wyckoff trading cycle emphasizes on the crowd psychology of the public, and how individuals are naturally inclined to make mistakes that work in favor of the smart money. Remember Wyckoff’s trading cycle is a contextual tool; it’s not a standalone trading technique. This cycle helps me with categorization and classification. Wyckoff trading cycle is similar to Market structure…

STRUCTURE AND LIMITATIONS OF WYCKOFF TRADING CYCLE

The structure mentioned here was originally spotted around the equity markets and on time frames ranging from months to years. It also has relevance to other markets and shorter time frames. Commodity follows a similar cycle, but the cycle in commodities is often driven by the production and consumption. Commodities, in general, tend to be a little more cyclical and volatile, than stock indexes. Currency markets tend to be a little less cyclical and tend to trend better than most other asset classes over longer time frames. There certainly are times when this cycle does apply to the currency markets—for instance, in extreme circumstances accompanied by market psychology.

Alterations of Wyckoff Trading cycle
Charting source

Though this cycle provides a useful framework, there are many limitation and problems in practical trading:

Accumulation lead to advances, but it is difficult to time entries out of accumulation. Buying breakouts results in a string of small losses that do add up. Breakout failures are large in numbers.Buying within the accumulation area is not simple, as there are no clear levels to place stop losses. Setting stops under accumulation areas is usually wrong and subjected to traps. Sometimes what looks like accumulation turns out to be distribution, the bottom drops, and the market does not look back. Small losses can quickly become big issues in these cases.

Trading bull and bear trends (markup and markdown) is also not as simple as might be expected. There are many patterns in trends, as well as patterns that suggest the trend is coming to an end, but it takes real skill to identify and to trade these patterns. Markup periods often go into long, sideways ranges that may be either accumulation or distribution. The pattern doesn’t always follows order like accumulation→uptrend→distribution;
it also follows randomly accumulation → uptrend→ accumulation, or some other variation.

So, In conclusion- Wyckoff trading cycle offers a great frame work for analysis and explanation, but it’s practical applicability is limited in terms of trading. Nonetheless, it’s still a powerful toolkit in the box of skilled price action trader.

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About the Author:

Balaji is a Speculator, Investor and Trader (All in All!!!) and self published author. Trading in the Markets since decade, have seen more ups and downs along with institutional trader's lifestyle. He usually trades Nifty, Bank Nifty, Commodities, Futures cum Options around both Indian and global Markets. Balaji applies highly analytical and systematic Price Action strategies He blogs passionately about Trading strategies, Price Action Trading, Technical analysis, Macro events, Market setups, Financial and Economical topics. Apart from Trading and Blogging, Balaji also mentors aspiring Traders and Investors on becoming successful in highly competitive financial Markets.

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