Erik Weijers, 5 months ago

What is the Wyckoff market cycle?

Understanding the Wyckoff market cycle can help investors decide what stocks or crypto to buy and when to buy. The market cycle has four phases: accumulation, markup, distribution, and markdown. The accumulation and distribution phase can be analyzed too. 

The Wyckoff market cycle was developed by Richard Wyckoff in the early 1930s. Being developed for the stock market, it is now applied to all sorts of financial markets, including crypto markets. 

Wyckoff's laws

A law that Wyckoff is perhaps most known for, is the law of cause and effect. This states that the differences between supply and demand come after periods of preparation, because of specific events. For example: 

  • An uptrend in price is preceded by a period of accumulation
  • A period of distribution eventually results in a downtrend

Wyckoff used a charting technique to estimate the price targets based on the periods of accumulation and distribution. 

The Wyckoff market cycle

Wyckoff observed that he prices of securities move in a cyclical pattern of four distinct phases: accumulation, markup, distribution, and markdown.

1 Accumulation phase
This is the first phase of a new market cycle. This phase is usually marked by a sideways movement. The accumulation is a gradual process, which is why the price doesn't change significantly.

The anatomy of the accumulation phase

The accumulation phase can be broken down in smaller sections. 

  • Phase A: Still in a downtrend, the sellers' power decreases, and the downtrend starts to slow down.
  • Phase B is the consolidation stage, in which smart investors accumulate what they can.
  • Phase C: typically, this stage of the accumulation phase contains what is called a spring. It is the last 'bear trap' before the higher lows start.
  • Phase D: trading volume and volatility are increasing and at a certain point, the price will break above the resistance levels.

2 Uptrend (Markup)

After a stage of accumulation, the sellers get 'exhausted' and the price climbs above the range that defined the accumulation phase. These first signs of an uptrend attract more investors, reinforcing the increasing demand and uptrend. As the market moves up, other investors are encouraged to buy. Eventually, even the general public becomes excited enough to get involved. By the way, within an uptrend, there can be short phases of accumulation. These are sometimes called re-accumulation phases, that precede the continuation of the upward movement. 

3 Distribution

At a certain point, the uptrend will fail to generate new highs. This signals the start of the distribution phase. It's kind of a mirror image of the accumulation phase: the price is in a range. At this stage, 'smart money' is taking profits, 'distributing' their stocks or coins to less experienced investors.


The anatomy of the distribution phase

  • Phase A: the uptrend starts to slow down due to decreasing demand.
  • Phase B is a consolidation zone that precedes a downtrend.
  • Phase C: in some cases, the market will present one last bull trap after the consolidation period. It is the opposite of the spring in an accumulation phase (see above).
  • Phase D of a distribution as well is pretty much a mirror image of phase D of the accumulation phase.
  • Phase E: this final stage is the onset of the beginning of a downtrend, with a clear break below the trading range.

4 Downtrend (Markdown)

After the distribution phase, the market starts going down. Smart money is done selling a good amount of their shares. Eventually, the supply becomes greater than demand, and the downtrend is in full force. Just like during the uptrend, the downtrend may have re-distribution phases. These are basically short-term consolidation between big price drops - also called bear market rallies.

Never exactly identical patterns

Wyckoff noted and warned that the market never behaves in exactly the same way twice.

Trends will unfold in roughly similar price patterns, with endless variations in detail. The patterns are 'shapeshifting' just enough from earlier patterns to surprise and confuse market participants. For example, the accumulation can happen with a very long phase B, or without a spring. 

Conclusion: be the smart money

Wyckoff had a term for what we these days call smart money. That is, experienced and disciplined investors. He adviced traders to be what he called 'the composite man': the smart money that buys during accumulation phases and sells in distribution phases. This sounds easier than it is. Emotion takes after a period of an uptrend. It's hard to tell a distribution phase from a re-accumulation phase, for example.

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