Decoding the essence of the market with Wyckoff theory

The Wyckoff Theory, developed by Richard Wyckoff in the 1930s, is a classic Technical Analysis method that is still supported by many traders today. Originally a tool for analyzing stock investment, it is now widely used in the crypto market, including Bitcoin and altcoins. Wyckoff's research, learned from the techniques of renowned traders like Jesse L. Livermore, is recognized as an important theory alongside Charles H. Dow's Dow Theory and Ralph N. Elliott's Elliott Wave.

Wyckoff Theory's Five-Stage Approach: Practical Techniques

The most practical aspect of Wyckoff Theory is its approach to analyze the market by dividing it into five stages. This is a series of processes that involves determining the direction of trends, assessing the relative strength of assets, checking for the presence of a sufficient price formation period (cause), measuring the potential for price increases, and finally deciding on the entry timing. By mastering this method, it becomes possible to make investment decisions based on logical reasoning rather than emotional trading judgments.

A theoretical framework supported by three core principles

The foundation of the Wyckoff theory is based on three important principles.

The first is the law of supply and demand. In the market, if demand exceeds supply, prices rise; if supply exceeds demand, prices fall. This is the simplest and most powerful market principle.

The second is the relationship between cause and effect. Changes in supply and demand balance do not occur randomly, but become clear results after a certain preparation period. In other words, market trends always have a preceding “cause”.

The third is the correlation between effort and results. The harmony between trading volume (effort) and price fluctuations (results) suggests the continuity of trends. A decrease in trading volume may indicate a precursor to price reversal.

Composite Man: The Power to Move the Market

The unique perspective of the Wyckoff Theory is the concept of the Composite Man. It is believed that large players such as institutional investors and market makers strategically control the entire market. They are in a conflict of interest with individual investors, systematically accumulating assets and then distributing (selling) them.

Market cycles consist of four stages: accumulation phase → uptrend → distribution phase → downtrend. Wyckoff's schematic further breaks down these phases and analyzes the price behavior and patterns in detail at each stage.

Accumulation and Distribution: The Framework of the Market

In an accumulation phase, it goes through preliminary support formation, selling climax, secondary test, cause formation, and final support confirmation.

The distribution phase is the opposite pattern of accumulation, going through stages of preliminary supply formation, buying climax, automatic reaction, secondary test, rise after distribution, final supply point, and the beginning of a downtrend.

Practicalities and Precautions in the Crypto Market

The Wyckoff theory provides a logical and systematic analytical framework and significantly contributes to risk management. However, it should be recognized that there are limitations to its function as a complete forecasting tool in the highly volatile crypto market.

The Wyckoff theory is merely a tool that provides probabilistic advantages, and by combining it with other technical indicators and fundamental analysis, more robust investment decisions can be made.