The Wyckoff Method in Crypto Trading: What Is It?

The Wyckoff Method in Crypto Trading: What Is It?

The Wyckoff approach is a set of laws, principles, and schematics devoted to the profound technical analysis of all types of financial markets. Formulated by Richard Demille Wyckoff and his fellow scientists in the late 1930s, this approach has successfully survived through the decades of the highly volatile evolution of financial thought, becoming one of the main methods of technical analysis for investors. Originally designed for a rather narrow niche (stock marketing), this technique is now used in all spheres of market analysis, with a special emphasis on the crypto market.

Its main principles may be summarized in terms of the following concepts:

●     The Composite Mediator.

●     Wyckoff’s Market Cycle (Schematics).

●     Three Wyckoff’s Laws.

●     The Five-Step Approach.

These concepts illustrate vital connections between supply and demand, which make them especially interesting for crypto investors. Let us look at them closely and determine how these concepts are adjusting to the crypto market economics.

Wyckoff’s Composite Mediator

This doctrine relies on the idea of a “hypothetical mediator”, portraying the market as if dominated by a single entity, guided by its self-interest. Instead of analyzing the actions and motives of thousands of investors (crypto or otherwise), the researchers may focus on the bigger picture: the hypothetical Mediator passes through four phases of the market cycle, always selling when the price is the highest and acquiring when the price is at its minimum. These four phases are as follows:

●     Accumulation. The Mediator starts gradually stockpiling the assets, avoiding rapid price changes.

●     Markup (Uptrend). When the Mediator has enough resources, they push the price up, trying to involve other investors. The demand wins over the supply.

●     Distribution. When the push-up is no longer strong enough to guarantee future profits, the Mediator sells, once again aiming for gradual changes instead of a too-rapid crash.

●     Markdown (Downtrend). The demand loses its charge, and the supply catches up, gradually predominating the situation before everything starts anew.

The Market Schematics

Crypto investors are usually most interested in the distribution and accumulation stages. After all, a stretched period of gradual build-up is a distinctive feature of all cryptocurrencies. The alternation between them becomes especially clear when compared with the early Bitcoin trends with its rapid 80% crashes.

These stages are also divided into five sub-periods each (from A to E). Although they have a lot in common, not all of them mirror each other. The details of these dissimilarities are too numerous to be explained in such a brief guide. However, the most crucial of them are as follows:

●     Accumulation B — a period for the extensive concentration of all tokens one can gather.

●     Accumulation C — a so-called “bear trap” when the support level is higher than the price and many players get rid of their tokens in fear of the downfall.

●     Accumulation D — instead of falling, the price reaches its maximum following the demand that dominates over the supply.

●     Distribution B — this period represents a preparation before the markdown, during which players usually sell the tokens.

Three Essential Laws of the Richard Wyckoff Method of Trading Cryptocurrency

The Law of Supply & Demand

This rule establishes how these fundamental forces influence the price, postulating that the price depends on the supply/demand ratio. When supply is higher than demand, the price goes down. When demand is higher, the price goes up. In rather rare cases, the market may achieve equilibrium, when both forces remain roughly equal.

This principle is well-established; in fact, it was not that revolutionary even at the beginning of the previous century, long before the dominance of cryptocurrencies. Nonetheless, in combination with other laws of Wyckoff’s method, it becomes a powerful tool. Its innovativeness relies on the introduction of a convenient charting method, which focuses on the duration of several phases of the Market Cycle. For instance, at TradingView Wyckoff technique is represented by a great number of charting tools, devoted to the analysis of market tendencies.

The Law of Cause & Effect

The second rule postulates the inevitable interchangeability of market phases because of predetermined events. All periods begin one after another; markup starts as a natural result of accumulation and ends, leading to the start of distribution.

These periods cannot change one another at random: one phase is but a direct result of the previous one — and a hypothetical downtrend cannot result in an uptrend. This rule finds usage in many spheres of crypto trading. For instance, thanks to such a chart, many investors successfully predicted the $30 000 Bitcoin crash of 2021.

The Law of Effort vs. Result

This rule focuses on the balance point between market volume and trends. The trend continues when market volume supports the price. This perfect concordance indicates the middle-phase period: investors are backing up the specific coin, the market trend is stable, and there are no signs, which could signify its end.

However, discrepancies between these indicators signify the inevitable shift towards another phase. To illustrate such a crucial moment, let us look at the charts at TradingView crypto screener — Wyckoff mode is essential for determining whether the prices are most likely to go up or begin falling.

To facilitate difficulties, which inevitably occur when one learns how to work with such a complex technique as the Wyckoff Method, one may look for help from specialized software. For instance, automated copy traders, thanks to which both investors and traders may share their knowledge and accumulate useful tricks and approaches.

As of today, Jet-Bot is a leading platform, which provides copy-trading services. By selecting this mechanism, you receive access to automated trading tools that allow you to mimic the winning moves of professional traders, create custom bots for small-scale trading, and learn how to apply sophisticated analytic tools (such as the Wyckoff Method) in the real world.

The Five-Step Technique of the Wyckoff Method of Crypto Trading

This approach is a practical embodiment of the aforementioned principles, a brief field guide for stock investors, which works perfectly fine when applied to cryptocurrencies.

It consists of five principal stages:

●     Identify the trend. The first stage of decision-making usually involves an analysis of the most likely directions of crypto assets.

●     Identify the strength of the similar trends with an emphasis on those trends that are backed up during both downturns and upswings. This stage focuses on the practical application of the second law.

●     Identify cryptocurrencies that undergo the accumulation phase. These crypto-assets have the highest potential for balancing or exceeding the investor’s price objective.

●     Check whether the selected coins are going to move. Carefully check the market volume before making any decision.

●     Wait for the right moment to enter. Invest when your analysis predicts the most favorable result and sell before the current market phase shifts towards the prevalence of supply.

Final Thoughts

Thanks to the wide implementation of the Wyckoff method crypto trading may become significantly less chaotic and more prosperous. Crypto investors familiar with the key principles of the Richard Wyckoff method of trading cryptocurrency can evaluate tendencies, select options with higher investment potential, and characterize the value of tokens without falling victim to emotional judgments.