The Wyckoff Trading Method Explained
The Wyckoff trading method has become very popular lately. A lot of people are teaching Wyckoff trading these days. However, most people completely understood it the wrong way.
Now you get people claiming to make 1:200 risk to reward trades using this method (which of course, is complete BS)
In this article you are going the read the truth about the Wyckoff method and how I use the Wyckoff trading method in forex.
Realistic expectations about the Wyckoff trading strategy
Let’s start off with giving you realistic expectations. The Wyckoff trading method is JUST a trading method that you can use to become a profitable trader in the markets. It’s just a trading method, it’s not the holy grail.
The holy grail will always be finding a trading method with an edge that 100% fits with your personality.
With the Wyckoff trading strategy, you can get into reversals early on and you can potentially aim for big targets. However, everything comes with costs. If you aim for huge targets, your win rate suffers, your losing streaks increase, your consistency of results decrease. These are all things to consider when you want to use the Wyckoff trading method.
On average, aiming for a 1:1, 1:2, or 1:3 is the best thing to go for. So, not 1:3000.
Also, don’t expect to drive a Lamborghini within 2 weeks because you think you have found the holy grail.
Again, it’s just a trading method that you can use to develop an edge. Nothing more, nothing less.
What’s the Wyckoff trading method?
The Wyckoff trading method is a method used to analyze supply and demand imbalances in different assets. The Wyckoff method can be used in basically all markets, such as:
Forex
Commodities
Metals
Equities
Bonds
When you are trading with the Wyckoff strategy, you essentially look for supply and demand within trading ranges to identify what’s happening. Is there absorption of supply or demand? How aggressive is that absorption?
You have to think about it like this: if a big player wants to buy a certain asset at a certain price, let’s say 1USD, that means that at that exact price there should be someone willing to sell to him.
Now, when the order is small, that’s not an issue. But, when the order is 1000 lots, that can be an issue if only 500 lots are selling at that price. Because of the imbalance, price goes up and a part of the 1000 lot order gets filled at a higher price, which causes the trader to buy at a disadvantageous price. Imagine trading with millions. Slippage of a few pips can be massive in terms of net P&L.
So, in order to combat this problem, bigger players often split up big orders and scale it around areas of liquidity. That’s exactly what you try to analyze when you look for the Wyckoff trading pattern.
Areas of liquidity are:
Below key swing lows
Above key swing highs
Below ranges
Above ranges
Why is there liquidity resting in those areas? It’s because traders often place stops below ranges. A stop loss from a buyer is a sell order. So, if the low of the range breaks, that’s an excellent area for a buyer to step in and absorb all this liquidity. This is also what’s called the Wyckoff spring.
A Wyckoff spring, a false breakout, a liquidity grab, whatever you want to call it. The point is, in that area there is a lot of selling which then can be absorbed. Analyzing what happens to liquidity can give you clues about the absorption of supply and demand and thus of future potential moves. The goal is to join the bigger player. That’s how you use Wyckoff in trading.
What are market cycles?
Market cycles are evident in all markets and tell you about the balance or imbalance between supply and demand. Market cycles are a part of the Wyckoff pattern. One of the Wyckoff trading rules is: know in which market phase you are before taking any positions.
Take a look at the picture below, that’s an example of how markets tend to behave. It’s important to note that a new trend often starts with a range, instead of just a turnaround.
The beginning of an uptrend starts with Wyckoff accumulation. During an accumulation range a bigger player is scaling in his order and building a position. When this process is finished, prices rise.
Why? Because all the supply in that area has been absorbed and demand increased. This process happens during an established trend as well. We get so-called re-accumulation ranges. This happens until supply increases and the positions are being sold. This causes a decrease in demand and an increase in supply, which causes distribution.
During a distribution range, long orders are being scaled out and possible short positions are being built. Whenever this process is done, supply is stronger than demand and prices drop. This causes a downtrend. Then, during the downtrend re-distribution ranges develop.
The way I trade the Wyckoff method is simple: I buy after the breakout of the accumulation range to catch the next leg to the upside.
I sell after a distribution range to catch the next leg down.
Wyckoff accumulation and distribution
So, you now know more about how markets work. You also know how supply and demand works. Let’s dive deeper into accumulation and distribution ranges. Let’s give you some Wyckoff trading examples.
Wyckoff trading example: accumulation
This is a clear Wyckoff accumulation range. I have marked out the boundaries of the range with yellow lines. I have marked the lows with red circles, indicating a triple bottom. If people buy during this range, their stop will go below the yellow line. The stop loss of a buyer is a sell order. Look at what happens when price breaks the low of the range.
The breakdown activates selling, but price aggressively moves up back into the range. (Look at the big candles.) This is what we call a Wyckoff spring.
As soon as we break the high of the range, you can see price accepts there, it doesn’t violently go back into the range like we have seen at the bottom. Completely different behavior. That’s key.
Below the range you want to see absorption, above the range you want to see acceptance.
The blue box indicates an important level that price likes to retest before moving up for the next leg.
I enter as soon as we have acceptance above the high of the range. This is how I am trading Wyckoff.
Where to enter an accumulation range?
Let’s talk about entries for a second. In my opinion the only places to enter come after the Wyckoff spring. You want to see clear absorption of the supply before entering a long position. Like I said, I prefer to enter at the breakout of the range. You can also enter at a retest of the range (blue box). Or, you can enter directly after a confirmed spring. Those are the options you have.
Entering after a spring gives you the best risk to reward ratio, but it gives you the lowest win rate.
Entering at the breakout gives you the highest win rate, but the lowest risk to reward ratio.
Entering at a retest gives you a decent R and a decent win rate.
It’s up to you what you like. I have kept statistics on entering a breakout and entering a retest of the breakout. Both are profitable. I prefer entering at the breakout. That’s how I am trading Wyckoff.
It’s up to you to figure out what works for you and what you like. That’s why keeping track of everything is so key in trading.
Wyckoff trading example: distribution
This is a clear Wyckoff distribution range. As you can see, I marked out the high and the low of the range with yellow lines. The red circles indicate unbroken highs. You can expect a lot of liquidity above those highs and especially above the upper yellow line.
When people sell, their stop is a buy order. So, when the upper yellow line breaks, you get a lot of buying but price immediately falls down. Again, look at the speed and length of the candles.
Then, price sits at the bottom of the range and eventually breaks the low and accepts below the low. Again, compare the price action with the price action we had when the high of the range broke. Very different behavior. Above the high you want to see absorption of demand; below the range you want to see acceptance.
The blue box is an area price likes to retest when it broke out.
Where to enter a distribution range?
The same as with accumulation: after the false breakout. I enter as soon as we accept below the low of the range. However, you can choose to enter after the false breakout or enter at the retest (blue box)
The same principles apply here in terms of statistics:
Entering directly after the false breakout gives you the biggest risk to reward ratio, but the lowest win rate.
Entering at the breakout gives you the highest win rate and the lowest risk to reward ratio.
Entering at the retest of the blue box gives you a decent win rate with decent R.
You decide what you like.
You backtest and gather statistics about this. That’s how you become a profitable Wyckoff trader.
The point of Wyckoff trading is to know what happens to the order flow and to the supply and demand. A Wyckoff trader analyzes this and then attempts to join the bigger trader in his moves. With those Wyckoff trading examples you should now know more about the Wyckoff trading method, the Wyckoff trading rules and the Wyckoff trading pattern.
Conclusion
The Wyckoff trading method is an effective trading method, but it’s not the holy grail of trading. Hopefully this “Wyckoff trading course” has helped you to become better at Wyckoff trading. I use the Wyckoff method in forex successfully. I also use the Wyckoff trading system when I’m investing in different assets.
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