Summary Cheat Sheet: Price Action Analysis Using the Wyckoff Trading Method

• Richard Wyckoff was a famous stock trader and investor who was born in the late 19 th century.

• The Wyckoff theory is based primarily on price action and the different cyclical stages the market
falls in to.

• It is essential that know the two important rules stated in his book “Charting the Stock Market”.
These two essential rules are paraphrased below.

o The first rule of Richard Wyckoff states that the market never behaves the same way. Price
action will never create a move in exactly the same way that it did in the past. The market is
truly unique.
o The second Richard Wyckoff rule is related to the first one. It states that since every price
move is unique, its analytical importance comes when compared to previous price behavior.

• The Wyckoff method states that the price cycle of a traded instrument consists of 4 stages -
Accumulation, Markup, Distribution, and Mark Down.

• Accumulation Phase - The Accumulation stage is caused by increased institutional demand. Bulls
are slowing gaining power and as a result, they are poised to push prices higher.

• Markup Phase - The Markup is the second stage of the Wyckoff trading cycle. Bulls gain enough
power to push the price through the upper level of the range.

• Distribution Phase - One indication that the market is in a Distribution stage will be the sustained
failure of price to create higher bottoms on the chart. The price action creates lower tops which is
an indication that the market is currently experiencing a selloff.

• Markdown Phase - The phase indicates that the bears have gained enough power to push the
market in the bearish direction. The Markdown is confirmed when the price action breaks the lower
level of the flat range of the horizontal distribution channel on the chart.

• The initial breakout (Spring) opposite to the expected price move is often associated with stop
running, wherein institutions push prices to obvious stop loss areas to find the required liquidity to
fulfill their orders.
• Richard Wyckoff emphasizes three laws which are a natural cause of the Market Cycle.

o Supply vs. Demand - If there is greater selling pressure, caused by excess supply, we are
likely to see a decrease in price. If there is a greater buying pressure, caused by excess
demand, we are likely to see an increase in price.

o Effort vs. Result – Every effort should lead to a result in the financial markets.

o Cause vs. Effect - Wyckoff states that every cause in the market leads to a proportional
effect.

• Volume is of a great importance for the Wyckoff trader, because it can provide valuable
information into what is really going on “behind the scenes”.

• When the price moves through a key level during the Wyckoff Price Cycle, you should consider the
move valid if the trading volumes are relatively high during the breakout.

• If the volumes are decreasing, then you are probably looking at a spring (false breakout) rather than
a real breakout.

• Understanding the different stages within the price cycle will allow you to position for the next
most likely price tendency.