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Buying and Selling Tests of the Wyckoff Method (part 3 out of 3)

Wyckoff Method - part 1 - 2 - 3

This is the third part of the Wyckoff Method analysis series. Click here for part 2

The laws of the Wyckoff method – that supply-demand determines price action, cause-effect relationships drive markets, and the law of effort allows traders to foresee events – are all helpful indicators of price movements. However, traders must be prepared to look at a more granular level to determine what the best time is to enter and exit trades. For this need, Wyckoff developed 9 tests to determine the best action to take when executing trades. 

Wyckoff tests for buying – Accumulation period

  1. The downside protection has already been established, that is when the stock has reached its low points in a period. 
  2. The stock has been given preliminary support, has undergone a selling climax, and then has met a secondary support test. 
  3. The stock has been undergoing typical volume patterns, where volume has been increasing during periods of bullish rallies and decreasing on falls in price. 
  4. Stock breaks through the resistance line and establishes the resistance line has new support. 
  5. The stock is experiencing ascending support lines, where each subsequent support line is higher than the last. 
  6. Each peak the stock is reaching is higher than the last. 
  7. The stock has a higher strength than the overall market. 
  8. The base of the stock chart has formed (ie. reverse head and shoulders pattern) to create a horizontal price line. 
  9. The risk-reward ratio is 1:3, so, the upside potential for profit is three times more likely than the potential for loss. 

Wyckoff tests for selling – Distribution period

  1. The P&F chart has already determined the optimal upside, and the stock has reached its highs in the period. 
  2. Activity is viewed as bearish, where volume decreases during periods of rising prices, and increases during sell-offs. 
  3.  The stock has reached its preliminary support level and buying climax. 
  4. The stock is weaker than the market, as it does not grow as much as the market during rallies, and falls more than the market during downturns. 
  5. The support line or upward trend line has been penetrated. 
  6. The stock is experiencing lower high’s (in accordance with the P&F chart). 
  7. The stock is experiencing lower low’s (in accordance with the P&F chart). 

This article is part two of the Wyckoff Method analysis series. Click here for part 1

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