Buying and Selling Tests of the Wyckoff Method (part 3 out of 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
- The downside protection has already been established, that is when the stock has reached its low points in a period.
- The stock has been given preliminary support, has undergone a selling climax, and then has met a secondary support test.
- The stock has been undergoing typical volume patterns, where volume has been increasing during periods of bullish rallies and decreasing on falls in price.
- Stock breaks through the resistance line and establishes the resistance line has new support.
- The stock is experiencing ascending support lines, where each subsequent support line is higher than the last.
- Each peak the stock is reaching is higher than the last.
- The stock has a higher strength than the overall market.
- The base of the stock chart has formed (ie. reverse head and shoulders pattern) to create a horizontal price line.
- 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
- The P&F chart has already determined the optimal upside, and the stock has reached its highs in the period.
- Activity is viewed as bearish, where volume decreases during periods of rising prices, and increases during sell-offs.
- The stock has reached its preliminary support level and buying climax.
- 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.
- The support line or upward trend line has been penetrated.
- The stock is experiencing lower high’s (in accordance with the P&F chart).
- 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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Written by: BetterTrader.co