If you want more Wyckoff, take a look at the “Wyckoff Trading” tag in the blog.
What is Wyckoff Method?
- The Wyckoff Method is a strategic trading approach based on the supply and demand dynamic that forms the base of market cycles.
- The Wyckoff method distinguishes several typical ‘phases’ (patterns) where the market either ranges or advances (in either direction).
- It is suitable mainly for trading the higher timeframes.
- Richard Wyckoff originally developed the trading method for the stock market several decades ago but today’s cryptocurrency traders are finding it very useful once again - mainly on the markets of larger cryptos such as BTC or ETH.
Wyckoff Method in Crypto
Richard D. Wyckoff’s trading method was popularized in the crypto trading circles mainly thanks to John Bollinger who has been using it a lot for his chart analyses on crypto twitter. He usually combines Wyckoff method with Bollinger bands, his own invention.
Wyckoff + Bollinger Bands: Great for Ranging Crypto Markets
The combination of Wyckoff method and Bollinger bands has a reason:
- The Wyckoff method describes market ranges, in other words periods of reduced volatility.
- Cryptocurrencies trade in pairs and show a typical pair behavior.
- Trading pairs with bbands give you an edge.
Definitely something to consider: The markets for big cryptos are maturing, traders who were used to capitalising on the obscene crypto volatility might have to actually develop a skill for the milder, ranging trades before their time comes again with the next alt season.
John Bollinger: “Bollinger Bands work fantastic on Bitcoin. And they work fantastic on all forex. There’s a reason for that. Currency trading is pairs trading - you’re long one and short the other, essentially. The idea is to earn a return at reduced volatility over time. So, forex is pairs trading and pairs have a statistical property, they’re stationary or they exhibit in the statistical parlance, stationarity. And it just turns out that Bollinger Bands work just a little bit better with series that exhibit stationarity. So, there is sort of a built-in edge to using Bollinger Bands on anything that’s a pair.” (From Meb Faber’s podcast, Episode 37, 2017/02/01)
Key Wyckoff Phases
One of the most notable things the very old Wyckoff method left us are the so called phases.
In general, some market phases are characterised by increased volatility or rapid price changes.
In Wyckoff method, the key market phases originally analysed by Wyckoff are in fact ranges:
- Ranges are market phases where volatility is low and price is confined within a certain level.
Market ranges are where experienced traders start scaling in and slowly building up a position in the anticipated direction. This way, once the ranging phase is over and the volatile phase starts, they are already riding on a profit.
As a result, there is less pressure to FOMO on them and in fact less risk as well: Being in a trending market with a position already in profit, the trader can simply check the markets once a day and move his stop loss.
What is a Market Range
- Ranges are market structures where the market is not trending.
- Ranging market is bouncing (roughly!) between the same two support and resistance levels
- Volume is typically declining with time.
More on ranging (sideways) markets in our glossary:
Wyckoff Market Cycles in Crypto
Cryptocurrencies had an amazing multi-year bull market that ended early on in 2018.
That means right now the two most seen and most remembered Wyckoff phases in cryptocurrency markets are the (re)acummulation phase and the distribution phase.
- Accumulation phase is the bottom of a bear market.
- Reaccumulation phase is the breather pause in a bull run.
Distribution range is the period of trend reversal at the end of a bull run.
- Here is the acummulation phase from the same source
Is it Wyckoff Reaccumulation or Wyckoff Distribution?
The notorious problem is the reaccumulation phase looking very much like the distribution phase.
From the high-level point of view, there is only one difference - the market continues to rise after reaccumulation rather than proceeding to markdown, which it does in distribution.
That’s not very helpful when analyzing the market, is it?
You will need to go deeper to see how the distribution and re-accumulation differ.
Let’s look into the ways you can tell one from another.
Supply and Demand in Wyckoff distribution vs Wyckoff reaccumulation
Telling the difference between Wyckoff distribution and Wyckoff reaccumulation boils down to the basics of supply and demand.
While hard fundamentals might not matter that much on legacy markets, they still do apply better in the free-ish, not overly regulated crypto.
Richard Wyckoff considered the very basic principles of supply and demand and applied them to the markets when he developed his trading method:
Excess supply leads to decrease in price, excess demand leads to price increase – plus, if there is effort, in the markets the result must be proportional to it. The volume and the price change must be in harmony.
This supply vs demand logic is particularly useful at the ends of ranges.
Analyze The market patterns: “Trying to jump the creek” vs “Walking on thin ice”
This is a thing that will suit best to the more macro-oriented traders.
In the final stages of a range, when the price bounced back and forth in a range a few times, the market can do two things:
- It can keep pressing down to support levels, getting bought up short term but not in a way that would gain following and become long-lived.
- Or the market keeps rallying in bursts, pushing up towards resistance, getting rejected back down but clearly only for the stort term gains targeted by scalpers and bots who short the resistance. The dumps do not gain serious following.
In a way, traders are making the market like this.
Use BBands: Tops have the typical 3-push pattern, bottoms the typical W pattern
In ranging markets, Bollinger bands provide balance boundaries.
- The center line on Bollinger Bands, which is in fact a moving average, forms the mean price around which the ranging occurs. Note that the line doesn’t have to be perfectly horizontal at all! That’s one of the practical points where combining Wyckoff method with Bollinger bands gives you an edge.
- The upper and lower bands work with standard deviations, or StdDev. They form the upper and lower boundary of a range. With StdDev of 3, overshooting the bands will likely lead to a retracement back inside of the bands, but just the overshooting alone is not a trigger to open a trade: You will find that sometimes it can overshoot quite substantially.
Now that we have our boundaries established, we can start searching for typical Wyckoff range chart patterns relative to the bands.
This is where bbands get to be really helpful: Traders often look for lower highs when they are looking for a top formation and higher lows when they are looking for a bottom formation. But they are only considering the basic horizontal chart levels.
That’s not wrong, it’s just a bit too basic. If you look at the actual price action’s own boundary, which are the bbands, you get a more refined information and potentially a better entry or exit.
Because of the fear and greed psychology, cryptocurrency markets typically do three pushes when forming a top but only two drops when forming a bottom - also known as three pushes to a high and W-bottom.
Let’s take the W-bottom formation. On the chart’s vertical axis only, you’d think of it like this:
- If the price of a bottom 2 is higher than the price of bottom 1, it’s a higher low and a convincing bounce.
- If the prices are the same, it’s still a W-bottom but somewhat weaker.
- If the bottom 2 is lower, it might not be the final bottom yet.
With bbands you will look for the 3-push and W-bottom structures relative to the bbands:
- If the bottom 2 has lower price than bottom 1 but is farther up from the lower bband than bottom 1, it’s a strongly convincing bottom. The edge lies in the fact that it’s a higher low relatively to the bbands, a bullish structure that a lot of traders will miss.
Combine Wyckoff with Volume Indicators
A simple and effective approach to see if a range is distribution or reaccumulation is simply to look at volumes.
It is true that especially on shorter timeframes, whale traders might be able to paint the volume – but sometimes their campaign gains following nonetheless.
With basic volume, you get to use the basic supply/demand logic:
- If there is a drop, the volume is rising but price gradually drops less and less – that’s a price vs volume divergence. It means there is significant demand and the drop is not expected to continue for much longer.
If there is a drop, the volume is rising and the price keeps sliding down – there is not enough demand and plenty of supply. The price is bound to drop some more.
- If there is a rally, the volume is rising but price starts topping – again, that’s a divergence. Local top there.
- If there is a rally, the volume is rising and price is still pumping – it will keep going.
By this logic, when there the market starts ranging, flagging and correcting healthily, the volume will diminish through the range too.
There are volume-based indicators like on-balance volume and others but what’s perhaps most helpful for traders are colored candles. There are several scripts for TradingView available that will color your chart’s candles according to the changing trading volume flow. Volume flow colored candles will give you a quick single-look idea about the state of the market, no need to overcomplicate it.
Volume Flow Script for Tradingview
One of the best ones is a free one, was made by spacetrader and you can get it from the strategy library if you search for
[ST] Volume Flow v6. The code and some how-to is available here, it is well possible to reuse it for a script in another language.
- Make your free TradingView account here
Case in Point: BTCUSD market in 2017
As they say, hindsight is 20/20. Here are two different kinds of BTCUSD price action.
A/ Weekly BTCUSD chart with the infamous 2-year bear market: there was an accumulation structure at the bottom.
B/ Daily BTCUSD chart of recent BTCUSD action that ended up corrective continuation.
The structure A/ formed obviously after a long downtrend. The fundamentals were shaken by MtGox bankruptcy, the prevailing opinion was that bitcoin was going to bleed out into death and that the whole cryptocurrency experiment failed.
From the fundamental point of view, at this stage savvy traders are have the option to literally buy wholesale: Buying the capitulation, provided the trader sees an opportunity in the asset. (“It will not really fail, there are industries that need payments resistant to censorship and regulations, people who just went in during the hype to make a quick buck are just capitulating irrationally.”)
Pro Tip: Ranges within ranges
For a deeper analysis you can scale in to shorter timeframes and look for ranges within the range.
- In every range, there will be part of a price action that will trade closer to the upper boundary of the range. That can be identified as the micro-distribution.
- From there, the price might drop to the middle of the range or deeper and consolidate there for a bit.
- In crypto, it typically results in a deeper drop: the micro-accumulation.
- From there, the price gets bought up towards the middle of the range again. The future direction depends among other things on the strength of the bounce.
Finding the inner market ranges
You get your inner ranges simply by checking lower timeframes, which you do anyway when you are looking for entries. The only change here is you are looking for ranging structures that stay within the bbands.
Let’s take the daily range in BTCUSD from above - that’s a 1D chart with the original range:
Now let’s switch to 4H:
Here you can easily spot the first inner reaccumulation range:
- Market reaches a resistance, tests it several times. In this case there were some long-term Fibonacci retracement lines.
- Relevant bband basis starts curling down.
- Price-wise, higher highs form but are already further from the upper bband, indicating weakness.
- Eventually, the market drops below the bband basis and fails to return up over it.
- Panic drop occurs but is bought up with force.
- Market continues upwards.
The second inner range was a distribution:
- Market hits an important fib line and makes a sharp top.
- Negative volume keeps picking up.
- Drop to median of the outer range (red dashed line) gets bought up but this rally crashes and fails to push through resistance.
- In a very simplified way you can say that if the price keeps pressing onto a support/resistance for some time, you can assume it will break it, even if only for short time. With support/resistance, it’s typically either a clear bounce, or it goes through.
- Market continues downwards.
Following the fast markdown the market tests previous breakout point and gets quickly bought up, consolidates a little on diminishing volume (sign of ranging coming to close) and continues upward. Looking back to the 1D chart you see the market formed a strong w-bottom with good higher low (both price-wise and relatively to the bband) and pushed through a resistance line.
All in all, on the 1D this was reaccumulation: A continuation structure in a bull trend.
Assessing the shorter timeframe movements of the range should help you get the idea about the health of the trend and the next direction of the market.
Wrapping Up Wyckoff Range Basics
Technical Tools & Fundamental Analysis
Simple, basic TA can be very helpful:
- Do the partial run-ups form healthy-looking bull flags?
- Does the range have M/W patterns?
- Do the candles at the bottoms of the retracements have long wicks, indicating strong dip-buying?
Also look for rare formations provided they are reliable – like widening formations that resemble bull flag which is rare but it indicates good bullish momentum:
Fundamental value of the asset
It would not be Wyckoff if there wasn’t some fundamental pickiness about what to actually trade. Indeed, fundamental analysis cannot be completely discounted here.
In crypto, fundamentals can seem problematic though:
- The valuation of most altcoins is based on future expectation rather than any kind of present utility.
- Altcoiners however will say the same about bitcoin, argumenting that not many people use it for actual payments.
The real fundamental data for big cryptocurrencies exist though.
Look at the following metrics:
- Bitcoin network activity
- Daily transaction counts
- Total number of ATMs
- P2P exchange data
- Darknet markets usage
At the end of the distribution phase, it is fair to be caustiously leaning bullish on the base of strong fundamentals.
At the end of a bull run, it is to be expected that the (fundamentally) strongest asset will start it’s decline as the last one.
How to trade a ranging market in general?
- Short-Term: Look for bounds of the inner ranges and formations and scalp them.
- Long-Term: Prepare to take substantial position at important points. Determine the “doom” bottom and set buys or the “upthrust” and set sells.
How to set price targets when trading ranges?
- Short Term: Formation targets
If you are trading flags, channels, megafones and triangles, the height of these usually provides a short term target within the range.
- Short/Mid Term: SCMR (Blue candle magic)
One of the very popular (paid) technical analysis suites for TradingView has been the SCMR. It provides the elusive colored candles - blue candle signifying a bullish shift in volume, suggesting bottom is near. Another popular feature are the dynamic levels which are basically better pivot lines. Traders use these very successfully.
- Mid/Long-Term: Point & Figure
- Mid/Long-Term: Fibonacci retracement
It’s anyone’s guess if the Fibonacci retracement stuff fundamentally makes sense but in 2017 most traders still use fibs to determine their targets, especially in a bull run that keeps reaching new ATHs where there is no previous data to draw resistance lines from. Some people do use simple pivots, but it seems that Fibs are still the most prevalent – which, if nothing else, makes them valid.
- How to draw fibs from a correction/markdown
The correct way to draw Fibonacci retracement lines for a currection or a markdown is to start from the swing high and drag the fib all the way to the swing low. This way you get to where to the north the market can reach in recovery from the correction.
You can get a fib retracement from a corrective range too - drag from its high to its low on the timeframe where you see the range. It’s far from a bad idea to have several fib structures one over another to see which fib levels coincide.
Cryptocurrencies seem to be particularly fond of the following fib extension levels: 1, 1.618, 2.618, 4.236. These are the ones that you need to have ticked in your TradingView settings as a minimum.
- How to draw fibs from a runup
If you want to see how far the market will correct from a runup, you do the opposite: start drawing the fib from the bottom to the high.
Fibonacci levels can provide longer term and swing targets if you use them on higher timeframes, even targets that will contain multiple ranges.
That’s all. If you think this post was useful, feel free to share it anywhere.
Posted in: Strategic Tools
Written by KarlVonBahnhof
KarlVonBahnhof also on Reddit, Chris belongs to the crypto trader class of 2013. Located in the Americas most of the time, you're most likely to meet at r/BitcoinMarkets though.