3 months ago 4 min read

Trading Guide on How to Use the Wyckoff Accumulation Principle


In terms of the Bitcoin and cryptocurrency markets, not all Wyckoff accumulation setups result in significant price increases.

Richard Wyckoff, a pioneer of technical analysis in the first half of the 20th century who divided the market cycle into four separate phases, is the namesake of the classic technical analysis setup known as Wyckoff Accumulation.

However, is Wyckoff a trustworthy pattern, especially when trading cryptocurrencies? Let's check it out.

Wyckoff Accumulation: What is it?

Wyckoff accumulation is one of the four phases—the others being markup, distribution, and markdown—that make up the Wyckoff market cycle hypothesis. In plain English, each phase decides when major players control the market's course.

When wealthy individuals increase their purchasing and generate demand, the accumulation phase naturally arises.

Increased interest causes the price to establish higher lows while trending higher. As a result, the price rises over the top trendline of its trading range and enters the Wyckoff cycle's markup phase.

Or, to put it another way, a persistent upward tendency, as seen in the diagram below.

The Phases of Wyckoff Market Cycle | Source: TradingCoach

Accumulation Processes and Actions

Big players gather assets inside a predetermined trading range as they get ready for their next bull strategy during the accumulation phase (TR). As they proceed, the assets bought outnumber the assets sold, which causes a decrease in the supply and aids the price surge over the TR.

Small investors using the Wyckoff accumulation method must therefore accurately predict the direction and rate of the TR's exit.

Fortunately, they have access to Wyckoff's widely-used accumulation scheme from the early 1930s, as seen below.

Wyckoff Accumulation Schematic Featuring Its Events and Phases | Source: StockCharts

Phase A displays the exhaustion of the prior downturn. Preliminary support (PS), which marks the beginning of significant purchasing and rising volumes, signals the beginning of the end of the current negative trend.

When the price reaches its selling climax (SC), at which time traders begin covering their short positions and major professional investors begin to absorb the retail side sell-pressure, the downside bias begins to fade.

The price then abruptly recovers to its automatic rally (AR) level, which establishes the upper limit of the Wyckoff trading range. The price then returns to test the areas close to SC, occasionally even dipping below it for a support level test known as a secondary test (ST).

Theoretically, it suggests institutional investors have been stockpiling the assets in expectation of a markup event. It is common to have more than one ST in Wyckoff accumulation, which drives the price into consolidation area in Phase B.

Consequently, increased volumes frequently go hand in hand with the rebounds from SC-ST levels in Phase B. In contrast, the volumes of the pullbacks from the AR levels are decreasing, indicating that the liquidity on the downmoves has run out. To put it another way, the asset is preparing for Phase C.

Large investors study the market for prospective supply surges during the "test" phase of Phase C. In other words, the unexpected appearance of sellers runs the risk of undermining Wyckoff's entire theory. As a result, during the test phase, the price increases cautiously.

The test time ends when the price crosses over the AR level, exhibiting the supposedly strong signal (SOS). Another little correction toward the final point of support follows (LPS).

The entire price movement falls under Wyckoff accumulation theory Phase D, demonstrating the superiority of demand over supply. Traditional analysts therefore view LPS as a superb entry point for traders and investors into the market.

In Phase E, the asset completely exits the trading range and enters the Wyckoff market cycle's markup phase.

How to Use Wyckoff Accumulation in Cryptocurrency Trading

In terms of the bitcoin market, not all Wyckoff accumulation setups result in significant price increases.

For instance, when it was trading for around $9,000 in early March 2020, Bitcoin's price had already reached the SOS stage of its Wyckoff accumulation setup. But after the COVID-19-driven worldwide market catastrophe, BTC/USD declined below $5,000 by mid-March, ignoring the bullish Wyckoff signals.

Bitcoin's Failed Wyckoff Accumulation Setup From 2020 | Source: TradingView

To benefit from the variations inside the Wyckoff accumulation's trading range, traders can use a range-bound approach. They might achieve this by initiating a long position on a rebound from the ST range, with the AR level serving as their main upside objective.

In the event of a false breakout, traders could simultaneously set a stop-loss below the ST level to prevent further losses.

However, traders seeking to open aggressive long positions might require extra support from the fundamental drivers of the crypto asset.

As an illustration, the Wyckoff accumulation arrangement for Bitcoin between May 2021 and November 2021 led to a price increase from roughly $37,000 to as much as $69,000. (after a breakout in Phase E). A era of loose monetary policy and rising mainstream adoption coincided with the sharp gains.

Bitcoin's Wyckoff Accumulation Setup From 2021 | Source: TradingView

However, cautious traders can hold off until the Wyckoff setup reaches Phase D before opening a long position following the price's convincing break above the SOS point. Naturally, it is recommended to set a stop-loss below the SOS in order to exit the trade with less loss should the trend change.

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