Key components of the Wyckoff Method include three fundamental laws: the concept of the Composite Man, a methodology for chart analysis (Wyckoff’s Schematics), and a five-step approach to the market. The three laws cover the principles of supply and demand, cause and effect, and the relationship between effort and result.
The first law, the Law of Supply and Demand, states that prices rise when demand exceeds supply and drop when supply is greater than demand. The second law, the Law of Cause and Effect, emphasizes that differences between supply and demand are not random but result from specific events after periods of preparation, leading to trends. The third law, the Law of Effort vs. Result, highlights that changes in an asset's price are a result of trading volume, and harmony between volume and price suggests a continuation of the trend.
The concept of the Composite Man involves viewing the market as controlled by an imaginary entity representing major players, such as institutional investors and market makers. This figure strategically accumulates and distributes assets, acting in opposition to the majority of retail investors. The market cycle involves phases of accumulation, uptrend, distribution, and downtrend.
Wyckoff’s Schematics, focusing on Accumulation and Distribution, break down these phases into smaller sections and events. Accumulation involves phases like Preliminary Support, Selling Climax, Secondary Test, Cause (Phase B), and Last Point Support. Distribution follows a similar structure with Preliminary Supply, Buying Climax, Automatic Reaction, Secondary Test, Cause (Phase B), Upthrust After Distribution, Last Point of Supply, and the beginning of the downtrend.
Wyckoff's five-step approach to the market is a practical guide based on his principles and techniques. It involves determining the trend, assessing the asset's strength, looking for sufficient cause, evaluating the likelihood of the move, and timing the entry.
Despite its age, the Wyckoff Method remains widely used, offering traders and investors a logical framework for decision-making based on principles that transcend emotional reactions. While it provides valuable tools for risk reduction and increasing chances of success, it’s important to remember that no investment technique is foolproof, particularly in the highly volatile cryptocurrency markets.