How to trade cryptocurrencies using Wyckoff’s Theory of Accumulation

On December 2, independent market analyst Stockmoney Lizards She said Bitcoin (BTC) had entered the process of bottoming out within its current $15,500 to $18,000 price range, citing Wyckoff Accumulation.

Wyckoff Accumulation is a classic technical analysis setup, named after Richard Wyckoff, a pioneer of technical analysis in the first half of the twentieth century, who divided the market cycle into four distinct phases.

But is Wyckoff a reliable model, especially for cryptocurrency trading? We find or.

What is Wyckoff accumulation?

Wyckoff accumulation is one of the four phases listed in Wyckoff’s market cycle theory, the other three being markup, distribution, and markdown. Simply put, each stage determines when large entities drive the direction of the market.

The accumulation phase develops properly when the big pockets increase their purchases and drive demand.

As a result of higher interest, the price makes higher lows while trending further up. In doing so, the price moves above the upper trend line of its trading range, moving into the markup phase of the Wyckoff cycle.

In other words, a sustained uptrend, as shown in the diagram below.

Phases of the Wyckoff market cycle. Source: TradingCoach.co.in

Events and stages of accumulation

In the accumulation phase, the big players prepare for their next bull strategy by accumulating assets within a given trading range (TR). As they do so, assets bought outnumber assets sold, leading to a drop in available supply which, in turn, helps prices rally above the TR.

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Therefore, small investors embarking on the Wyckoff accumulation strategy must correctly identify the direction and speed of the TR exit.

Fortunately, they can draw assistance from a widely traced accumulation scheme created by Wyckoff in the early 1930s, as illustrated below.

Wyckoff accumulation scheme with its events and phases. Source: StockCharts.com

Phase A it reflects the exhaustion of the previous downtrend. Begins with preliminary support (PS) – a period when substantial buying begins along with increasing volumes – suggesting that the prevailing downtrend is nearing its end.

The downside bias eases after the price falls to its sales climax (SC)a point where large professional investors begin to absorb the retail pressure and traders begin to cover their short positions.

As a result, the price sharply rebounds to its automatic rallying (AR) level, which defines the upper limit of the Wyckoff trading range. Then, the price returns to test the levels around the SC, sometimes even dipping below it for a so-called secondary test (ST) of the support.

BTC/USD 12-hour price chart showing a potential Wyckoff accumulation setup. Source: Stockmoney Lizards

It is common to have more than one ST in the Wyckoff accumulation, which takes the price into Phase B consolidation territory. Theoretically, this means that institutional investors have accumulated the assets in anticipation of a markup event.

Therefore, rebounds from SC-ST levels in Phase B they typically accompany higher volumes. Conversely, pullbacks from AR levels see volumes declining, showing that liquidity is running out on moves to the downside. In other words, the asset is preparing Phase C.

Phase C begins with “test“, in which large investors scan the market for potential supply booms. In other words, the sudden arrival of sellers which threatens to invalidate the entire Wyckoff logic. As a result, the price rises cautiously during the test period.

The test period ends when the price breaks through the AR level, thus showing the so-called sign of strength (SOS). This follows another short-term correction towards the last support point (LPS).

All price action occurs in Phase D of Wyckoff’s theory of accumulation, which shows the dominance of demand over supply. As a result, mainstream analysts view LPS as an excellent place for investors and traders to enter the market.

In Phase Ethe asset leaves the trading range entirely to enter the markup phase of the Wyckoff market cycle.

How to trade cryptocurrencies using Wyckoff Accumulation

Not all Wyckoff accumulation setups lead to massive price hikes as far as the cryptocurrency market is concerned.

For example, the price of Bitcoin entered the SOS phase of its Wyckoff accumulation setup in early March 2020, when it traded for nearly $9,000. But BTC/USD then dipped below $5,000 in mid-March, snubbing Wyckoff’s bullish signals in the wake of the global market meltdown caused by COVID-19.

Failed Wyckoff accumulation setup of Bitcoin from 2020. Source: TradingView

Traders can use a range-bound strategy to profit from fluctuations within the trading range of the Wyckoff accumulation. They could do this by opening a long position on a bounce off the ST range while looking at the AR level as their main upside target.

At the same time, traders could place a stop loss below the ST level to avoid deeper losses in case of a false breakout.

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On the other hand, traders looking to place aggressive long positions may need further confirmation from the fundamental catalysts regarding the crypto asset.

For example, Bitcoin’s Wyckoff accumulation setup between May 2021 and November 2021 led to a price increase from approximately $37,000 to $69,000 (after a breakout in Phase E). The explosive gains were accompanied by a period of accommodative monetary policy and growing mainstream adoption.

Bitcoin Wyckoff Accumulation Setting from 2021. Source: TradingView

However, cautious traders can wait for the Wyckoff setup to reach Phase D. They can enter a long position after the price clears the SOS point with compelling volumes. Naturally, it is recommended to place a stop loss below the SOS to exit the trade with smaller losses in the event of a trend reversal.

This article does not contain investment advice or recommendations. Every investment and trading move carries risk and readers should conduct their own research before making a decision.