Can the Wyckoff method help us define the bottom of a market?

Long before cryptocurrencies existed, the investor Richard Wyckoff developed a method on what drives market prices. This method says that large investors repeatedly fleece retail investors by moving the market for their own benefit. We can also apply this centuries-old method to investing in cryptocurrencies. Today we are going to give a trading training on the Wyckoff method to understand where the strong hands plan to take prices and how we can prepare. 

What is the Wyckoff method?♻️​

Wyckoff explained his method by describing an imaginary entity that is responsible for manipulating the market for its own benefit. We can take advantage of it if we understand what it is based on. According to Wyckoff's method, the market moves in four stages. First, there is accumulation, in which large investors accumulate their positions as stealthily as possible. Unlike small investors, large whales cannot buy everything they want at once because there would not be enough sellers to sell to them. In turn, if they execute orders of the caliber of their accounts, they would cause imbalances in the price of the asset in question. That is why they should buy gradually, little by little, keeping the price low until they achieve their goal for what comes next.

This is when the price growth phase begins. Once the strong hands have absorbed all the supply, there are not many sellers left, only buyers, so prices rise rapidly. This attracts smaller investors (even those who have just sold their positions to the whales) to buy back, causing the price to continue rising. Once large investors have profited from the price increase, they have to realize those profits by selling. And so begins the distribution phase, in which they sell little by little, and silently, to keep the price at higher levels until they finish downloading. It should also be taken into account that large investors can accumulate short positions here before driving the price down in the reduction phase.

What does the Wyckoff method bring to our trading training?​

These stages are constantly repeated in the case of bitcoin and other crypto assets. At the end of the day, crypto is a tiny market compared to the stock market. Strong hands can take months to accumulate or distribute their positions. That's why bitcoin bottoms are often seen taking so long to form, and "V-shaped" recoveries are rare compared to stocks. In 2018 (bottom chart), it took four months for bitcoin to find a bear market bottom. And in 2015 (chart above), it took 10 months for larger investors to receive their buy orders before the next bull run. As we see, applying this method in our trading training may seem complicated, but not everything is what it seems... 

If we look at what has happened with Bitcoin in the last two years, we can see several examples of Wyckoff's stages in action. We must keep in mind that, in reality, there may be two or more accumulations (reaccumulations) and price increases in a row, or two or more distributions (redistributions) and price decreases in a row. That's why we said that it might seem complicated to apply the method to our trading training. 

So, can the method be used to find out whether the price is more likely to go up or down?路‍♂️​

When bitcoin or any other digital asset is moving in a sideways price range for a while, that is the time where we should pay attention. The big players are likely building their positions, and preparing for the next volatile move. It turns out that's exactly what bitcoin has been doing since June, oscillating between about $18.000 a coin and just under $25.000.

And although there is no way to know for sure whether the current range is accumulation or distribution, there are clues that can help us distinguish the difference. If it is an accumulation, we must look at how the price behaves at the bottom of the range. If it continues to be bought every time it dips slightly below, it is usually a sign that large investors are buying. When the price temporarily drops below the bottom of the range, many investors often interpret it as a signal to sell. Since large investors need many sellers to buy, they use these temporary dips to load their positions.

What situation are we in right now?​

We have proposed a hypothesis to show the possible path that Bitcoin could take during the following months to deepen this lesson for your trading training. Mainly we could see the price falling below the accumulation range, where strong hands will absorb the selling positions, returning back to the accumulation range, better known as a “spring”. This would be a good entry point to take advantage of the possible move higher. Next, if it manages to overcome the upper part of the range and establish itself above it, we could make a second purchase, at the moment the breakout is confirmed, better known as a “retest”. 

Markets tend to have certain patterns of behavior. And they usually revolve around incentives, fear and greed, whatever the situation. That is why the Wyckoff method, which is already a century old, can continue to be a useful tool for our trading training.