Starting with the Historical Perspective
Many of us might not be familiar with his name, but Richard Wyckoff is considered to be one of the greatest traders in history and he has left behind a legacy unparalleled in the world of finance. He began his illustrious career as a mere stock runner and was able to rise to the heights of owning his own brokerage. Throughout his life, Wyckoff was perpetually interested in the strategies used by the most successful Wall Street traders and this fixation enabled him to develop his own unique methodologies.
Understanding Wyckoff’s Philosophy
Wyckoff’s philosophy builds on the understanding of the intricate relationship between supply and demand forces in the markets. He believed that what actually moves the markets is the institutional and big money players – Wyckoff referred to them as ‘Composite Man’. Through exhaustive analysis and extensive reasoning, Wyckoff was able to digress that these Big players were adept at manipulating the markets by influencing the emotions of the public.
Building on this, Wyckoff laid out the three laws that guide the market:
1. The Law of Supply and Demand: This is simply the interaction between buying pressure (demand) and selling pressure (supply). According to Wyckoff, an asset’s price will rise when demand outweighs supply and will plummet when supply overpowers demand.
2. The Law of Cause and Effect: In the world of Wyckoff, this was all about hindsight. The cause could be a lengthy period of accumulation or distribution which is then followed by an effect, a powerful price move. Additionally, the greater the period of accumulation or distribution, the greater would be the consequent upward or downward price movement.
3. The Law of Effort vs. Result: This law aims to establish a relationship between volume (effort) and price (result). If an increase in volume does not result in a substantial change in price, it is usually an indicative of a turn in the market.
Significance of Wyckoff’s Method
These laws educated traders about the strategies of ‘Composite Man’, thereby enlightening them as to when the ‘Composite Man’ was appearing to buy or sell. Herein lies the importance of Wyckoff’s method: an understanding of these laws could provide a trader with significant opportunities for profit.
For instance, by recognizing these signs, it becomes possible to anticipate a potential price reversal before it occurs. Furthermore, predicting the future direction of price movement – upward, downward or sideways – becomes a more straightforward task for the observer.
Wyckoff’s Four Phase Market Cycle
Wyckoff’s simple yet effective interpretation of the market cycles could be broken down into four distinct phases: Accumulation, Markup, Distribution, and Markdown. He describes the way ‘Composite Man’ operates within each of these individual phases, giving traders the ability to anticipate their next move.
Final Thoughts
Wickoff’s method, known for its unique blend of observational and deductive prowess, is an enriching trove of insights that traders, both old and new, can find beneficial. By gaining an understanding of how the ‘Composite Man’ moves markets, traders can enhance their abilities to predict future price movements with a greater degree of accuracy. Therefore, immersing oneself in Wyckoff’s philosophy is a significant step to reaching your potential as a trader and conquering the ever-fluctuating market forces.