Crypto Academy Week 16 - Homework Post for Professor @fendit : The Wyckoff Method

This is my homework for Steemit Crypto Academy Season 2 Week 8 for Professor @fendit’s lesson The Wyckoff Method.

Note : I performed this task on Windows 10 PC, Google Chrome browser.

1. The Composite Man, The Fundamental Laws, and My Point Of View On Them

1.1. The Composite Man

The Composite Man is the theory proposed by Richard Demille Wyckoff (1873–1934) to help understand price movements in stocks and the market as a whole. This Composite Man theory is part of the Wyckoff Method. In this theory, Wyckoff suggested that all the fluctuations in the market and various stocks should be studied as if they were the result of one man’s operations. He named this man “the Composite Man”. Wyckoff needed us to think that this Composite Man (or Composite Operator) sits behind the scene and manipulates the stock. The traders who understand the game he plays will make great profits, while the traders wo do not will go different way.

The Composite Man idea that Wyckoff formulated basically is the way to simplify the understanding about the market sentiment and psychology. It it helps traders monitor the market and understand trends better to decide when to buy or sell. The Composite Man theory, as part of the Wyckoff Method, is classified as technical analysist tool in trading.

How can The Composite Man theory help traders? It does by observing the trend. The Composite Man strategy is somewhat predictable. The investors (traders) can learn from it, and put to a good use to take advantages of the market. The Composite Man always works in four phases:

• Accumulation. In this phase, the Composite Man accumulates assets before most investors do. But he does not do it immediately and in a hurry, he did it gradually to prevent any significant price swings.
• Uptrend. Once he has enough stock, the price will start to rise. At this time investors are increasingly interested and this causes demand to increase. When the market shows this trend, more and more investors are interested in buying. At this point, demand is higher than supply.
• Distribution. At this time, when a high ask price causes prices to soar, The Composite Man relinquishes his share.
• Downtrend. The release of stock by The Composite Man will slowly rise up the supply, and eventually will make supply higher than demand, causing prices to fall.

The idea is: the Composite Man buy as many stocks while keeping price swings at a tolerable level. And when the price is moving up, he starts the selling and take profits. Buy cheap, sell high.

1.2. The Fundamental Laws

There are three fundamental laws in Wyckoff Method, which are: The Law of Supply and Demand, The Law of Cause and Effect, and The Law of Effort vs. Result.

1.2.1. The Law of Supply and Demand

This law is the main law in the study of economics. In this law there are three arguments, namely:

• When the demand is higher than supply, the price rises.
• When the supply is higher than demand, the price drops.
• When demand is equal to supply, there is no significant price change.

1.2.2. The Law of Cause and Effect

The Law of Cause and Effect stipulates that every action will cause a reaction (effect), and that everything is initiated (caused) by something. Easy way to put this law to Wyckoff Method is : accumulation leads to uptrend, and distribution leads to downtrend. Accumulation and distributions are the cause (starting points), while the uptrend and downtrend are the effects.

1.2.3. The Law of Effort vs. Result

This law states that every action must have an equal and opposite reactions. The changes in an asset’s price are a result, while the trading volume is the effort. So, to drive the price up, it takes efforts (in the form of volume). Related to The Composite Man theory, the accumulation phase is the effor to drive the price up.

1.3. My Point Of View On The Composite Man Theory and The Three Fundamental Laws of Wyckoff Methodology

The Composite Man theory helps us understanding the market trend in much simpler way. Since the Composite Man acts in predictable manner, investor can take advantages by learning from it and following the trend which is performing.

The three fundamental laws explains how The Composite Man's actions relate to the resulting effect on the market. By making an accumulation, The Composite Man causes the supply to decrease and therefore the price starts to increase. The increase in prices is considered a positive trend and this attracts many investors to do the buying so that demand slowly increases and it also increases prices. Then when The Composite Man releases his share, the three fundamental laws also explain that it is time for a correction to occur and the price will decline.

I think this two aspects of Wyckoff Methodology is easy to understand in theory, but to put it into action, it may take a lot of trainings or practices.

2. Chart Analyzing

This time I am analyzing this 15 minutes timeframe of MDX/BNB chart from binance.com.

^{15m MDX/BNB Chart on binance.com}

1. Accumulation. It can be seen in this phase there was no significant price volatility. Prices tend to move sideways. The beginning of the cycle began to take shape here.
2. Uptrend. As accumulation reduced supply, attracted more investor which increased the demand, prices slowly creep up. Accumulation phase as “the effort”, results in the price increases. One re-accumulation occurred in this phase (the cause), which drove the price up furthermore (effect).
3. Distribution. When the price reached the peak, the selling begun. Time for investors to take profit from the market.
4. Downtrend. Profit taking (selling assets) lead to the increasing of the supply and decreasing of demand, made the price decrease. There were 3 re-distribution phases occured.

Conclusion

It is a technical analysis of the state of the market that can help traders determine the right time to enter the market and make trades. Likewise this will help them determine when they should make profit taking (sell their assets). Understanding market trends (market psychology) better will certainly help a trader in making decisions in the market. The Wyckoff Method with it's The Composite Man theory and the three fundamental laws is not difficult to understand in theory, with enough practice, someone will gain understanding and will be able to put it in to action on the market.

Thanks

Thanks Professor @fendit for the lesson about The Wyckoff Method.

Pictures Sourcing

• The editorial picture was created by me.
• The chart picture was a screenshot from binance.com and was edited with Photoshop CS 3.

Sources and Reading Suggestion

• https://medium.com/@ColdBloodShill/wyckoff-101-part-2-the-composite-operator-4e80d3862682;
• https://medium.com/@Blocksavant/composite-man-ca18c9d2d5a5;
• https://www.forexfactory.com/thread/302849-the-composite-man;
• https://onlinelibrary.wiley.com/doi/10.1002/9781119196822.ch9;
• https://academy.binance.com/en/articles/the-wyckoff-method-explained;
• https://www.investopedia.com/terms/l/law-of-supply-demand.asp;
• https://en.wikipedia.org/wiki/Supply_and_demand;
• https://www.investopedia.com/ask/answers/033115/how-does-law-supply-and-demand-affect-prices.asp;
• https://www.britannica.com/topic/supply-and-demand;
• https://www.opencollege.info/law-of-cause-and-effect/;
• https://www.pocketmindfulness.com/law-cause-effect/;
• https://tradingwyckoff.com/en/effort-and-result/;
• https://stockcharts.com/articles/wyckoff/2015/12/the-laws-of-wyckoff.html;

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