Crypto Academy Week 16 , Homework post for [ @fendit ].. Wyckoff Trading Method.
Hello friends, hope we all are fine and enjoying Cryptoacademy
Lectures. Today i am writing homework task for @fendit which is about wyckoff method. So let's begin.
Introduction
Richard Wyckoff in early 20th century did critixal analysis of financial markets and put forth road map for the investors to follow while entering and analysing financial markets. Wyckoff trading analysis divides price cycle of an asset into four phases. They are accumulation, uptrend , distribution and downtrend. He also put forth two important rules related to price action of assets. First one says that, market never behaves in same way. And second rule is related to first, it is related to comprehension of uniqueness of market. So it focusses on previous price behavior of asset. To understand existing price behavior, past price behavior must be taken into consideration. With these basics in mind, let's proceed to task.
Share your understanding on "Composite Man" and the fundamental laws. What's your point of view on them?
Composite Man
Composite man represents a hypothetical market identity proposed by Richard D. Wyckoff to help traders better understand the psychology of the market. According to wyckoff, we as traders or investors in financial market should understand the market as if it is controlled by a single self centered and predictable man, to which he has given name of "composite man". Practically we can correlate it to financial institutions who have significant share in the market. I think this concept of composite man would make it easier for us to understand the price action of assets in market
Market cycle of a composite man can be understood in four phases. To understand the different phases, we will first have to understand that these phases are described in relation to any asset that the composite man is trading . So the composite man will adopt different strategies to buy the asset at low and sell at high . Those strategies of the composite man have been categorised into four phases described below .
Accumulation.
During this phase , composite man will preapre himself for trade by accumuting the asset to be traded. During this phase there in no significant variation in the price, so composite man takes advantage of it by collecting the asset to be sold later on.
Mark up /Uptrend.
By accumulating the asset, the composite man has now command over the market. He will try to push market up thereby attracting more investors to buy the asset. So there will be short phase of re accumulation before actually going further up. So demand will significantly go up due to attractive price.
Distribution
As uptrend increases demand in the market. So composite man will start selling his holdings to small number of traders who are willing to buy at higher price. It creates a sideways movement of the market at higher price range of the asset.
Mark down/Downtrend.
As composite man had sold good amount of shares at higher price. He will now try to pull down the price again. However some traders will try to hold with the hope of price pullback creating small redistribution before furrher price slack will continue. So supply increases and downtrend continues and than it enters accumulation phase again.
Fundamental laws
Law of supply and demand.
According to this law, price of an asset is determined by its supply and demand in market. When demands is more than supply, price increases and when supply is greater than demand, price decrease. This law is simple to understand. Let me tell you how.
Suppose you want to purchase a pen, you went to market and there were 9 other buyers but there were only 2 pens in market. So demand is more and supply is less. As you have to buy the pen, so you are ready to pay any price. Even if a seller, sells a $1 pen to you at $5 . It is so because you know that supply of pens is scarce in market. Same principle applies to cryptos too. As supplies increases, price decrease and vice versa.
Law of cause and effect.
We know that to every action there is equal and opposite reaction . This law is somewhat similar to it. According to this law, price drop or rise of an asset has a definite reason behind it. It is actually a reaction to some action or we can say that it is an effect of some cause. Let's try to understand it with respect to market cycle.
During uptrend price increases because of accumulation of asset by compositie man and therfore decrease in supply. So accumulation is cause and price hike is effect. Similarly, during distribution supply increaaes and price decrease. So distribution is the cause and price drop is the effect.
Law of effort vs result.
Here we will have to understand that effort refers to volume and result is price change. More volume means more effort and less volume means less effort. This law aims at detecting direction of price trend . If effort and result synchronise, trend will continue. On the contrary, if effort and result show divergence than it signals change in price trend.
My view point on laws.
Law of supply and demand is simple to understand and follows basic laws of economics. It is universal and holds true for not only cryptos but for conventional markets too. However, the mechanism of control of supply in case of cryptos is different. Like BTC has limited and finite supply of 21 million . So it is added at fixed rate of 10 blocks every 10 minutes. It is unlike conventional markets where supply and demand has linear relation. But for existing supply of cryptos, it holds true.
As for law of cause and effect is concerned, it is closely related to first law. Here we can say, supply and demand are causes and price changes are effects. In conventional markets, we see that when stockists dump assets, black marketing increase. Similarly, when shortage of goods occur ( cause) in market, price of goods increase (effect) .
Law of effort and result is specific to cryptos/stock and is very useful for trading. It represents depth of understanding of subject by wyckoff. It can be understood only in relation to cryptos.
As for concept of composite man is concerned, i think it is not universal because all market cycles don't follow the same pattern.
Share a chart of any cryptocurrency of your choice (BTC or ETH won't be taken into account for this work) and analyze it by applying this method. Show clearly the different phases, how the volume changes and give detail of what you're seeing.
Let's analyse ENJ/uSDT for this task. Have a look at chart below:
ENJ/USDT from trading view
Review of ENJ/USDT chart more or less follows wyckoff model. We can see that in accumulation phase there is sideways movement of price chart. During this phase composite man is preparing himself for the trend. Market is relatively stable with low volume. Accumulation of asset is taking place at certain range of price without much fluctuations.
Next we see, uptrend in which price starts going up and therefore more and more traders get attracted and so trading volume increases and so does the price. Composite man may sell some of assets during this phase to attain profit.
Next comes distribution phase in which the composite man for the sake of acquiring profit sell positions but some traders keep holding or even buy shares with the hope of further price hike. So there is no much price change during phase too and price chart moves sideways at higher price.
Than comes downtrend during which major shares are sold by composite man and as price starts dropping, other traders also start selling their positions even at lower prices making newer lows. The cycle than repeats.
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Thank you for being part of my lecture and completing the task!
My comments:
Your answers were pretty good, but I'm not that convinced when it comes to the chart. You should have included a chart that shows the volumes, as that's one of the most important parts of the theory.
Also, the different phases were not correctly shown.
Overall score:
5/10
Thank you for pointing it out. Will try to improve.