Crypto Academy Season 2 Week 8 Homework Post for (@fendit) - The Wyckoff Method

This week, professor @fendit Wyckoff explained her trading method down to the last detail. The method was developed by Richard Wyckoff about 90 years ago. It is designed for traders and includes a set of principles and strategies. A trader who applies the principle and strategies well can increase his profits more or reduce his losses to a minimum.

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1.Share your understanding on "Composite Man" and the fundamental laws. What's your point of view on them?

There are three basic laws of the Wyckoff method. These; The Law of Supply and Demand is the Law of Cause and Effect, and the Law of Effort and Effect.

a) Law of Supply and Demand:

The link between supply and demand determines the price. If the supply is high and the demand is low, it indicates that the price will decrease. If the supply is low and the demand is high, it indicates that the price will rise. If supply and demand are close to each other, it means that the price will remain flat. In fact, this is the basic principle in all financial instruments.

To give an example, some fruits are available in limited quantities during the winter seasons in Turkey. Demand is greater than supply. Therefore, fruit prices are quite high. In the summer seasons, there is a large amount of fruit in the markets. Supply is greater than demand and therefore fruit prices are low.

The difference between supply and demand brings with it price fluctuations. It is possible to feel the selling pressure immediately in the markets where the supply is more than the demand. This pressure causes the price fluctuation, the price starts to increase. In markets where demand is greater than supply, there are more buyers. You will see the asset price increase in a very short time. In markets where supply and demand are close to each other, the number of buyers and sellers is close to each other and there is no significant fluctuation in the asset price.

b) Law of Cause and Effect

This is the 2nd law of the Wyckoff method. It shows that the difference between supply and demand is not ordinary. It means that the difference between supply and demand is first the preparation, then the cause and then the result. It has certain stages. Preparation periods create cause and effect relationship. This happens in two different ways. An accumulation period triggers an uptrend. (Accumulation = cause, rise = result). A distribution period also triggers a downtrend. (Distribution = cause, decrease = effect)

It is supply during the accumulation period. Less supply drives up the price. The supply is high during the distribution period. The greater the supply, the lower the price.

c) Law of Effort and Results

In this last law effort and result are related. Price changes also change volume. Buying and selling is an effort here. Effort also causes volume changes. If price and volume are in line, price action is likely to continue. If there is no compatibility between price and volume, the market trend will likely end.

In other words, for the trend to continue, the effort and the result must be compatible with each other.

Composite Man

Wyckoff gives us the opportunity to see the big picture (the entire market).
He came up with the idea of ​​"Composite Man". In order to make it easier to identify market movements, he wanted traders to think that the market is controlled by a single asset.

The composite man actually represents the market makers. Because whales or institutional investors are the actors that shape the market. They buy low and sell high. While making all moves, they act in their own interests. We also need to read the market thoroughly and act with this logic in order to make more profits.

We know that most investors lose in the long run. Because we know that the moves of investors are in the opposite direction of the behavior of the composite man.

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In order to better understand the concept of composite man, I will explain how it is in a cycle. It consists of 4 main phases. Accumulation, uptrend, distribution and downtrend.

Accumulation: The composite man starts accumulating assets before anyone else. The price it starts accumulating is usually the lowest price. The asset price may rise and fall slightly, but the asset price moves sideways. Accumulation is done gradually so that the asset price does not change significantly. The most important point here is that the price and volume are quite low.

Uptrend: The composite man started accumulating enough assets. He bought the assets he had accumulated at the lowest price. It may push the direction of the market upwards as the selling pressure decreases. While doing this, investors in the market will start to become aware of the asset due to price movements and will start to buy the asset. The increase in demand will draw attention.

There can be more than one accumulation phase during an uptrend. These are called reaccumulation phases. In the above screenshot, the pink line during the uptrend is the reaccumulation phase. In this period, the asset price remains flat for a while. Investor interest will increase gradually. Investors will begin to see this as an opportunity and start buying. Therefore, the demand is much higher than the supply. There will be a large increase in the asset price.

Distribution: The composite man starts making a move here. He starts selling the assets he has accumulated in the first phase here. Those who start buying later buy these assets. As supply and demand balance each other during the distribution phase, the asset price remains horizontal.

Downtrend: This is the final phase. After the distribution phase, the market will now move in a bearish direction. Composite man has sold a significant part of his assets. It has some assets left and will sell it in this phase. It will push the direction of the market downwards. As the supply is greater than the demand, the asset price will fall sharply.

I said that there are reaccumulation phases during an uptrend. There are also reaccumulation phases in a downtrend. Asset price moves horizontally for a very short time. Some investors may mistake this period as a bull period.

My Perspective

As in all financial systems, in order to make a profit in the cryptocurrency market, it is necessary to buy the cryptocurrency at the lowest price possible and sell it at the highest price possible. Composite man and Wyckoff's laws express this.

Before applying this method, it is necessary to distinguish the trend thoroughly. It is necessary to know whether it is a bull or bear period. At the end of the bear trend, the accumulation phase begins. In that period, the price movement is horizontal and the volume is low. In an uptrend, volume and price increase. The distribution phase marks the end of the bull period.

Volume and price changes provide us with important data for our understanding of this method. As I just mentioned, volume and price change/increase or horizontal course in the main phase of Composite Man 4 is sufficient for us to understand the process.

It will provide us with important data in terms of understanding the demand-supply relationship method. Changes in supply and demand occurring in the 4 main phases will indicate the price change and the transition to the next phase.

It is difficult for normal investors to apply this method. Because normal investors are not patient and do not have enough money to lead the market. But it is possible for normal investors to act like a whale. Normal investors may not make as much profit as whales, but at least they will avoid loss. I see the applicability of this Wyckoff method quite high with good strategies.

2.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.

To illustrate the Wyckoff method in detail, I reviewed the Cardano (ADA/USDT) chart that I follow closely. Cardano, which was originally a centralized blockchain, is now enjoying decentralization.

(tradingview ADA/USDT chart)

To show the 4 main phases in the cosmopit man, I first determined the prices, price changes in the phases. Along with the price, the volume is progressing harmoniously. In the next image I will show the 4 main phases and the reaccumulation phases down to the last detail.

(tradingview ADA/USDT chart)

ADA accumulates in the accumulation phase for approximately 4-5 days. Here whales or market makers are trying to buy ADA at the lowest price. It is possible to see market makers buying the ADA price at $1.55. The ADA price rises as high as $1.82, but then comes the intervention again and the ADA price falls. The whales' goal here is to buy the ADA as low as possible. As you can see in the screenshot, the trading volume of ADA is also horizontal. ADA accumulation was carried out gradually so that prices do not change significantly. Support and resistance points are tested many times during this phase. But it is the resistance point that is tested more. The pressure on the resistance point should be reduced to start the ascent.

Market makers have accumulated enough ADA and selling pressure has eased. I recommend that you pay attention to the starting point of Uptrend. (End of the accumulation phase) In this region, many investors' stops were blown or many investors were misled. There were market makers who bought ADA at a price below $1.50. As you can see in the screenshot, the ADA price spikes up to $1.94 with a sudden rise. There is a serious fluctuation in volume and price. Then it accumulates here for a while. In the reaccumulation phase, the volume and price are flat. The ADA price change also attracts the attention of some investors. With the contribution of investors, the ADA price will start to rise after a while. The volume increases along with the price. In the uptrend, we can see that the resistance points are broken very easily and these resistance points turn into support zones after a while.

Due to reduced demand, the ADA price begins to slow down for a while during the distribution phase. In this phase, we can sometimes see that there are sales attempts, but this is not strong enough against the purchase. ADA price continues to rise but not as much as it is in an uptrend. ADA price climbs as high as $2.46 in this phase. The reason why the ADA price has risen so much is due to the emotional behavior of inexperienced traders. Buyers, who noticed the uptrend late, continue to buy the market makers' assets. The last part of the distribution phase is the beginning of the downtrend. The supply started to increase gradually at the end of this phase.

Market makers sold most of their holdings during the distribution phase. They are left with no more assets and will try to change the direction of the market. In a downtrend, ADA price continues to drop sharply. The price of ADA, which rose to $2.46 during the distribution period, drops to $2.02. The downtrend stops after a while. The reaccumulation phase is very short. Here, some investors fall into the bull trap. After the reaccumulation phase, the ADA price continues to decline. ($1.39) . Price and volume fluctuations were quite high during this phase. Supply outweighed demand.

Conclusion

The Wyckoff method is one of the methods used in technical analysis for many years. The fact that it continues to be used today means that it is a successful method. As with all technical analysis methods, the Wyckoff method is not 100% reliable. Sometimes it can be misleading. Once a trader has thoroughly identified the accumulation phase, he can wait for the uptrend to begin. Meanwhile, the uptrend may not start due to other reasons (negative news, market crash).

In the Wyckoff method, sometimes multiple accumulation phases can lead the investor differently. That's why we need a lot of practice to practice this method well, to develop good strategies. We should try to find the Composite Man in the charts of many entities. Thus, we increase our success rate even more.

Cc:
@steemitblog
@fendit