How to Trade Crypto Using Wyckoff’s Accumulation Theory

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On December 2, independent market analyst Stockmoney Lizards said that Bitcoin (BTC) had entered the process of bottoming out in its current price range of $15,500-$18,000, citing Wyckoff Accumulation.

Wyckoff Accumulation is a classic technical analysis setup, named after Richard Wyckoff, a pioneer of technical analysis in the first half of the 20th century, who broke down the market cycle into four distinct phases.

But is Wyckoff a reliable model, especially for cryptocurrency trading? Let’s find o.

What is the Wyckoff accumulation?

Wyckoff’s accumulation is one of the four phases listed in Wyckoff’s market cycle theory, the other three being markup, distribution, and markdown. Simply put, each phase determines when large entities determine the direction of the market.

The accumulation phase develops properly when large pockets increase their purchases and stimulate demand.

Due to increased interest, the price forms higher lows while trending higher. In doing so, the price pushes above the upper trendline of its trading range, moving into the markup phase of the Wyckoff cycle.

In other words, a sustained uptrend, as shown in the diagram below.

The phases of the Wyckoff market cycle. Source: Events and accumulation phases of TradingCoach.co.in

In the accumulation phase, big players prepare for their next bullish strategy by accumulating assets within a given trading range (TR). As they do, the assets being bought outweigh the assets being sold, leading to a drop in available supply which, in turn, helps prices rally above the TR.

Related: What is a Doji Candle Pattern and How to Trade With It?

Therefore, retail investors undertaking the Wyckoff accumulation strategy must correctly identify the direction and speed of the exit from the TR.

Fortunately, they can build on a widely followed accumulation scheme created by Wyckoff in the early 1930s, as shown below.

Wyckoff’s accumulation diagram with its events and phases. Source: StockCharts.com

Phase A reflects the exhaustion of the previous downtrend. It begins with preliminary support (PS), a period where substantial buying begins alongside rising volumes, suggesting that the prevailing downtrend is coming to an end.

The downside bias fades after the price reaches its selling high (SC), a point at which large professional investors begin to absorb selling pressure from the retail side and traders begin to cover their short positions. .

As a result, the price rebounds sharply to its auto-rally (AR) level, which defines the upper boundary of the Wyckoff trading range. Then the price returns to test levels around SC, sometimes even below for a so-called secondary (ST) test of support.

BTC/USD 12-hour price chart showing a potential Wyckoff accumulation setup. Source: Stockmoney Lizards

It is common to have more than one ST in the Wyckoff accumulation, which drives the price into consolidation territory in phase B. Theoretically, this means that institutional investors have been accumulating the assets in anticipation of an event increase.

Therefore, rebounds from the SC-ST levels in the B phase usually accompany higher volumes. Conversely, pullbacks from AR levels see volumes decline, showing that liquidity is running out during bearish moves. In other words, the asset prepares for phase C.

Phase C begins with a “test”, in which large investors examine the market for potential supply booms. In other words, the sudden arrival of sellers which risks invalidating the whole Wyckoff logic. As a result, the price increases cautiously during the test period.

The test period runs out when the price breaks above the AR level, thus showing the so-called sign of strength (SOS). This follows another short-term correction towards the last support point (LPS).

All of this price action occurs in phase D of Wyckoff’s accumulation theory, showing the dominance of demand over supply. As a result, mainstream analysts view LPS as an excellent place for investors and traders to enter the market.

In phase E, the asset completely leaves the trading range to enter the markup phase of the Wyckoff market cycle.

How to Trade Crypto Using Wyckoff Accumulation

Not all of Wyckoff’s accumulation setups lead to massive price increases when it comes to the cryptocurrency market.

For example, the price of Bitcoin entered the SOS phase of its Wyckoff accumulation setup in early March 2020 when it traded near $9,000. But BTC/USD then fell below $5,000 in mid-March, snubbing Wyckoff’s bullish signals following the COVID-19-induced global market crash.

Bitcoin’s Wyckoff Accumulation Setup Failed from 2020. Source: TradingView

Traders can use a range-bound strategy to take advantage of moves within the Wyckoff accumulation trading range. They could do this by opening a long position on a rebound in the ST range while looking at the AR level as their main upside target.

Simultaneously, traders could place a stop-loss below the ST level to avoid larger losses in the event of a false breakout.

Related: Margin Trading vs Futures: What’s the Difference?

On the other hand, traders looking to place aggressive long positions may need further confirmation from fundamental catalysts regarding the crypto asset.

For example, Bitcoin’s Wyckoff accumulation pattern between May 2021 and November 2021 caused prices to rise from around $37,000 to $69,000 (after a breakout in the E phase). The explosive gains were accompanied by a period of loose monetary policy and growing mainstream adoption. .

Setup of Bitcoin’s Wyckoff accumulation from 2021. Source: TradingView

However, cautious traders can wait for the Wyckoff setup to reach phase D. They can enter a long position after the price breaks above the SOS point with convincing volumes. Of course, it is advisable to place a stop-loss below the SOS to exit the trade with lower losses if the trend reverses.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

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