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A Wyckoff Approach to Crypto Futures

You’re definitely aware of the exciting moves the crypto markets have taken recently, whether you’ve been following cryptocurrencies since the early days of Bitcoin or you’ve just jumped on the crypto bandwagon. For example, since its price reached a new all-time high of nearly 65,000 USD on April 14, 2021, Bitcoin has attracted a lot of attention. However, if you examine the peaks and dips that preceded that point, as well as what came after, you may discover a distinct chart pattern.

We can discern the intents that whales and institutional investors have executed during each market cycle by carefully analyzing their trades. Market cycles are driven by “smart” money acquiring “weak” money from regular investors in a broad sense. The Wyckoff approach is excellent for predicting the actions that big traders would make to trigger hasty market choices.

What is the Wyckoff method, and how does it work?

Richard Wyckoff, an American writer and stock market speculator, created the Wyckoff method. He became well-known for following the investment flow of institutional funds and advising investors and traders on how to avoid institutional influences throughout his career. The Wyckoff Market Cycle was created as a result of his research and techniques.

The strategy is aimed to track how markets ebb and flow, as well as anticipate accumulation and distribution times. He coined the term “Composite Operator” to describe the effect of institutions and other significant market participants, claiming that the technique can assist people foresee and comprehend what the Composite Operator is thinking as a whole.

Wyckoff Diagrams

The Wyckoff Method is divided into four schematics. The growth and depreciation of a market or asset can be traced back to these four stages. The Accumulation Phase comes first, followed by the Markup Phase, Distribution Phase, and Markdown Phase.

When the Composite Operator’s demand has increased, the Accumulation Phase begins. The bulls and the Composite Operator want to expand their positions and then push prices higher. The Markup Phase begins once prices begin to rise, and it leads to the Distribution Phase. The reverse of the accumulation phase occurs when a new high is reached. The Composite Operators and market bears are looking to cash in on their profits by selling. The selloff triggers a downward capitulation known as the Markdown Phase, which lowers the price until the next Accumulation Phase.

The Five-Step Approach of Wyckoff

Within the Wyckoff Method’s accumulation and distribution schematics, there are five different phases that occur. We’ll start there because this post is being produced following the first indicators of an accumulation phase.

 

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  • Phase A – There is a noticeable uptick in trade volume towards the tail end of a massive surrender, signaling preliminary support (PS). However, despite this support’s efforts, the trend eventually finds a selling climax (SC), and enormous downward candlesticks appear as a result of panic. As a result of the automatic buys and active purchases, an automatic rally (AR) occurs, allowing traders to profit from lower prices. These two SC and AR min/max points normally indicate a trading range where the accumulation stage will take place. After a secondary test (ST) occurs after the AR, the price drops again, signaling that the accumulation scheme isn’t over.
  • Phase B – Following the secondary test, the Composite Operator has a window of opportunity to accumulate the underlying asset. Premature bull and bear traps may form as the trading range is tested, providing opportunities for the Operator to profit.
  • Phase C – A definite bear trap designed to scare investors into selling can be used to determine the end of Phase B. This is called a Spring, and it can happen before prices begin to rise from their low points. The absence of a visible Spring or bear trap does not rule out the rest of the concept.
  • Phase D – This is a transitional period in which investors and traders have one more chance to acquire at a cheaper price. As lows are priced at higher and higher levels, a Last Point Support emerges (LPS). Before the market smashes through barrier levels, this is the highest low. SOS (Signs of Support) are created where past resistance prices were, so creating fresh supports. As the support levels rise, a larger upward trend emerges, ushering Phase E into view.
  • Phase E – A clear breach of the trading range indicates an increase in market demand. Investors are pleased by the fact that the low accumulation phase is finished, and purchasers flood the market with confidence, resulting in an uptrend.

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The distribution schematic follows the same phases as the accumulation schematic, however many of the same events occur in the opposite order.

The Preliminary Supply (PSY) arrives with the Markup Phase of the cycle, indicating that the first opportunity to sell for a large profit is approaching. The Buying Climax (BC) is the point at which the Composite Operator and bears sell off for the first time, forming a new resistance line. Price falls until a new Automatic Reaction (AR) occurs, which raises the price to a Secondary Test (ST).

  • Phase B – This phase is similar to Phase B of the Accumulation Schematic in that the Composite Operator is now selling off its investments and realizing earnings from prior schematic stages. Between the trade range, bear traps and bull traps are possible. An upthrust (UT) may occur, briefly exceeding the BC and establishing a new resistance line.
  • Phase C – This phase may or may not occur, just as the Accumulation Schematic. An Upthrust After Distribution (UTAD) could lead to a new high in the market. Whether or not this occurs, Phase D will occur at some point.
  • Phase D – Before the market begins to surrender, this is the last chance for investors to sell at higher levels. A Last Point of Supply (LPSY) is usually identified inside the trading range, followed by a buy/sell reaction, and then a new LPSY is found at or below the support line, starting Phase E.
  • Phase E – The downward surrender starts with a definite dip below the trading range as investors sell off, reducing demand and causing the price to plummet.

 

How to Trade Crypto Futures Using the Wyckoff Approach

First and foremost, when applying the Wyckoff technique in any type of trading, keep in mind that no two cycles are the same. There are far too many external elements influencing markets for a one-size-fits-all Wyckoff maneuver to occur every time.

It’s critical to stay on top of each schematic’s stages, particularly where Phase A of either schematic has occurred. This phase will determine whether you should place your stop-loss order at the lowest or highest point (accumulation or distribution plan, respectively).

When a Markup is present, Phase E of accumulation is the best opportunity to enter a trade. Tracking prior patterns can help you figure out what phase you’re in and whether you’re missing a new LPS or LPSY. Keeping an eye on trade volume might also help you figure out when this is the right time.

 

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The crypto market went through a distribution phase in the first four months of 2021, as evidenced by the Binance BTCUSDT perpetual contract (graphic above). As an investor, it would have been beneficial to record the initial bounce, which indicates the start of a possible distribution phase.

This graphic fits the previous distribution phase chart completely and includes all of the stages. Marking the support and resistance limits, setting up stop losses, and preparing for a Bullish Spring could have been beneficial for this cycle (where the new all-time high occurred). The candlesticks were not green during this Bullish Spring moment, indicating that the Composite Operator had begun to sell off and a market downturn was about to begin.

In any case, it’s critical to keep an open mind about what’s going on and which trend follows which, because the fundamental charts aren’t always a foolproof guide. A thorough examination is required in this case.

Final Thoughts

The market theory of Wyckoff is based on looking at markets through the viewpoint of institutional investors. The trader must evaluate the ultimate goals of these institutional operators and how present market behavior reflects their interests and behaviors.

Here’s how to use the Wyckoff method for your next transaction, step by step:

  • Recognize and evaluate the present market cycle. Is it a bull or bear market, or is it perhaps moving sideways? Wait patiently for the next change of character in trending markets.
  • Fill in the events on the chart using the accumulation and distribution diagrams from before.
  • Determine the schematic phase based on your event analysis.
  • Analyze volume and price action to look for institutional fund footprints.
  • Wait for the optimal risk/reward opportunities to long (short) in phases C and D, which frequently arise on varied configurations.

 

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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