On December 2, the independent market analyst Stockmoney Lizards said that bitcoin (BTC) had entered the process of bottoming out within its current price range of $15,500-18,000, citing the Wyckoff Accumulation.
The 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 divided the market cycle into four distinct phases.
But is Wyckoff a reliable pattern, particularly for cryptocurrency trading? Let’s find out.
What is the Wyckoff accumulation?
The Wyckoff accumulation is one of the four phases listed in the Wyckoff market cycle theory.; the other three are augmentation, distribution, and reduction. In simple terms, each phase determines when large entities drive the direction of the market.
The accumulation phase develops correctly when the deep pockets increase their purchases and drive demand.
As a result of the increased interest, the price makes higher lows as it continues to rise. Thus, the price breaks above the upper trend line of its trading range and enters the rising phase of the Wyckoff cycle.
In other words, a sustained uptrend, as shown in the following diagram.
Events and accumulation phases
In the accumulation phase, large traders prepare for their next bullish strategy by accumulating assets within a certain trading range (TR). By doing so, the assets bought outweigh those sold, causing a drop in available supply. which, in turn, helps the price rise above the TR.
Therefore, Small investors following the Wyckoff accumulation strategy must correctly identify the direction and speed of movement out of TR.
Fortunately, they can draw on a widely followed accumulation scheme created by Wyckoff in the early 1930s, as illustrated below.
Phase A reflects the exhaustion of the previous downtrend. Begins with Preliminary Support (PS), a period in which substantial buys are initiated along with increasing volumes, which suggests that the prevailing downtrend is nearing its end.
The downtrend disappears after the price falls to its selling climax (SC), a point at which large professional investors begin to absorb the selling pressure from the retail side and traders begin to cover their short positions.
As a result, the price bounces sharply back to its automatic rally (RA) level, which defines the upper limit of the Wyckoff trading range. Next, the price retests the levels around SC, sometimes even dipping below for a so-called secondary test (ST) of support.
It is common for there to be more than one ST in the Wyckoff accumulationwhich pushes the price into consolidation territory in Phase B. Theoreticallymeans that institutional investors have been hoarding the assets in anticipation of a revaluation event.
Therefore, rallies from SC-ST levels in phase B are often accompanied by higher volumes. On the contrary, in the pullbacks from the AR levels the volumes decreaseindicating that liquidity is drying up on downward movements. In other words, the asset is preparing for Phase C.
Phase C begins with the “test,” in which large investors survey the market for potential supply booms. In other words, the sudden arrival of vendors that risks overturning all of Wyckoff’s logic. As a result, the price rises cautiously during the trial period.
The test period ends when the price breaks above the AR level, thus showing the so-called signal of strength (SOS). Another short-term correction towards the last support point (LPS) follows.
All of this price action occurs in phase D of the Wyckoff accumulation theory.which demonstrates the predominance of demand over supply. Consequently, traditional analysts consider LPS to be an excellent place for investors and traders to enter the market.
In phase E, the asset completely leaves the trading range to enter the marking phase of the Wyckoff market cycle.
How to trade cryptocurrencies using the Wyckoff accumulation
Not all Wyckoff accumulation setups lead to massive price rallies when it comes to the cryptocurrency market.
For example, The bitcoin price had entered the SOS phase of its Wyckoff accumulation setup in early March 2020, when it was trading at nearly $9,000. But the BTC/USD pair dipped below $5,000 in mid-March, disregarding bullish signals from Wyckoff following the global market collapse led by the COVID-19 pandemic
Traders can employ a range bound strategy to profit from fluctuations within the trading range of the Wyckoff accumulation. They could do this by going long on a bounce from the ST range, while looking at the AR level as their main upside target.
At the same time, Traders could place a stop-loss below the ST level to avoid further losses in the event of a false breakout.
Secondly, traders looking to place aggressive long positions may need additional confirmation of the fundamental drivers relative to the crypto asset.
For example, bitcoin’s Wyckoff accumulation setup between May 2021 and November 2021 resulted in a price rally from around $37,000 to a high of $69,000 (after a breakout in Phase E). The explosive gains were accompanied by a period of loose monetary policy and increasing adoption by the general public.
Nevertheless, cautious traders can wait for the Wyckoff setup to reach Phase D. They can enter a long position after price breaks above the SOS point on convincing volumes. Of course, it is advisable to place a stop-loss below the SOS to exit the trade with minor losses in case the trend reverses.
This article does not contain investment advice or recommendations. All investments and trades carry risk, so readers should do their own research when making a decision.
Clarification: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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