Wyckoff Distribution Explained: How to Use Wyckoff Pattern

What is a Wyckoff Distribution?

The Wyckoff Distribution is a price pattern that helps you recognize the market phase. It occurs during an uptrend, when large institutional traders begin selling their positions before the downtrend begins. It forms a boarder market cycle and signals a potential trend reversal to the downtrend.

The Wyckoff Distribution is a strategy used since the early 90s to analyze the stock market. This strategy was developed by Richard D. Wyckoff, a technical analysis legend at the time.

Why the Wyckoff Distribution Matters for Traders?

The Wyckoff Distribution matters because it helps traders spot when the institution or smart money influences the price chart. Instead of chasing a trend that appears, this helps you anticipate better potential trend reversals.

It helps traders understand:

• You will understand that demand is higher than supply, or vice versa.

• You will understand price, volume, and price momentum, which will help you predict the next price moves.

• You will understand the major market trends and the major price reversals.

This is why the Wyckoff method is well known among traders: it helps them understand market cycles and interpret price charts. Once you understand the market cycle, you can use it to profit from trading by predicting the market moves.

Wyckoff Distribution Basic Fundamentals

The Wyckoff Distribution pattern is based on 3 major fundamentals, and it’s crucial to understand before delving deeper.

1. Learning the Supply and Demand Rule

The supply and demand are the basis of the price moments rule:

• If the demand exceeds the supply, it means the price will go up

• If the supply exceeds the demand, it means the price will go down

2. Understand the Market Manipulate

When the market is accumulating and distribute will tell you the strength and duration of the trend effect. Analyzing the market volume and sideways duration can help you predict the next price moves.

3. Institution Investors Effective

If you compare trading volume to price changes, you will see a divergence. The divergence shows how the price reacted when the big players entered the market.

5 Phases of the Wyckoff Distribution Market Cycle

The Wyckoff distribution has 5 phases in the market cycle. Understanding each Wyckoff distribution phase will help you predict future price movements more effectively. Let's break down.

Phase 1: The uptrend has ended

• This stage can signal that the price has reached a peak in an uptrend, as institutions begin selling. This explains that the supply is more than the demand

• This phase begins with preliminary supply (PS), marked by rising selling pressure, which indicates that the uptrend is weakening.

• Then the smart money enters the market and pushes the price to a peak, which we call the buying climax (BC). But at the same time, they are continuing to sell, which increases selling pressure.

Phase 2: The price is going sideways

• The price starts going down because the retail investors stop buying, and the smart money keeps selling, which increases the selling pressure; this is called Automatic Reaction (AR).

• After this, the market is trying to reverse to an uptrend to retest the previous high, but most of the time it sails to reach the previous high; we call this Secondary Test (ST).

• Automatic Reaction (AR) and Secondary Test (ST) are occurring in phase 2, which are impacting the price going sideways and causing price swings up and down within a range.

Phase 3: The price goes above the resistance level

This phase has an upthrust after distribution (UTAD), which is considered a bull trap. You need to be careful of a false breakout that may occur above the previous highs. This signals that the price is getting ready to go down once the smart money stops selling.

Phase 4: The price breaks the support level.

This phase shows the last point of supply (LPSY), which signals that buying pressure is decreasing. The smart money has almost sold all the stocks, and the remaining selling pressure is coming from retail traders trying to control the market.

Phase 5: Price Mark Down

This is the markdown phase of the Wyckoff distribution. The price is rapidly decreasing because the selling pressure is increasing. Most traders would consider this phase to take a short position when the price is confirmed to be in a downtrend.

3 Steps to trade with the Wyckoff Distribution Pattern

Trading using the Wyckoff distribution strategy will include only 3 simple steps:

Step 1: Spotting the Entry Points

• Enter a short position near the resistance level that happens after the upthrust after distribution (UTAD) by setting the stop loss above the high peak price point.

• Wait until the price breaks through the support level with strong momentum or at the last point of supply (LPSY).

Step 2: Watch out for the Volume Signals

• If the price shows strong selling pressure and weak buying pressure, it’s a confirmation of a downtrend.

Step 3: Exit the trade

• Exist a short position at the markdown phase at the previous support level.

• Or exist when you see a new Wyckoff accumulation, such as higher lows with strong momentum.

Tips Wyckoff Distribution Trading Strategies

• Check the distribution phase for decreased momentum, price volume, or sideways movement.

• In phase 3, the price is likely to move above the resistance level, so you need to be careful about false breakouts.

• Make sure the price breaks the support level in Phase 5 to confirm the downtrend has started.

• Enter a short position at the Last point of the supply phase when the market is surely going down.

• Don't forget to set a stop-loss order to manage your risk.

• Always keep the position size small when trading in a high-volatility market.

Pros and Cons of the Wyckoff Distribution

The Wyckoff distribution pattern is a great tool for traders to analyze the market prices. However, you need to understand the strengths and weaknesses of this pattern when using it.

How to Manage Your Own Risk Trading With Wyckoff Distribution?

Even though the Wyckoff trading strategy seems great, it's just a probability without risk management. So, to make sure that you can continue trading in the long term, having a stable balance account, you need to follow these risk management tips:

• Check the relative strength against the broader market.

• Consider global economics.

• Use a tool like volume profile to show the price-volume.

• Don’t force it to enter if the graph doesn’t look like a Wyckoff distribution pattern.

• Plan your trades in advance to lock in profits and set stop-loss levels.

• Don’t short too fast when the price goes sideways.

What are the best indicators to use with Wyckoff Distribution?

If you want to use indicators to guide your decision-making and increase accuracy, here are some suggested tools:

1. On-Balance Volume (OBV) helps you measure the buying and selling pressure.

2. The Relative Strength Index (RSI) helps you see overbought during the distribution phase.

3. Moving Average Convergence Divergence (MACD) shows the momentum shift in the market.

4. Bollinger Bands help you see price volatility and false breakouts.

5. The Volume Weighted Average Price (VWAP) shows when the smart money enters the market.

Conclusion

The Wyckoff distribution pattern is one of the best trading strategies because it's based on real market price movement. This helps you to understand how the market moves and how to benefit from the market cycles. You can apply the Wyckoff distribution tips and risk management across markets such as stocks, crypto, and forex.