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Chapter 2 - The Market Cycle and the Four Trades - Coggle Diagram
Chapter 2 - The Market Cycle and the Four Trades
Market Cycle
Wyckoff Method
Buying & Selling of large traders
Four Cycles
Distribution
Manic blow off
Uptrend runs out of steam - sideways range
Similar but different from accumulation
Drops below support take longer to bounce
Hugs the bottom of a range
False breakouts at the top of range (upthrust)
Retailers still hopeful
Hard to analyze subtle clues - continue markup, or trendover?
Accumulation
Large Buyers
Gauge other interest by not buying
Price stabilize - Have other buyers
Spring pattern - failure test at bottom of range
Candle with Long shadows below support. Few or no closes below
Patterns often complex & obscured by noise
Price Drops - No other interests
Buy at bottom of range for cheap
Sideways movement of slow passive buying
Boring. On no one's radar
Avoid trading the chop. Noisey breakouts. Hard to time beginning & End.
Markdown
Inverse of markup
Goes down faster than goes up
More shark and vicious
Requires different skill in trading
Retailers buy new highs in distribution area - belief new trend to start
Bounces fall short of previous highs
Negative emotional extreme = very bottom
Markup
Begins sneaky & unnoticed
Big buyers hold, or buy/sell with trend
Grinds higher
Causes shorts to cover
Disbelief "fundamentals do not support this move"
Dissenting opinions on the move
Buy pullbacks or breakouts
Psychology of crowds
Market is sum of trader's & investors hopes and fears
Cycle: disbelief - acceptance - consensus
Consensus = trend is close to over
Mania stage = stories in non-financial media. Time to book profits
Misc
Commodities cycle driven by production & consumption
Currency trend better
Markets are fractal - same patterns in long & short term
Patterns may not be tradable at all timeframe
Liquidity issue in short term
Issues
Difficult to time uptrend out of of accumulation areas
Buying accumulation area hard. Stops below accumulation is wrong. Buy flushes, not sell into them
Trend buying difficult. False signs of trend ending
Cannot be 100% correct
The Four Trades
Trend Continuation
Most appropriate in markup or markdown
Patterns
Most common is pullbacks
Failure
Previous resistance holds. Maintain range
Two legged consolidation
Can take small lost. If obvious play, maybe more selling
Risk/Reward
Define points where trend trade is conclusively wrong
Conclusively wrong could be far and not worth the risk/reward
Most reliable profit at or beyond previous high
Best examples have multi leg trend
Trend Termination
Won't catch the top. Sell NEAR highs.
Obvious spot is where uptrend stops
Overextended spots - fade for quick reversals
Only for quick & developed traders
Can become manic buying - must have risk management
Pullback in an uptrend - take long
Not usually high-probability plays, but good reward
Holding Support/Resistance
Can be applied to different sports in market structure
Buy in accumulation/Distribution areas
Beware of dropouts below support
Traders Shaken out
Traders buy back after noticing it's a fake-out
Adds to strength of the support
Issues with trading
Buy with size and sell with drop-out?
Buy small?
Can take large loss on real decline
Low reward since not full size
Lowest Reward trades
Support in the trend
Can be classified as trend continuation trades
Failed Breakout - Resistance holding
High probability trade - can be dramatic
Failing Support/Resistance
The classic breakout trade
Spot - at end of accumulation/distribution
Attracts traders since they work well dramatically
Can offer high high risk, especially short term trades
Patterns
Market holds higher lows into the resistance level before actual breakout
Sudden breakout causes trapped out traders who are compelled to buy later
Maintain a watchlist of stocks fitting the studied patterns
Most breakouts fail
Breakout areas are high-volality, low liquidity reas
Crowded trade since chart point is very visible
Execution skills matter a lot
Unplanned breakout trades in reactive mode not good for long-term success
Misc
Best results - have 2 counter balancing setups
Breakout traders also trade breakdown
If breakout, hard to wait for best conditions
Results in forced trades
Otherwise, must practice waiting
Apply the right kind of plays in the right environment
Pullback trades trade end of trend patterns