Wyckoff trading cycle is a great frame work for analyzing and understanding the Market behavior. According to it, there are 4 stages namely- Accumulation, Mark-up, Distribution and Mark-down.
- Accumulation Phase:
Begins with institutional investors-such as mutual funds, large banks etc. There is Mass buying of shares of a given stock. Price forms a base as the shares of stock are accumulated at the bottom of a bear market. Market moves sideways in a range and is spread over a long time horizon. One of the Common accumulation pattern- Cup and Handle. - Markup Phase:
When the price breaks out of a range and begins an uptrend, it is called to be a markup phase. This stage is when the price begins moving up. The big money has established a position and retail investors are now invited to join in the profit party. This is the most profitable time to own the stock. - Distribution Phase:
The distribution phase begins as the markup phase ends and price enters another range period. Institutional investors who accumulated at the bottom begin to distribute/ sell before anyone else. This time, the sellers want to maintain higher prices until the shares are sold i.e selling off the shares to the ones entering at a high price. One of the common distribution pattern- Head and Shoulders. - Markdown Phase:
The last phase of the stock cycle is the markdown phase. Markdown begins when the price makes a lower high and no new high. It is when institutions sell inventory, simply taking profit or to change position into another stock or sector. The markdown phase is a downtrend.
- Naturally, the market doesn’t always follow these phases accurately. Though it’s an interesting framework but has certain limitations:
1. It is a task to identify the accumulation and distribution phases. Sometimes, what seems to be accumulation turns out to be distribution and vice-versa.
2. In a similar manner, It becomes difficult to plan a trade as the price moves in a range.
3. The cycle doesn’t always follow:
1. Accumulation 2. Mark-up 3. Distribution 4. Mark-down.
It might go around like 1.Mark-up 2. Distribution 3. Mark-down.
- In essence, the Wyckoff Method allows investors to make more logical decisions rather than acting out of emotions. But, One shouldn’t just rely on it, rather combine it with other price action strategies.
Read about the cycle of market emotions- https://www.tradetales.in/the-cycle-of-market-emotions/
~For educational purposes only, the charts are used for reference to the content to ease explanation.