This guide covers the famous Wyckoff method of investing and how to use it to your advantage in the markets. We’ll talk about accumulation and distribution cycles, and how big investors operate. You can also find the video version of this guide at the bottom of the page if you prefer.
Contents
Video version of this guide
PDF download for this technical analysis guide
You can also download the PDF slide deck version of this guide below. This can be used to summarize the main concepts of the guide.
Why it’s tough to be a whale in investing
Some think it’s easier to trade if you’re a big investor with lots of capital. But this couldn’t be further from the truth. Big investors (or “whales”) impact the price much more than smaller investors (or “fish”). Their big buy or sell orders can move prices to their detriment. That can cause them to buy or sell at a worse price than what they bargained for.
Here’s how it works. You’re a big investor trying to buy $200 million worth of bitcoin on a crypto exchange. As soon as you hit the buy button, you unleash loads of buyer demand onto the market all at once. And there likely isn’t enough seller supply to meet that demand straight away. So, your buy order pushes the price higher to fill all the seller’s supply. The result? You’ve bought bitcoin for a higher price than you wanted to.
To get around this problem, whales buy gradually, in smaller amounts, to build their position without moving the market higher first. That’s called accumulation.
When it comes to selling, it’s the opposite: whales sell gradually rather than all at once. This way, they can offload their position without crashing the market first. That’s called distribution.
It can be tough to be a whale, but it can be great to be a small fish. Unlike big investors, small investors don’t move the price when they buy or sell. For example, you could buy one bitcoin on a crypto exchange without moving the needle. That means you can get in and out of positions much faster than a whale.
Richard Wyckoff’s theory about what drives market prices
Richard Wyckoff came up with a theory about 100 years ago on what drives market prices. He believed big investors control the market to take advantage of smaller investors. This theory forms the basis of the Wyckoff method.
Wyckoff thought the best way for investors to understand whale behavior is to think of them all as one big trader – called the “composite man”. The composite man sits behind the scenes manipulating the market for his own benefit.
As a trader or investor, you’ll do well if you understand the composite man’s game. But you could lose money if you don’t. So, the trick is to swim with whales. In other words, trade with them rather than against them.
The four phases of the Wyckoff price cycle
What exactly is this game the whales are playing? It’s all based on the Wyckoff price cycle, and how big investors control the market in four phases: accumulation, markup, distribution, and markdown.
Wyckoff Phase 1 – Accumulation: Big investors deliberately keep the price lower, usually within a sideways trading range, so they have time to build their positions. They’ll move the price around to trick smaller investors into selling, so they can scoop up those investments for cheaper prices themselves.
Wyckoff Phase 2 – Markup: Once the whales have soaked up enough seller supply to get into their positions, they’re ready for the markup phase. Since there isn’t much seller supply left in the market, prices can now move up quickly. This usually draws in more media attention and more buyers.
Wyckoff Phase 3 – Distribution: Now in big profits, the whales begin to slowly sell their investments. Likein the accumulation phase, they’ll use all sorts of tricks to take advantage of smaller investors. But this time, they’ll make small investors think the price will go higher. This way, the whales can create more buyer demand to soak up their seller supply.
Wyckoff Phase 4 – Markdown: After the whales have sold enough (or potentially loaded up on short positions), they’ll unleash the markdown phase. Since they’ve already used up most of the buyer demand, there aren’t many buyers left to stop prices from going lower.
So that’s the four phases of the Wyckoff price cycle, and these will repeat again and again…
Wyckoff method accumulation example: Bitcoin bottom of 2022/2023
As you’ve probably guessed, the Wyckoff method goes deep and can get very technical. The below chart from stockcharts.com (white, left), shows the different phases within a Wyckoff accumulation.
Fortunately, you don’t need to know all the above acronyms to understand what’s going on. Instead, just understand the general pattern. Notice how the price moves within a sideways trading range for a long time, before eventually breaking higher. In these accumulation phases, you can buy when the price is near the bottom of the range – and do it gradually to manage risk. You can also buy once it’s clear that the markup phase has started (i.e. once the accumulation range breaks). Or, you could buy if the price “retests” the top of the range to confirm it as price support.
In reality, Wyckoff patterns don’t all look the same. Notice the bitcoin low of late 2022 / early 2023 (chart on the right, above). The price moved around in a choppy trading range, with a few big drops to scare investors out of their coins. According to Wyckoff’s theory, these drops gave whales more seller supply to fill their buy orders.
Wyckoff method distribution example: Bitcoin top of 2021
Recall that a Wyckoff distribution is when big investors gradually sell their positions in smaller chunks. This way, they can take profits at higher prices – without making the drop too much before. Like with Wyckoff accumulation, there’s a detailed diagram from stockcharts.com below (white, left) showing the different phases within the distribution phase. But again, we’re trying to understand what’s happening in terms of buyer and seller demand, rather than memorize a bunch of terms and jargon.
So here, the key point to understand is that big investors move the price up and down within the range for a long time. Each time the price gets to the top of the range, smaller traders and investors are led to believe it will “breakout” above the range. So, they buy in near the top of the range. And that gives the whales the demand to offload their seller supply onto the market.
The bitcoin top of April / May 2021 is a classic example of a Wyckoff distribution pattern (chart on the right, above). Notice how the price consolidated within a range for about three months, before the eventual markdown phase. This gave the whales enough time to sell their coins to unsuspecting retail investors. And by the time the markdown phase started, there wasn’t much buyer demand left. Hence the big price drop in May.
Multiple accumulations and distributions
Earlier, I explained how the four phases of the Wyckoff price cycle go in this order: accumulation, markup, distribution, and markdown. While that makes the theory easier to understand, it’s not always what happens in reality. The chart below shows the bitcoin price from 2018 to 2023, with multiple accumulations and distributions.
Sometimes, the accumulation phase comes after a markdown phase (shaded green rectangles). Each of these was a major low for bitcoin after a longer downtrend, and would generally have been a great time to buy the dip.
But here’s the thing. You can also have accumulation during a strong bull market. In other words, the price can go up first, then “re-accumulates” before carrying on with the rally (hollow green rectangles).
It’s the same story with distribution. You can have distribution to signal a major top in the price after a big rally (shaded red rectangles). Or, you can have a “redistribution”, where big sellers offload their positions during a downtrend (hollow red rectangles).
As an investor, you want to buy during the accumulation phases and sell during the distribution phases. But here’s the problem: it’s not always easy to know if accumulation or distribution is happening until the final direction has been revealed. That’s where a deeper understanding of technical analysis can help.
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Key takeaways of the Wyckoff method
- Whales move the market, not small fish. It’s easier for small fish to trade without being noticed.
- The Wyckoff method describes the market in 4 phases of whale behavior. That’s accumulation, the markup, distribution, and the markdown phase.
- Wyckoff describes big investors as one big trader called the “composite man”, who pulls the strings of the market for his own benefit.
