Wyckoff Power Charting

The Laws of Wyckoff

Bruce Fraser | December 04, 2015 at 02:48 PM

Three Principles or Laws govern the structure of the Wyckoff Methodology. Procedurally there are a
series of Tests that determine buying and selling decisions. There are nine of these Tests, or thresholds,
to be passed for making a buying decision, or a selling decision. The Nine Buying Tests and the Nine
Selling Tests all adhere to the overarching Wyckoff Laws. The tools Wyckoffians use to evaluate the
Three Laws and the Nine Tests are vertical barcharts and point and figure charts. Our studies of
Accumulation, Markup, Reaccumulation, Distribution, Markdown and Redistribution are chart
analysis skills that prepare us to function within these Laws and Tests for making buying and selling
decisions.
Three Principles or Laws are at the heart of the Wyckoff Methodology. Each addresses a characteristic
of the nature of price and volume essential to a trader's market knowledge (as seen through the eyes of
the Wyckoff Methodology). Here we will discuss the three laws and at a future time we will explore the
buying and selling tests.

Three Wyckoff Laws*:

Supply and Demand
Cause and Effect
Effort and Result
Supply and Demand. This principle examines the quality of ownership of the stock. When stock is in
strong hands it has been Absorbed. Very little stock is available for sale thus the Supply is low. Any
incremental increase in Demand for the stock will cause it to move up. When Demand is increasing
and Supply is low, expect prices to rise.
In a number of our early posts, we discussed the importance of Composite Operator absorption or
ownership of a stock. When the C.O. is actively campaigning a stock, they remove available stock from
the marketplace simply because they buy the stock and will not sell it. This can be observed throughout
Accumulation when the C.O. stealthily buys up shares during long grinding basing periods.
As Wyckoffians evaluate Accumulation and Distribution phases (through the study of bar charts and
PnF charts) the principle of Supply and Demand is being observed. The balance of ownership is
shifting during these large trading ranges. This shift in ownership will profoundly change the Supply
and Demand equation.
During Distribution the C.O. is selling and thus stock is going into weak hands. This has the effect of
releasing a Supply of stock into the marketplace. Since the very large and informed C.O. is supplying
the market with stock, a phase of Distribution forms, followed by a period of Markdown.
When Supply and Demand are about equal, the result will be a trading range where prices stay in a
trendless state. This will be where the important shifts between Supply and Demand will take place. At
the conclusion of the trading range, a new up or down trend will begin which reflects the imbalance of
Supply and Demand.
Cause and Effect. This principle relates to the first law, Supply and Demand. A Cause must form before
there will be an Effect. And the Effect will be in proportion to the size of the preceding Cause. A large
Cause will produce a large Effect, a small Cause results in a small Effect. Accumulation and
Distribution phases are periods of Cause building. The Effect is the subsequent Markup or Markdown.

The primary charting tool for estimating the potential Effect are Point and Figure charts (PnF). The
Wyckoff Method uses a horizontal PnF counting technique. For example, an Accumulation trading
range is plotted with a PnF chart. We then use Mr. Wyckoff's PnF technique for counting across the
horizontal range of the Accumulation (or Distribution) and estimating the potential projected
movement. PnF provides a powerful tool for counting the Cause and estimating the Effect (see earlier
posts for examples of PnF charting and counting). Distribution would produce a down count and
therefore the Effect would be declining prices.
A key to Wyckoff Analysis is to determine when a trading range is under Accumulation or Distribution
(see earlier posts on this concept). We can then estimate a price target based on the count.
Effort and Result. Volume provides Effort and the action of Price is the result. It takes Effort, in the
form of Volume, to drive Price upward. As an illustration; the Stock Price climbs out of the
Accumulation Phase and begins Marking Up. The Price Spread then should be wide and typically the
close will be toward the high of the day (or week). Volume expands from the prior days. A Wyckoffian
would conclude the Result (price advance) to be large on increasing Effort (higher Volume). This is
Bullish for the continued advance of prices.
Toward the end of a trend, the daily price spread begins to narrow in comparison to prior Markup
days. Meanwhile, the Effort of Volume is very high and expanding. The analysis of this condition is that
large Effort (Volume) is Resulting in a marginal price advance. Large Effort with minimal Result is a
form of divergence or inharmonious action between price and volume. This is an indication of a tiring
uptrend and a correction of prices is expected. The above example is only an illustration. There is much
more to consider in the evaluation of Effort and Result.
Exercise: Keeping these principles in mind go back to some of the early posts on Accumulation and
Distribution and attempt to adapt these concepts to the chart studies.
These principles form a structure for understanding the nature of price activity and how best to
conduct a speculative campaign. During our prior posts you have been exposed to each of these
structural principles of the Wyckoff Methodology. There is much more to come.
All the Best,
Bruce
*Source: Hank Pruden, 'The Three Skills of Top Trading', Wiley Publ. 2007 with adaptations and
modifications.

About the author: An accomplished "Wyckof4an", Bruce Fraser

has been teaching graduate level courses on Technical
Analysis at Golden Gate University since the early 1990s,
where he has been instrumental in crafting the curriculum. At
Golden Gate University, Bruce's teaching has focused largely
on Wyckoff Analysis. Learn More

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