Bitcoin (BTC) has recently been identified as entering the Wyckoff Accumulation phase, according to independent market analyst Stockmoney Lizards. Wyckoff Accumulation is a well-known technical analysis pattern named after Richard Wyckoff, a pioneer in technical analysis during the early 1900s. This pattern divides the market cycle into four distinct phases: accumulation, markup, distribution, and markdown. But is this pattern reliable for trading cryptocurrency? Let’s take a closer look.
Wyckoff accumulation is one of the phases in the Wyckoff market cycle theory, with the other three being markup, distribution, and markdown. In simple terms, each phase represents a period where large entities drive the market’s direction. The accumulation phase occurs when major players accumulate assets within a specific trading range. This accumulation leads to a decrease in available supply, causing the price to rally above the trading range.
To successfully implement the Wyckoff accumulation strategy, small investors need to correctly identify the direction and speed of the price move out of the trading range. Fortunately, they can refer to a widely-tracked accumulation schematic created by Wyckoff in the early 1930s. This schematic outlines the events and phases of the accumulation pattern.
Phase A marks the exhaustion of the previous downtrend and begins with preliminary support (PS), which indicates that the bearish trend is nearing its end. The price then experiences a selling climax (SC), where professional investors absorb the selling pressure and traders cover their short positions. This leads to a sharp rebound in price known as the automatic rally (AR), which defines the upper boundary of the trading range. The price may then return to test the levels around the selling climax, known as a secondary test (ST) of support.
It is common to have multiple secondary tests in the Wyckoff accumulation pattern, which leads to a consolidation phase in Phase B. This consolidation indicates that institutional investors have been accumulating assets in anticipation of a price markup event. Rebounds from the secondary test levels are typically accompanied by higher volumes, while pullbacks from the automatic rally levels see diminishing volumes, indicating a decrease in liquidity and preparation for Phase C.
Phase C begins with a “test” period where large investors examine the market for potential supply booms. The price rises cautiously during this period. The test period concludes when the price breaks above the automatic rally level, known as the sign of strength (SOS). This is followed by a short-term correction towards the last point of support (LPS), which occurs in Phase D. Traditional analysts consider the LPS level an excellent entry point for investors and traders.
In Phase E, the asset breaks out of the trading range and enters the markup phase of the market cycle.
While not all Wyckoff accumulation setups result in massive price rallies in the cryptocurrency market, traders can still profit from the fluctuations within the trading range. They can open long positions on bounces from the secondary test range, with the automatic rally level as the primary upside target. A stop-loss can be placed below the secondary test level to minimize losses in case of a false breakout.
Traders who wish to take more aggressive long positions may require additional confirmation from fundamental catalysts related to the crypto asset. For example, Bitcoin’s Wyckoff accumulation setup in 2021 resulted in a significant price rally due to loose monetary policies and growing mainstream adoption.
Cautious traders can wait for the Wyckoff setup to reach Phase D and enter a long position after the price breaks above the sign of strength point with convincing volumes. It is advisable to place a stop-loss below the sign of strength level to minimize losses if the trend reverses.
Please note that this article does not provide investment advice or recommendations. Investors should conduct their own research and analysis before making any investment decisions.