Richard Demile Wyckoff was a pioneer and one of the forefathers of technical analysis. Above all Wyckoff was a contrarian advocating that the markets are manipulated, leading to the great works to what we know as the market undergoing ‘’accumulation’’ or ‘’distribution’’, derived from this is arguably the most famous picture found within technical analysis known as ‘the price cycle’.
Our price cycle leads us on to more important topics and for the most part from here onwards we are discounting accumulation and distribution. There are far greater teachings and valuable wisdom that Wykoff brought to the table that appear to have been lost over time, often overlooked or misinterpreted. These are known as the 3 Universal Laws:
- The Law of Supply and Demand
- The Law of Cause and Effect
- The Law of Effort vs. Result
Understanding these laws in their entirety can open the charts and provide deep, profound insights offering traders multiple edges regardless of methodology, or at the very minimum it can be integrated as a filter for most profitable strategies. At Feibel trading we use these laws on a daily basis from sentiment and context to setups, granted we have amalgamated some of the principles and for the better of the word we have modernised these teachings, tweaked them, and brought them into the 21st century. Over the forthcoming weeks I will share this potent knowledge, first of all in a theoretical manner and then will go through the process of application of how to use these laws in today’s modern markets. These laws are incredibly powerful and as our price cycle kindly illustrates demand and supply, this will be the first law we shall dissect:
The Law of Supply and Demand
A very basic, simple law, BUT this must be understood with 100% clarity as this is the cornerstone of our whole trading methodology. As we look for the imbalance. Every bar on the bar chart (irrespective of timeframe) represents a battle between buyers (demand) and sellers (supply)
When demand (the buying) is greater than supply (selling) prices will rise. And vice versa; when the supply (selling) is greater than demand (buying) prices will fall.
Very simple, but as previously stated; we look for the imbalance between the forces of demand and supply – if buyers are in control (as in the force is strong) and we recognize the behaviour, whilst being able to read the chart effectively we can look for long plays. Vice versa for a bearish tone: if sellers are in control, we look for short plays.
All other means of technical analysis found within our methodology are a mere tool that we have at our disposal to help us gauge the imbalance between the forces
When one becomes competent we can find the turning points in the markets we trade. Many Wyckoffians use an excerpt from Wyckoff’s book that I too must share as it is profoundly important
‘’Successful tape reading is a study of force; it requires ability to judge which side has the greatest pulling power and one must have the courage to go with that side. There are critical points which occur in each swing, just as in the life of a business or an individual. At these junctures it seems as though a feathers weight on either side would determine the immediate critical trend’’ source – The Day Traders Bible by Wyckoff
What does this mean? Well this is my interpretation:
We study the forces of demand and supply to determine who is in control (PULLING POWER) have belief (COURAGE) in ones analysis and execute in the direction of the force (extremely important that Wyckoff mentions courage; self confidence and belief are harder skills to develop than the mere analysis part of trading, as you cannot teach these,: these are gained through experience and knowledge)
The (FEATHERS WEIGHT) is the turning point where the balance is shifted from one force to another (sellers to the buyers or vice versa) there will be an action; either a bar or a combination of bars that can illustrate this concept. As we progress through the articles and our base level of understanding increases, we shall incorporate and study a turning point.
Bottom Line
To summarize we are always looking/analysing/studying the force of buying and selling (demand and supply) within the market. When the market offers an imbalance and we can read the action we look to market structure to lean against and price action to enter. There is nothing more of value one can give towards the law of demand and supply, literally the passage from Wyckoff and the price cycle contain the philosophy. Next week we shall examine The Law of Cause and Effect.