📈 Adjusting Richard Wyckoff Volume Spread Analysis to Trade the Forex Market
“Those who think they are studying the market are, in fact, only studying what someone else has said—not what the market has said about itself.”
Richard D. Wyckoff (1873–1934) introduced his method through a widely circulated newsletter he sent to 200,000 subscribers in the 1920s, titled The Magazine of Wall Street. Wyckoff's method focuses on:
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Measuring accumulation and distribution
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Defining the correlation between price and volume
Wyckoff believed that understanding supply and demand through price and volume is key to predicting future market movements. He also emphasized that no trade position should be taken without a predetermined exit strategy. Although the Richard Wyckoff method was originally designed for analyzing and forecasting the stock market, in this analysis, we apply Wyckoff's principles to the Foreign Exchange market.
📝 The Three Laws of Richard Wyckoff
According to Wyckoff, global financial markets operate under three primary laws.
(1) The Law of Supply and Demand
When demand exceeds supply, the market will eventually rise; when supply exceeds demand, the market will eventually fall. Price and volume are used to gauge the strength of these two economic forces. Measuring volume when trading stocks is straightforward, but the Forex market is an OTC (over-the-counter) market, making direct volume measurement more challenging. Therefore, Forex traders can rely on alternative data sources, such as the aggregate number of positions in the Forex Futures market.
(2) The Law of Cause and Effect
Every price movement (effect) must be preceded by a cause. The magnitude of the effect is proportional to the cause. The most profitable price movements occur after a period of accumulation or distribution. In currency trading, the appearance of an accumulation or distribution phase following a strong price move is a common occurrence.
(3) The Law of Effort vs. Result
Where there is effort (cause), the result (effect) should be proportional. Any imbalance between price and volume may signal an impending change—potentially indicating a shift in trend direction. To identify effort and assess accumulation versus distribution, the On-Balance Volume index is used. This index was referred to as “Optimism vs. Pessimism.”
🔢 Richard Wyckoff's Five Steps
These are the five steps Wyckoff proposed for evaluating each trade:
(1) Determine the current trend and the market’s position
Is the market ranging or trending? Are there signs of a new trend forming? These questions can be answered by analyzing historical support and resistance levels, price patterns, candlestick formations, breakouts, and similar indicators.
(2) Follow the trend by identifying relative strength or weakness
After identifying the market’s primary trend (step 1), align your trades accordingly by evaluating relative strength or weakness. For example, if the U.S. Dollar—as reflected by the USDX index—is trending downward, focus on shorting the Dollar. This could mean going long on EUR/USD, going long on GBP/USD, or shorting USD/CHF, among others. Always enter trades that align with the dominant trend of the market you are trading.
(3) Select trades with a cause significant enough to yield a satisfactory effect (profit)
Trading involves exposure to both market risk and transaction costs. You should therefore pursue only those trades (causes) that are likely to produce sufficient returns (effects) to cover both risk and cost. In practical terms, choose trades with a minimum Reward/Risk ratio of 2—preferably 3 or higher.
According to Wyckoff, to generate a meaningful cause, focus only on markets that are already in accumulation or re-accumulation phases. As mentioned earlier, a strong effect requires a significant cause, which usually stems from a prior period of accumulation.
(4) Evaluate the readiness of an asset to respond immediately to its cause
Anyone who has traded Forex or any other financial market understands the importance of proper timing. An undervalued asset can remain undervalued for extended periods—sometimes lasting several months. Therefore, time itself represents a unique and often overlooked form of risk.
Significant shifts in demand or supply can indicate that a market is ready to enter a strong trend. Since the Forex market does not provide reliable volume data, traders can identify these shifts by observing changes in price volatility, monitoring market sentiment, or analyzing data from the futures and options markets (such as COT reports).
Additionally, certain chart patterns and technical indicators can reveal whether an asset is poised to begin trending. For example, using the MACD histogram across H1, H4, and D1 timeframes—alongside monitoring price breakouts or divergences between price and the MACD histogram—can help determine trend readiness.
(5) Time your trades to anticipate movements
Trade timing should be guided by the three core Wyckoff laws (Supply & Demand, Cause & Effect, Effort & Result).
The phases of the market, as defined by Wyckoff, are illustrated in the following S&P 500 chart (courtesy of readtheticker.com).
Chart: Wyckoff Logic on S&P 500
🎯 Conclusions When Using the Wyckoff Method
According to Wyckoff, the most effective strategy is to choose a strong market and, within that market, select the strongest asset. Traders should focus only on causes (trades) that offer a strong potential effect (payout), and must exercise great care in timing their entries. The Wyckoff method emphasizes several key principles, primarily trend evaluation and the identification of market phases. Wyckoff maintained that strong price movements typically occur only after the market has absorbed existing price levels—through an accumulation or distribution phase. Traders are advised to avoid entering positions before this phase is completed, unless they are highly experienced and confident in their analysis. It is more prudent to wait for a clear shift in demand or supply that is capable of driving a significant price move. Such shifts can be identified using various tools and indicators based on price volatility and volume.
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Utilize multi-timeframe analysis to decode the market's underlying structure and validate cause-and-effect relationships across time horizons.
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Recognize and align with the prevailing market phase—accumulation, markup, distribution, or markdown—based on the principles of Wyckoff's "Composite Man" theory.
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Leverage volume analysis to support or challenge your market perspective, confirming the strength behind price movements and structural shifts.
🔗 More About The Wyckoff Method at TradingCenter: https://TradingCenter.org/Wyckoff-Method
■ Adjusting Richard Wyckoff Volume Spread Analysis System to Trade the Forex Market
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