The Art & Science of Technical Analysis: Market Structure, Price Action & Trading Strategies

CHAPTER 2

The Market Cycle and the Four Trades

To every thing there is a season, and a time to every purpose under the heaven.

—Ecclesiastes 3:1, KJV

The early twentieth century was a time of great progress in markets and in thinking about markets. There were giants on the earth in those days—legends like Jesse Livermore, old man J. P. Morgan, Bernard Baruch, and Charles Dow. In this fertile environment, Richard Wyckoff developed his understanding of markets and the trading process through conversations and interviews with these master traders. After amassing a sizable personal fortune in the markets, he laid out his system in a set of correspondence courses, as was the practice of the day, to educate the public and to help them avoid the scams and frauds that were so prevalent at the time. Referring to the Wyckoff method is a bit of a misnomer, for he offered no simple system or one way to trade. Rather, Wyckoff created a method for understanding the buying and selling convictions of very large traders and institutions through the patterns their activity left on prices. If the smaller trader could recognize the signs they left in the market, he could align his positions with their activity and interests; in the end, it is the buying and selling pressure of these large pools of money that actually moves the markets. This method is as powerful and as relevant today as it was a hundred years ago.

Wyckoff proposed a four-stage market cycle. His idea was that the cycle resulted from ...