SteemitCryptoAcademy - Week 8 // The Wyckoff Method homework for @fendit

Hello @fendit, thanks for this amazing lecture.

Share your understanding on "Composite Man" and the fundamental laws. What's your point of view on them?

Richard Demille Wyckoff was the first to start using a technical approach to study the stock market in the 20th century. He proposed the method called THE COMPOSITE MAN which is used to understand the price fluctuations in the financial market. The idea was to make traders see this supposed man as a real being with the following concepts:

• The composite man takes time to plan and execute all his goals

• He attracts people to buy an asset in the stock market after he must have accumulated a good number of assets and then he takes it out to the public like it is a broad market.

• Charts must be studied extensively to be able to understand the purpose and fluctuations of the stocks and understand the motives behind the high shareholders and operators. By studying these charts, one can understand how the market runs, see opportunities really early and make good profits from them.

In other words, all he was trying to say here is buy at accumulation, sell at distribution and continue the process.

In the financial market, one must understand that analyzing and making conclusions based on a single day’s price may result to doom and one must compare the price with what happened a day ago, three days ago, a week ago and even beyond because context is everything in the financial market.
The composite man concept can be well explained using the following four phases;

• Accumulation

• Uptrend

• Distribution

• Downtrend

Accumulation: this is likely the first stage and the composite man accumulates assets before anyone else. He does this gradually so that there won’t be changes in the price and it doesn’t increase due to overbuying or high demand. You know the accumulation phase by a sideways movement.

Uptrend: this is the next stage after accumulation. Here the composite man is holding enough assets now and what he does is to start pushing the market upwards. At this point, investors are attracted to buy because there is an increase in demand and the price is getting higher. As the price continues to increase, other investors are again encouraged to make purchases and it will get to a point where the demand will be greatly more than the supply.

Distribution: at this point, the composite man begins to distribute his accumulated assets. He sells them at a profitable amount to those entering the market lately. The best way to know the distribution phase is that it is marked by a sideways movement that absorbs demand until it gets exhausted.

Downtrend: this is likely the last stage of the concept and the market begins to drop. The composite man has sold his assets at a very good amount and he begins to push the market down and as it would be, the supply would be more than the demand, and hence the market crashes which is a downtrend.

In my opinion, I would say that Elon Musk acted as a composite man a couple of months ago with respect to DOGECOIN. He must have purchased a lot of the coin and then came out to make tweets about the coin which caused a rise in price and demand to about an increase of over 300%. After some time, he made another tweet that crashed the price of Dogecoin. This may not be certain but as I make researches about the composite man, this is what comes to mind. I stand to be corrected though.

THE FUNDAMENTAL LAWS

There are three fundamental laws of Wyckoff and they are as follows;

• The law of supply and demand

• The law of cause and effect

• The law of effort vs result

The law of supply and demand

This is Wyckoff’s first law and it simply states that prices of stocks are bound to increase when the demand is greater than the supply and vice versa. This is very applicable in all spheres of the financial market and not particular to Wyckoff. In simple terms when;
Demand > Supply = Increase in price
Demand < Supply = Decrease in price
Demand = Supply = No price change

Excessive demand makes the price go up because there are lots of people buying it but, in a situation, where there is more supply than demand, the price reduces. This can be used to gain insights into the movement of the market before investments are made, knowing when to enter and exit the market.

The law of cause and effect

The second fundamental law states that there is no randomness in the difference between supply and demand but happens after periods of preparation with regard to the result of specific events. In simpler terms, a period of;
Accumulation (cause) leads to Uptrend (effect)
Distribution (cause) leads to Downtrend (effect)

This law of cause and effect shows us that truly there is no random movement in the market and there is a reason for everything and this goes ahead to give us a better view of the market and how the duration of a trend can be calculated after breaking out of a consolidation zone.

The law of effort vs result

The third law states that changes in the price of assets in the financial market are a result of inputted efforts which is denoted as trading volume. If the price and volume are going in the same direction, the trend will possibly continue but once there is a divergence between the price and trading volume, the market trend will possibly change direction or stop entirely. This particular law is all about the relationship between the price and traded volume and shows that work (effort) must be done to have desired results/outcome

Share a chart of any cryptocurrency of your choice (BTC or ETH won't be taken into account for this work) and analyze it by applying this method. Show clearly the different phases, how the volume changes, and give detail of what you're seeing.

In this case, I used the ZEC /BUSD chart. I took a 1day time frame and got all 4 phases, let's see the graph:

The accumulation stage is where the composite man begins to store lots of coins. From the chart, we can see that the price is increasing slowly. Remember we said that he doesn’t it meticulously so there won't be a sudden rise in price. He does this at a low price with little effort and volume.

At the uptrend phase, the price begins to increase slowly, investors must have seen the gradual rise in price and are now buying coins. The price rises slowly though. At phase 2, the price is about 250. The price continues with its trend with little volume until it reaches where the volume increases and the price shoots up faster and this is where phase 3 likely begins.

From the chart, phase 3 is fast and has a sudden and high price of ZEC. This is where the composite man makes a lot of profits because he now sells at relatively high prices.

Finally, there is a downtrend which could have been as a result of news or something else. The supply is now higher than the demand and hence, the market crashes and there is a drop in price.

Conclusion

The composite man concept is good for people who have studied and understood it although it may seem a little bit selfish it gives each trader the opportunity to know when to enter and exit the market. Late arrivals will be the ones to suffer the loss because they will buy at a high price and make little or no profit out of their stocks but generally, it is a good concept and we understand what influences trends.

cc: @fendit