These 5 steps are an overview of the Wyckoff method along with his three laws of price action
1. The law of supply and demand determines the price direction. This is his central principle and method of trading. When demand for a stock is greater than supply, prices rise, and when supply is greater than demand, prices fall. The technical analyst can study the balance of price between the supply and demand by comparing price versus volume bars on the chart over different periods of time. This law is simple in principle but it takes time and practice to learn to both quantify supply and demand on bar charts and understand how to trade the supply and demand patterns on charts.
2. The law of cause and effect is a filter for the trader to set price targets by measuring the potential magnitude of a trend breaking out from a trading range. Richard Wyckoff’s “cause” can be quantified by the horizontal point count in a Point and Figure chart, while the “effect” is the distance price moves corresponding to the point count. This law can be read as the power of accumulation or distribution inside a price trading range. How this power and force plays out in the following trend or price movement up or down is what this law is trying to project. He used Point and Figure chart counts to quantify a cause and project the extent of its effect.
3. The law of effort versus outcome gives an early warning signal of a potential change in the direction of a trend coming in the future. Divergences between the volume and the price action can many times signal a change in the trend direction. When there are many high volume/large effort but small price range bars after a large up swing in price and price fails to make a new high which shows no result, this can mean that big holders are selling shares and distributing believing a trend reversal in price is near.