How do we identify accumulation and distribution?

By analyzing volume patterns.

Identifying The Patterns

As we have already noted, positive volume patterns signals accumulation, while a negative volume patterns
signals distribution.

The simple way to think about accumulation and distribution volume patterns is to simply eyeball the chart
and study the volume bars. Pay close attention to the size of the bars, especially the bars that are outside
the average size.

If the big bars are green, and the smaller bars are red, we can decide that sharer is more buying than selling
volume. This is accumulation.

On the other hand, if the big bars are red, and the smaller bars are green, there is more selling than buying.
This signals distribution.

Keep in mind that we are not focused on one or two individual bars, but overall patterns.

Multiple bars make trends.

The Distribution and Accumulation of Twitter

Take a look at the Twitter chart. Notice that from 2014 thru 2016 the stock was in a downtrend. However,
there were periods where price action alone would indicate a potential bottom or reversal. However, every
one of the bounce attempts failed and were actually textbook short opportunities.

Now it’s easy to say this now, but how do could we know during this period that twitter was a sell?

By the volume pattern.

During this two year period, red volume dwarfed green volume. It was not until late 2016 and early to mid
2017 that we started to notice a change in the volume trend. Now big green started to outpace red volume.

This signaled a dramatic shift in the volume trend. Now there was more buy side pressure than sell side,
which predicted the 2017 and 2018 uptrend.

Uptrends, downtrends and Rangebound Markets

Now that you know what to look for, keep in mind what type of trend a stock or market is in and then analyze
the volume pattern according to there parameters.

1. If stock in uptrend with positive volume pattern (accumulation): expect continuation of uptrend
2. If stock in downtrend with negative volume (distribution): expect continuation of downtrend
3. If stock in uptrend with negative volume (distribution): Expect reversal at some point
4. If stock in downtrend with positive volume (accumulation): Expect reversal at some point
5. If stock rangebound or bottoming with new accumulation: Expect breakout at some point
6. If stock rangebound or bottoming with new distribution: Expect breakdown at some point

The first thing I do, before I even think about the stocks and setups I’d like to trade, is execute a full market
analysis. This is the opposite of what most traders do. Most traders start with stocks, scans and setups, and
completely ignore the overall market.

This is a fatal flaw, and it’s why so many traders fail.

They find a great setup, but don’t understand that that setup might not work well under current market
conditions.

They find a great stock, but don’t realize that no matter how strong that stock is, most can not out maneuver
the overall market trend.

How to Analyze the Market

Market analysis doesn’t have to be all that complicated. Just answer the following questions.

1. What is the long term trend in the market?

2. What is the intermediate trend in the market?
3. What is the near term trend in the market (this most impacts your trading)?
4. Are their any hidden underlying factors not showing up in the trend?
5. Which market index is leading the market?
The answer to these 5 questions will help guide the stocks and setups you end up trading. You will place
most of your trades in the direction of the prevailing market trend, using setups that work best in the current
market.

For the most part, a strong positive “accumulation” phase or confirmation of trend contains “bigger green
candles than red candles”. A distribution phase, or selling trend,  has “bigger red candles than green
candles”. However, that doesn’t mean big green is always good and big red is always bad. during reversals
or capitulation events, big red candle are actually a good thing.

1. Pick 20 different charts to study. SPY, QQQ, IBB, FB, NFLX, AMZN, X, GS, LULU, KSS and 10 of
your own choosing.
2. Make sure volume is on your chart.
3. Study the volume patterns, paying close attention to the size of green and red candles during trend
phases and at reversals.

How do you know if buying or selling volume?

Is there any indicator to track total buy volume and total sell volume? If the price and volume go up then the volume is
considered a buy vol. Likewise, if price comes down, and vol increases it is considered a sell volume.
Wyckoff Trading Method Example

Now let’s show the Wyckoff market analysis in action, using the
trading strategy we discussed above. Have a look at this image: